Philippines Races To Develop Digital Economy.

Updated: Nov 10

By Andrew Kemp











The Philippine government is ramping up its economic digitalisation efforts in response to COVID-19-driven turbulence in the physical economy


The Philippines has been slow to embrace economic digitalisation, trailing some of its Southeast Asian rivals. This is changing, however, as the COVID-19 pandemic disrupts traditional business models and forces the country to seek out new opportunities.


The World Bank and the National Economic and Development Authority (NEDA) released a study on October 5 showing that while the Philippines’ use of digital payments and e-commerce had climbed since the start of the pandemic, the country’s wider use of digital technologies still trailed that of Singapore, Malaysia and Thailand. That study reinforces Statista’s findings last year, with the market and consumer data specialist noting that the Philippines had the smallest internet economy of Southeast Asia’s six primary markets.

But while the pace of the Philippines’ digital transformation leaves something to be desired, recent government efforts underscore the greater importance Manila places on the development of the digital economy.

Tough times


Since the start of the pandemic, the government has repeatedly called for businesses to adopt a digital-based strategy in order to weather the economic storm. The country’s varying levels of lockdowns, with partial restrictions in and around Metro-Manila having been extended to October 31, have severally disrupted traditional bricks and mortar businesses.

The Philippines’ gross domestic product (GDP) contracted by 16.5% year on year in the second quarter, after registering a first-quarter decline of 0.7%. The situation has driven the Asian Development Bank (ADB) to lower its growth projections for the country in 2020 from -3.8% to -7.3%.


The situation prompted Philippine Finance Secretary Carlos Dominguez III on August 28 to urge domestic enterprises to innovate and identify new business opportunities in the digital space. He argued that such a strategy was about more than simply moving toward a COVID-19 “new normal”, but was a purposeful move toward a “digital-based New Economy”.


One proposed measure to encourage investment in the Philippines is an exemption from “all national and local taxes” during the first two years of operations in favor of a new micro-enterprise that will engage in e-commerce, as provided under a bill for an Internet Transactions Act, which is pending with both houses of Congress.


Another bill, which was initially dubbed the Digital Economy Taxation Act, is pending with Congress and seeks to capitalise on the country’s economic digitalisation by introducing a 12% value-added tax (VAT) on a range of online business and trade services.


The new tax has been projected to yield up to PHP29.1bn (US$600.7mn) in annual revenues for the government, which will be used to fund social and infrastructure programmes designed to help lead the economic recovery.


The same lockdown measures that have disrupted traditional business operations have also highlighted the country’s need to speed up its adoption of digital payments.

Going digital


The Philippines has been building out its cashless transaction ecosystem for a number of years, culminating with Bangko Sentral ng Pilipinas (BSP) declaring in November 2019 that it wanted to see digital payments account for 30% of the country’s transactions this year. This is part of its strategy to turn the Philippines into a “cash-lite” economy by 2023.


However, more needs to be done to encourage digital payment adoption, the WB and NEDA said in their joint report this month. The publication found that low transaction account ownership, the lack of a national ID, nascent payment infrastructure and the perceived risk of digital transactions were restricting the wider uptake of digital payments.


Aware of the challenges, the government is striving to lay the necessary groundwork for digital payments to take off.


WFH and contact-tracing measures that are being put in place are predictably giving rise to all sorts of data privacy related anxieties. But the pandemic hasn’t triggered any real changes in the data privacy regulatory landscape. There is no need for someone to ‘waive their privacy rights’ where the law and rules already allow collection and processing of sensitive personal information, such as health data, where this is required by law.

Rose Marie King-Dominguez, partner, SyCipLaw



The Philippine Monetary Board approved on June 25 the Payment System Oversight Framework (PSOF), which establishes the BSP’s regulatory oversight of payment systems. The BSP noted on July 1 that the framework adopted a risk-based oversight approach.


