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VAT on Digital Transactions

By Euney Marie Mata-Perez on November 25, 2021

On Sept. 21, 2021, the House of Representatives passed on third reading House Bill 7425 (HB 7425), which seeks to amend the National Internal Revenue Code (Tax Code) to impose a 12-percent value-added tax (VAT) on the sale of digital services and goods to Philippine residents.

HB 7425 expanded the definition of VAT-liable persons to include those selling goods that are “digital or electronic” in nature and those rendering services “rendered electronically or otherwise”. This sale of goods or services should be done through an “online platform”.

These sellers or digital service providers (DSPs) are acknowledged to be “nonresidents” and are thus referred to as “nonresident digital service providers”. HB 7425 states that DSPs may include the following: * a seller of goods through information-based technology of the internet or an intermediary for such sales; * a platform provider that uses the internet to deliver marketing messages to attract buyers; * a host of online auctions conducted through the internet; * a supplier of digital services to a buyer in exchange for a regular subscription fee for the use of said product or services; and * a supplier of goods or services that can be delivered through an information technology infrastructure, such as the internet.

“Digital service” is defined as services that are “delivered” or “subscribed over the internet” and other electronic networks and which cannot be used without the use of information technology and where delivery may be automated. These include the online licensing of software, mobile applications, video and online games, mobile applications, webcasts and webinars, the provision of digital content such as music and files, advertising platforms, online marketing platforms, search engine services, social networks, data and website hosting, online data warehousing, and internet-based telecommunications.

Based on the foregoing definitions and enumerations, streaming apps, social media ads, and sales via online platforms will be deemed covered and the fees paid for these will be subject to the 12 percent VAT. However, a careful reading of the provisions also reveal that several transactions may inappropriately be subject to VAT.

Territoriality and source rules In this age and especially during the Covid-19 pandemic, the internet has been used so extensively to transact business. However, it should be borne in mind that not all transactions made or done with the help of the internet or transmitted through the internet can be considered made, performed, or rendered in the Philippines to justify the imposition of Philippine VAT.

Subjecting the consideration paid for the sale of goods and services made through an electronic platform to VAT assumes that those sales are deemed to have been made and/or rendered in the Philippines. VAT is a transaction tax and pursuant to the rules on territoriality can only be imposed on sales and/or transactions that take place in the country. Under basic Tax Code source rules, fees for services are deemed Philippine-sourced if the services are rendered in the country and any consideration for the sale of goods are deemed Philippine-sourced if the sales also take place in the Philippines.

Subjecting to VAT any and all output for services that are transmitted or delivered through the internet under RA 7425 can thus disregard basic territoriality rules. The sales (actual transfer of title) can happen abroad. The services can also be performed abroad and the output of services, like a design or advice, can just have been “transmitted” through the internet. Also, the provider of goods or services may not have solicited the sale of goods or services themselves. Buyers in the Philippines are free to search the internet worldwide for goods or services. HB 7425 does not make a distinction as to who made the offer of sale of goods or services. Neither does it consider the regularity or continuity of the conduct of such sales or services — a criteria in determining whether a nonresident entity is deemed to be doing or engaged in trade or business in the Philippines.

Compliance and enforcement RA 7425 requires nonresident DSPs to register for VAT purposes and issue an electronic invoice or receipt, subject to the rules and regulations prescribed by the Secretary of Finance. However, being nonresidents, they do not have any Philippine presence, i.e., no branch or agent in the country. They are basically outside the Philippines’ taxing jurisdiction. It is for this reason that under present rules, the VAT (on services rendered in the Philippines) and income tax due on Philippine-sourced income of nonresidents is collected through withholding — the payors of the goods and services withhold the tax from the service fees or purchase price and are the ones obliged to remit such to the government. Also, HB 7425 assumes that nonresident DSPs agree to the requirements imposed. What happens if they refuse to submit to the BIR’s administrative requirements? How can the BIR run after them? International trend It is a fact that international transactions done with the help of or through information technology platforms that can be accessed by people all over the globe pose an international taxation challenge. There have been efforts by countries to review prevailing taxation nexus rules to consider taxing transactions based on the source of the economic activity that gave rise to the income. If countries do not agree on how digital transactions should be taxed at an international level, they will just make their own individual rules (like what HB 7425 seeks to achieve), leading to confusion and even double taxation. Our legislators should carefully review the provisions proposed by HB 7425.

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Euney Marie J. Mata-Perez is a CPA-lawyer and the managing partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A, and tax lawyer and has been ranked as one of the top 100 lawyers of the Philippines by the Asia Business Law Journal. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any questions or comments, you can email the author at or visit the MTF website at

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