article banner
Let's Talk Tax

SEC on technology corporations

Our era is characterized by ever-changing technological advancement. Technology has touched our human existence including the way we educate ourselves, the way we deal and communicate, and the way we travel from one place to another. It has affected our interactions with one another such as shopping and socializing. From a business perspective, technology continues to play a vital role on how entities conduct their operation and maintain their competitive advantage.

The advent of technology, however, has given birth to some issues confronting our government regulators. Such advancement includes the use of Internet to disseminate information on certain products and the sale of products online. These issues may not have been expected a few decades ago, but should be clarified and expounded in order to meet the demands of our fast changing world.

The Securities and Exchange Commission (SEC) is no exception from this challenge. Recently, it faced the task of making a determination as to whether a certain business using technology to bolster its operation would be subject to the foreign equity limitation in accordance with existing rules. Under the Constitution, mass media must be fully owned and controlled by Filipino citizens. On the other hand, foreign equity is allowed for advertising business but must not exceed 30% of the total shareholdings.

The issue on foreign equity becomes relevant when, for instance, a foreign investor which may be more technologically wise and advanced would like to engage in business in the Philippines. As we know, our Constitution was last revised in 1987 -- an era when technological development may not have been as extremely fast as today. Thus, it is timely to look back at how the SEC has classified certain business activities to determine whether there is need to comply with the requirements on foreign equity.

In making the characterization of a business activity, the SEC, citing a Department of Justice opinion, held that the function of advertising agencies is to serve as agents or counselors of advertisers by writing, preparing or producing the commercial messages or materials used by advertisers in selling their goods and services and by selecting and recommending the medium or media to be used as the vehicle for disseminating such messages to the public. Advertising agencies do not actually disseminate the materials they prepare as they have to utilize or avail of the facilities of mass media such as newspapers, radio, and television.

Relevantly, the Consumer Act of the Philippines states that advertising agency or agent is a service organization or enterprise creating, conducting, producing, implementing or giving counsel on promotional campaigns or program through any medium for and in behalf of any advertiser. Advertising is defined as the business of conceptualizing, presenting or making available to the public, through any form of mass media, fact, data or information about the attributes, features, quality or availability of consumer products, services or credit.

On the other hand, mass media under the Constitution refers to any medium of communication designed to reach the masses and that tends to set the standards, ideals and aims of the masses, the distinctive feature of which is the dissemination of information and ideas to the public, or a portion thereof. It refers to any means or methods used to convey advertising messages to the public such as television, radio, magazine, cinema, billboards, posters, streamers, hand bills, leaflets, mails and the like.

Considering the forgoing, the SEC has made the following determination:

1. The leasing out or subleasing of advertising spaces, such as waiting sheds, billboard structures, electronic LED displays, and other fixed or movable structures where advertisements can be displayed, actually provides a medium to disseminate or convey advertising messages to the public is considered as mass media activity (SEC-OGC Opinion No. 16-17).

2. The operation of a voucher platform on the Internet with the purpose of increasing the sales of particular product or service is, in effect, a dissemination of information to the general public through the Internet and, thus, considered as mass media activity. However, the mere design of the voucher placement such as writing, preparing or producing the commercial messages or materials and selecting and recommending the medium or media to be used as the vehicle for disseminating such messages to the public is treated as advertising business (SEC-OGC No. 16-12).

3. The wholesale marketing and sale of digital publications through the Internet and mobile technology which necessarily includes the conceptualization, creation, preparation and production of the commercial Web layout and communication messages intended by the digital publications’ creators to attract and lure their target consumers to purchase said digital publications is considered as advertising activity (SEC-OGC Opinion No. 06-14).

Undoubtedly, the shift of business models from the traditional brick and mortar to virtual may cause some issues as to their proper classifications. Businesses and regulators must continuously coordinate to address any difficulty and find solutions that preserve the rule of law and promote business at the same time.

Renato R. Balisacan, Jr. is a manager of the Tax Advisory and Compliance division of Punongbayan & Araullo.

As published in Business World, dated 30 August 2016