Eric T. Dykimching | Christianne Grace F. Salonga
On 2 October 2024, President Ferdinand R. Marcos Jr. signed into law Republic Act No. 12023, otherwise known as the “Value-Added Tax on Digital Services Law.” This legislation imposes value-added tax (VAT) on digital services rendered by non-resident digital service providers (DSPs).
The Bureau of Internal Revenue (BIR) anticipates that this law will create a fairer compliance landscape for all DSPs serving consumers in the Philippines. It aims to equalize tax obligations between local and foreign DSPs, fostering competition and ultimately benefiting consumers through improved services and pricing.
BIR Commissioner Romeo Lumagui Jr. stated that this new law will promote fair competition within the growing digital economy in the Philippines, correcting the previous disparity where only digital services purchased from local or resident DSPs were subject to VAT, leaving foreign or non-resident DSPs exempt.
Under the VAT on Digital Services Law, any entity, who in the course of trade or business, sells, exchanges, or leases goods or services, including digital services, will be liable for VAT and will have to register as a VAT taxpayer. The term in the course of trade or business refers to the regular conduct of commercial activities. Meanwhile, digital services are those services supplied over the internet or electronic networks, primarily through automated means, and encompass various offerings such as online search engines, marketplaces, cloud services, online media, and digital goods.
The law clarifies that services provided by non-resident DSPs are considered rendered in the Philippines if consumed locally.
As a general rule, DSPs, whether resident or non-resident, shall be liable for assessing, collecting, and remitting the VAT on digital services consumed in the Philippines. Thus, non-resident DSPs required to register for VAT is responsible for remitting VAT on digital services consumed by non-VAT registered consumers in the Philippines. However, if the consumers are VAT-registered, these consumers must withhold and remit the VAT on purchases from non-resident DSPs to the BIR within ten (10) days after the month of withholding (also known as the “Reverse Charge Mechanism”).
If a VAT-registered non-resident DSP operates as an online marketplace, it must remit VAT on transactions conducted by non-resident sellers through its platform, provided it controls key aspects of the supply process and performs any of the following: (a) it sets, either directly or indirectly, any of the terms and conditions under which the supply of goods is made; or (b) it is involved in the ordering or delivery of goods, whether directly or indirectly.
Notably, the law provides that non-resident DSPs shall not be allowed to claim creditable input VAT.
Certain digital services are exempt from VAT, including the sale of online subscription-based services to the Department of Education, the Commission on Higher Education, the Technical Education and Skills Development Authority, and educational institutions recognized by the said government agencies, and services of banks and financial intermediaries rendered through digital platforms.
A digital sales or commercial invoice shall be issued for every sale, barter or exchange of digital services made by a VAT-registered DSP.
The VAT on Digital Services Law empowers the BIR to suspend services of DSPs who fail to register as a VAT taxpayer by blocking the digital services rendered in the Philippines through the Department of Information and Communications Technology and the National Telecommunications Commission.
Five percent (5%) of the additional revenue generated from the VAT on DSPs will be allocated for the development of creative industries, as defined under Republic Act No. 11904, for five (5) years following the law’s enactment.
The VAT on Digital Services Law aims to enhance revenue generation, promote transparency, and ensure accountability among DSPs, particularly non-resident DSPs, benefiting from the Philippine market. President Marcos Jr. emphasized that this measure is not new but a reinforcement of the BIR’s authority to regulate VAT collection from these businesses that are operating in the Philippines.