Digital Marketing Business and International Payment System: An Overview to Commence such Business

Digital Marketing Business and International Payment System: An Overview to Commence such Business

While the use of the internet and social media has been proliferating, digital marketing has become the easiest and strategic form of marketing for competing entrepreneurs. Digital marketing simply refers to the marketing mechanism reaching a wide number of consumers through the internet, whether it be through email marketing, content marketing, search platforms, social media, sponsored content, and more. Nepal has been experiencing social media marketing widely through Google, Facebook, Twitter, Youtube, Linkedin, etc. among others.

With the proliferation of digital marketing, the concern herein is about how has the payment system been in practice for a native entrepreneur of Nepal to make payments to global social media like Google, Facebook, etc. and how should such payment be channeled. The payment mechanism for digital marketing in these sites has been challenging in Nepal along with payments for premium digital resources like Amazon Prime, Netflix, etc. Even digital marketing agencies have been relying on informal modes of payment usually through family members or relatives residing abroad or foreign fellows. There are some instances where Nepali residents who have dollar cards from Nepali banks make payments when they travel abroad. No banking channels have particularly been sought by concerned payers due to so called tedious and lengthy procedures.

In this premise, an illegal outflow of currency through informal channels and without proper banking channels like hundi is not uncommon. Such transactions have evaded tax liabilities of the concerned taxpayers. In this regard, Nepal Rastra Bank (hereinafter referred to as the “NRB”) has issued a notice on 31st January 2020 regarding payment and receipt for digital marketing through social media and the internet after noticing illegal outflow of currencies through informal modes for digital marketing depriving the government taxes. The notice clearly states the international payment for digital marketing in such social media through unofficial channels to be illegal, penalizing such transactions under Foreign Exchange (Regulation) Act, 1962 (hereinafter referred to as the “Act”). NRB, thus, has emphasized for regulation of payments to be conducted through commercial banks as the taxation in this sector has been affected by informal mode of payments as well as this constitutes foreign exchange embezzlement pursuant to the Act and is punishable under the same.

However, legal mechanisms in relation to the payment of international digital services including digital marketing have been set out by NRB creating a way for the emergence of a proper banking system and legitimate payments. NRB allows payments for advertisements on social media platforms if digital marketing agencies produce agreements signed with social media companies and subsequently pay taxes. Currently, there are some digital marketing agencies like Genese Solution Pvt. Ltd. through which payment to these international online platforms can be made. Such service providers have been providing digital marketing services in Nepal by concluding agreements with respective online platforms and making payments formally through the banking system.

While discussing digital marketing agencies and international payment they make, you would want to know about operating a digital marketing business in Nepal.

Setting up Digital Marketing Business

One can operate a digital marketing business by registering an entity either as:

1. A Sole Proprietorship, or
2. A Partnership, or
3. A Company.

The procedure of Setting up Digital Marketing Business

Step 1: Registration of an Entity:

As discussed above, the entity could be either a Sole Proprietorship or partnership  or a company.

For Registration of Sole Proprietorship

A Sole Proprietorship may be registered in the name of a proprietor at the Department of Industries (DOI) (directly) under the Industrial Enterprises Act, 2020. In such a case, the proprietor’s liability will remain unlimited.  The documents required for registration are as follows:

1. Project report or scheme of the proposed industry,
2. Name of the Sole Proprietorship,
3. Address of the Sole Proprietorship,
4. Objective of the Sole Proprietorship,
5. Name, address and three generation details of the proprietor,,
6. A personal declaration,
7. Copy of citizenship certificate,
8. 2 copies of pp sized photos,
9. Receipt or bank voucher of payment of registration fee.