The BSP is also spearheading the roll-out of the country’s national ID system, having been tasked with printing the ID cards. The Philippines Statistics Authority (PSA) launched a national ID pre-registration process in 32 provinces on October 12.


Siddhartha Shah, Director Advisory Division 2, Office of Public-Private Partnership at the ADB, said getting the ID system up and running as smoothly and as quickly as possible would be a key pillar of the country’s ongoing digitalisation. Only 29% of Philippine adults had access to a bank account in 2019, according to a BSP survey that was published in July.

Shah said: “The national ID system should lower the cost of setting up bank accounts, speed up eKYC processes and significantly improve financial inclusion.”


However, Shah also noted that the development of physical infrastructure needed to be ramped up in order to improve broadband access. He said: “Physical access is a key bottleneck and this needs to be addressed. Improving the infrastructure side of the equation will dramatically improve internet affordability and accessibility.”


Shah said these two steps – upgrading physical infrastructure and implementing the national ID system – were essential to the country’s digital transition, improving the convenience and cost efficiency of digital transactions. He added: “Once the infrastructure is in place, I expect the pace of the digital transition to happen very quickly.”


While the country’s ongoing digital transformation is to be welcomed, rapidly shifting political and economic landscapes have left some players adrift.


“Physical access is a key bottleneck and this needs to be addressed. Improving the infrastructure side of the equation will dramatically improve internet affordability and accessibility.”

Siddhartha Shah, Director Advisory Division 2, Office of Public-Private Partnership, ADB


For example, even non-resident foreign corporations that do business online may be subject to Philippine regulations under the terms the bill for the Internet Transactions Act and the bill for the Digital Economy Taxation Act.


Another case in point is data protection, where regulations remain unchanged but new operational demands surrounding work-from-home (WFH) and returning-to-work arrangements have shaken stakeholder confidence in their regulatory compliance.

Moving parts


The National Privacy Commission (NPC) issued guidelines on WFH data protection in May, which then led to businesses and individuals seeking greater clarity and prompted a follow-up bulletin from the NPC in June.


While nothing has changed at a regulatory level, with the NPC satisfied that the Data Privacy Act of 2012 covers all existing interests, the sheer scale of change has left employers and employees alike uncertain as to their responsibilities, obligations and rights.


The NPC advised employers that they could monitor employees while they worked from home as long as they adhered to “general data privacy principles”. It also noted that employers were responsible for safeguarding personal data processing systems being used by employees under WFH arrangements.

Employers were also given the green light to collect and process data from employees that returned to work, this included temperature checks and travel histories. The commission made it clear that employers should collect such information “to help control the spread of the virus and keep their workers and visitors safe.”


SyCipLaw senior partner Rose Marie King-Dominguez said: “WFH and contact-tracing measures that are being put in place are predictably giving rise to all sorts of data privacy related anxieties. But the pandemic hasn’t triggered any real changes in the data privacy regulatory landscape.”


King-Dominguez added: “There is no need for someone to ‘waive their privacy rights’ where the law and rules already allow collection and processing of sensitive personal information, such as health data, where this is required by law.”


She pointed to a 2019 statute, the Mandatory Reporting of Notifiable Diseases and Health Events of Public Health Concern Act, on the Law on Reporting of Communicable Diseases, which requires hospitals, workplaces and schools, among others, to accurately and immediately report incidences of notifiable disease. King-Dominguez added: “Authorities and actors, however, must observe proportionality and balance.”


The Philippines has a lot more ground to cover in terms of digitalising its economy, but several important steps have been taken. It will be essential that the government continue these efforts, while at the same time avoiding costly mistakes of rushing policy agendas that may end up complicating the regulatory landscape.


This article was written by Andrew Kemp for Conventus Law in association with SyCipLaw.

For further information on Going Digital in Philippines, please contact:


Carina C. Laforteza (cclaforteza@syciplaw.com)

Partner; Head of Tax Department


Rose Marie King-Dominguez, (rmmking@syciplaw.com)

Partner










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