Tax Articles

The Phygital Revolution: How FinTechs Should Navigate

By: Atty. Jomel N. Manaig

Constantly emerging buzzwords is a reflection of our fast-paced reality.

One of the more recent buzzwords doing its rounds in the business community is PHYGITAL. Simply put, phygital is the marriage of the traditional physical infrastructure with the conveniences of the digital experience. You may think that phygital is something new but, believe it or not, you may have already been experiencing phygital services without you realizing it.

The electronic kiosks at some fast-food outlets where you can put your order and pay for your meal? That is phygital. The tablets in bank branches where you put your transaction and get a queuing number? That is phygital. The stores with a brick-and-mortar set-up as well as an online/app-based marketplace? You guessed it! That is phygital.

Phygital is all about making consumer experience more convenient. It breaks the barriers of the physical and the digital realms to create a hybrid to bring the best of both worlds together.

Among the core of the phygital revolution is the drive to make transactions easier and hassle-free. Liberating people from having to worry about cold hard cash on hand to pay for goods and services is part, if not the most piece, of the game. This is where financial technology (“FinTech”) comes in.

Just like many digital-based innovations, FinTech services thrived during the period of face-to-face restrictions due to the pandemic. FinTech companies gave us a way to bridge the gap by closing transactions without ever having to hand over cash for purchases. And even up to now, innovations are being made for the betterment of the consuming public. This has made FinTech entities successful.

However, despite the constant advancements, not everything has been keeping up with the times. Tax-wise, there has been no significant strides to provide updated rules to specifically cater to transactions involving FinTech entities. Whether the transaction was done physically or digitally, the rules and regulations applied are basically the same.

Unfortunately, this may prove disastrous as transactions involving FinTech companies may not necessarily adhere to the established norms and procedures in taxation that we are all familiar with. Applying existing tax rules and regulations may subject FinTech companies to unwarranted tax exposures.

Unsuspecting FinTech companies may be hit with a plethora of supposed tax exposures like deficiency withholding taxes and deficiency value-added taxes, to name a few. This is mostly because FinTech companies may have adopted financial reporting and internal documentation procedures which are unsuitable to the existing (and often dated) tax rules and regulations.

Assessments for national taxes are not the only possible concern of FinTech companies. Local government units may likewise assess deficiency local business taxes for the same reason that financial reporting and internal documentation of FinTech companies may have incompatibilities with existing tax rules and regulations.

Since the tax rules and regulations are not yet being updated to adapt to the unique circumstances of FinTech companies, it is incumbent upon the latter to minimize, if not eliminate, exposures in its financial reporting and internal documentation procedures. FinTech companies need to revisit their current business models to identify these loose ends before the taxman comes and bust it wide open.

Buzzwords more often signal a trend which comes and goes depending on what is new and what is waiting on the wings. However, every so often, buzzwords transition from something temporary to an enduring staple. Phygital, with its track record, may be well on its way to having a permanent home in our society. And since FinTech is reaping the benefits of going phygital, best to expect that continued growth will also bring chronic issues. The question now is, will FinTech companies adapt before the hammer falls?