Or, For Registration of Partnership

A partnership related to digital marketing need to submit an application for registration at the DOI along with the following details and documents:

1. Project report or scheme of the proposed industry,
2. Full name of the partnership,
3. The primary place of the transaction of the partnership,
4. The objectives of the partnership including the short description of the nature of the services, as the case may be, which the firm intends to run the business,
5. The full name, surname, and permanent address of the partners,
6. The matter of restriction imposed on the power of a partner, if any,
7. The types of partnership and the capital subscribed by each partner,
8. The name of a partner or partners, who represent the partnership,
9. The mode to share the profit and loss between/among partners,
10. The mode to calculate the profit of the partnership,
11. Declaration,
12. Copy of citizenship certificates of all partners,
13. Resolution of the partners regarding registration and photo to be used,
14. 2 copies of pp sized photos of one of the promoters to be used in the certificate,
15. Partnership deed,
16. Receipt or bank voucher of payment of registration fee,
17. Approval letter of concerned authority (if required).

Or, For Registration of Company

A company related to digital marketing shall be established as per Company Act, 2006. To incorporate a company, first the person(s) desirous of incorporating such a company has to get the name of the company approved by the Office of Company Registrar (OCR) through online. After approval of the name, all required documents listed below shall be uploaded in the computer system through electronic means, and later, it shall be submitted in the office along with the application. The office issues the certificate of registration within 7 days of submitting the application. Documents required for registration of the Company are as follows:

1. Cover application,
2. Memorandum of association (MoA),
3. Articles of association (AoA),
4. Power of attorney for processing agent, if needed,
5. Copies of citizenship certificates of the promoters,
6. Shareholders’ Agreement (if any).

Step 2: Register the entity (business) at local levels

Any of the three entities listed above should be registered at the local level (ward or municipality). This step is essential for tax registration purposes and to obtain tax clearance purposes at the end of the fiscal year as well (although many tax offices still do not require clearance from these entities). The documents required are as follows:

1. Application form,
2. Copy of Company/ Firm’s Registration Certificate,
3. MoA and AoA of the Company / Partnership Agreement of Firm (if any),
4. Copy of all promoters’/ proprietors’ citizenship certificate,
5. Copy of lease agreement,
6. Building owner’s citizenship certificate photocopy,
7. Electricity/water bill or land ownership certificate of the lesser,
8. Resolution regarding registration at the office and use of the photo in the certificate,
9. Passport size photo of promoter,
10. Sketch map of the location of the head office of the Company,
11. Power of Attorney, if required,
12. Registration Fee (Varies according to the local levels),
13. Office Seal.

Step 3: Get a PAN for the business

After getting the entity registered either as a firm or company, it needs a Permanent Account Number (PAN) for tax purposes. Business PAN can be acquired by submitting an online registration and then submitting the following documents at the concerned Inland Revenue Office along with the submission number provided after online registration:

1. Tax registration form,
2. Copy of Company/ Firm’s Registration Certificate,
3. MoA and AoA of the Company / Partnership Agreement of Firm (if any),
4. Original letter issued by OCR regarding securing the company’s PAN no. (for a company only),
5. Original letter issued by OCR regarding registration of the company (for a company only),
6. Copy of all promoters’/ proprietors’ citizenship certificates,
7. Copy of lease agreement,
8. Building owner citizenship certificate photocopy,
9. Electricity/water bill or land ownership certificate of the lesser,
10. Resolution regarding registration at the tax office and use of the photo in the certificate,
11. Passport size photo of the promoter (Minute required for using the photo in the certificate),
12. Payment slip of local tax,
13. Sketch map of the location of the head office of the Company,
14. Power of Attorney, if required,
15. Office Seal.

Step 4: Registration at Department of Industries (DOI)

Since digital marketing falls under the service-oriented industry, Section 3 of the Industrial Enterprises Act, 2020 mandates that the business is registered as an industry at the Department of Industries (DOI). So, in case of the company, after its incorporation, the investor has to apply for registration of industry at DOI filling a prescribed form along with the following documents:

1. Application,
2. Project report or scheme of the proposed industry,
3. Company registration certificate,
4. Certified copy of Memorandum of Association and Article of Association,
5. Certified copy of citizenship certificate of shareholders, (if the shareholders are Nepalese citizen),
6. Certified copy of passport and recent photo and Bio-data,
7. If there is foreign investment, approval letter for foreign investment, Joint Venture agreement, Financial Project Proposal, and Bank Credibility Letter.

