Explaining VAT on digital services
By: Atty. Euney Marie Mata-Perez on October 10,2024
On October 3, 2024, Republic Act (RA) No. 12023 was signed into law, making effective the imposition of value-added tax (“VAT”) on gross sales derived from the sale or exchange of digital services, and thereby amending certain provisions of the National Internal Revenue Code of 1997 (“Tax Code”). With the passage of the law, the Philippines joins other countries in the region, such as Singapore, Indonesia, Malaysia, and Thailand, which have started imposing a similar VAT in 2020 or 2021.
The government expects to generate tax collections of approximately PhP105 billion within five years from its implementation.
What is a “Digital Service”?
Section 105 of the Tax Code on VAT on services was amended to state that “any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, including digital services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108” of the Tax Code.
A new definition of what constitutes a “digital service” is added to Section 108-A of the Tax Code, as one which refers to any service supplied over the internet or other electronic network with the use of information technology and where the supply of the service is essentially automated. Such service shall include online search engine, online marketplace or e-marketplace, cloud service, online media and advertising, online platform, and digital goods.
Also added to Section 108-B of the Tax Code is a definition of a “Digital Service Provider” or DSP, as a resident or nonresident supplier of digital services to a consumer who uses digital services subject to VAT in the Philippines.
Meanwhile, Section 108-C of the Tax Code, as amended by RA No. 12023, defines a nonresident digital provider as a digital service provider that has no physical presence in the Philippines.
Section 105 of the Tax Code was also amended to state a new situs rule (for VAT purposes), stating that “digital services delivered by nonresident digital service providers are considered performed or rendered in the Philippines if the digital services are consumed in the Philippines.” This new rule is necessary to put forth the digital services within the ambit of our VAT regime, since being a transaction tax, VAT can be imposed legally only on services performed within the Philippines.
How the VAT is collected
As a general rule, DSPs, whether resident or nonresident, shall withhold and remit the VAT on digital services consumed in the Philippines. However, the liability to remit the VAT is shifted to a VAT-registered consumer in transactions with a nonresident DSP. In that case, the VAT-registered consumer must remit the VAT on its purchase from the nonresident DSP within ten days following the end of the month the withholding was made. This means that this withholding tax obligation arises only if the consumer is in business itself, or in other words, in back to back or B2B transactions.
Furthermore, a VAT-registered nonresident DSP classified as an online marketplace or e-marketplace is liable to remit VAT on the transactions of nonresident sellers that go through its platform, if either of the two conditions below exist:
- The DSP controls key aspects of the supply of goods, sets the terms and conditions under which the supply of goods is made, directly or indirectly;
or
- The DSP is involved in the ordering of delivery of goods, directly or indirectly.
VAT Registration and Invoicing
To place them within the ambit of our VAT system, DSPs are thus required to register with our Bureau of Internal Revenue (BIR). Such registration is also required for any provider of digital goods or services if its gross sales exceed the PhP3,000,000 threshold for the past or ensuing 12-month period.
DSPs are also required to issue a digital sales invoice or commercial invoice for every sale, barter, or exchange of digital service, which invoice shall contain the following information: date of transaction, transaction reference number, identification of consumer, brief description of transaction, and total amount with an indication that such amount includes the VAT.
If the sale includes some services subject to VAT and some that are VAT zero-rated or VAT-exempt, the invoice shall indicate the breakdown accordingly.
No Creditable Input VAT for Nonresident DSPs
Nonresident DSPs, however, shall not be allowed to claim creditable input VAT (Section 113(C) of the Tax Code, as amended).
Failure to register shall be meted with the penalty of temporary closure for not less than five days, including the blocking of digital services performed or rendered in the Philippines by a DSP. The order of closure shall be lifted only upon compliance with the requirements prescribed by the Commissioner of Internal Revenue.
Educational and Banking Services on Digital Platforms are VAT-exempt
Under the amendment, VAT-exempt transactions now include educational services conducted through online courses, online seminars and online trainings, as well as services of banks, non-financial intermediaries performing quasi-banking functions and other non-bank financial intermediaries rendered through digital platforms.
RA No. 12023 is thus historic in a sense, and it seeks to place on equitable footing foreign and local DSPs.
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 Asia Business Law Journal and is the incoming Chair of the Tax Committee of the Management Association of the Philippines. She acknowledges the contributions of Atty. Raida Argeli G. Grefiel and Atty. Joshua Rizlan A. Simbillo in this article. 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 question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF website at www.mtfcounsel.com