International Payment through Banking Channel

The major concern in operating a digital marketing business is the international payments that they have to make for the global social media and online platforms. For a lawful business operation, one needs to be careful about the proper and legitimate channel of payments that is through the banking system so as to comply with procedural requirements and taxes. However, digital marketing agencies are found to be making payments through informal channels, and to redress the situation, NRB has urged such agencies to make payment through the banking channel by publishing a notice on 31st January 2020.

How to make payment through a banking channel?

The unified circular issued for banks and financial institutions and other entities authorized for foreign exchange transactions, 2019 by NRB provides the procedures for international payment for service imports and other purposes under The Circular issued for Exchange of Convertible Foreign Currency for various purposes and The Circular issued for Exchange Facilities provided for Payment against Services received from Third Countries (hereinafter referred to as the “Circulars”). The Circulars explicitly provides that in order to make payment through the banking channel, the following conditions must be fulfilled:

1. The person or entity seeking payment service shall be Nepali.
2. The beneficiary must be an entity located abroad. A person living abroad cannot be made a beneficiary.

Procedure:

The Circulars provide detailed procedures based on the amount of payment to be made and the circumstances specifically requiring approval of the Foreign Exchange Management Department (hereinafter referred to as the “Department”) of NRB. The procedures are provided as follows:

1. For the payment of up to 3,000 USD or any other convertible currency equivalent to it, payment can be made through commercial banks by submitting necessary documents.
2. For the payment from 3,000 USD to 10,000 USD or any other convertible currency equivalent to it, payment can be made through commercial banks by the means of draft/T.T. For this payment, the service agreement approved by the regulating body or recommendation letter from the regulating body that proves the payment amount must be submitted.
3. For the payment of more than 10,000 USD or any other convertible currency equivalent to it, the payment facility shall be made available only after the approval of the Department on the recommendation of the regulating body.

Note: If there is no regulating body or if the service agreement is not approved or if the regulating body does not provide recommendation for payment, approval of the Department is required even for the payment of up to 3,000 USD or any other convertible currency equivalent to it.

The same procedure applies to those firms, companies, or any entity established in Nepal seeking payment service against the service imports in Nepal by concluding an agreement with the firm, company, or entity located abroad.

In case the agreement is not approved by the regulating body or there exists no regulating body, approval of the Department must be obtained by the firm, company, or organization importing services from the third countries. In such case, for payment of 3000 USD or more or any other convertible currency equivalent to it, the following documents are to be submitted at the Department:

1. Certificate of registration of firm, company or organization and certificate of tax registration,
2. Tax clearance certificate or evidence supporting submission of tax returns and evidence supporting payment of withholding tax for the services,
3. The latest audit report,
4. Certified agreement concluded with the entity providing services and invoices,
5. Copy of decision of board of directors of the entity requesting for payment service along with work performance as per the agreement and self-declaration regarding liability against any foreign currency embezzlement,
6. Documents proving performance of work,
7. Recommendation letter of regulating body (if available).

Note: Before receiving services worth more than 50000 USD from foreign entity, prior approval of NRB must be obtained compulsorily by submitting the documents mentioned above.

Thus, these are the procedures in order to make payments to foreign entities for service imports like digital marketing. The legal payments made without causing or leading to cause embezzlement of foreign currency definitely serves the good. Informal channels of payments should be avoided as this constitutes an offence under the Act. However, the payment system has been more challenging for Nepalese entrepreneurs also due to the absence of a national payment gateway. It’s been in news that the government is all set to bring a national payment gateway into operation, which shall comprise payments from and to the government, international payments, including private digital wallets and card transaction system, under one payment gateway. Operation of such a gateway will be a huge relief for many entrepreneurs.

You may find the circulars at https://www.nrb.org.np/contents/uploads/2020/02/Forex_Unified_Circular-2076.pdf.

The Payment Systems Department of NRB has issued a notice on 17 September enabling the flow of remittance from foreign countries through Online Financial Services for E-Commerce services. You may refer to https://www.nrb.org.np/contents/uploads/2020/09/eCommerce_Related_Notice_20770601.pdf for detailed information.