Guidelines in imposing VAT on digital services
The Bureau of Internal Revenue (“BIR”) issued Revenue Regulations (RR) No. 3-2025 on January 16, 2025, the awaited regulations implementing the provisions of Republic Act (“RA”) No. 12023, which imposed a 12% value-added tax (“VAT”) on gross sales derived from the sale or exchange of digital services in the Philippines.
Supply of digital goods subject to VAT
RR No. 3-2025 adopted the definition of “digital services” set out in RA No. 12023 which refers to any service supplied over the internet or electronic network with the use of information technology (“IT”) and where the supply of service is automated.
The law specified that digital services include the supply of digital goods without defining what are “digital goods”. In this regard, RR No. 3-2025 defines digital goods to refer to intangible goods that are delivered or transferred in digital form, including sounds, images, data, facts, or combinations thereof. This further includes digital content purchases, subscription-based supplies of content, digital art, supplies of software services and maintenance, licensing of content, telecommunication and broadcasting services, and virtual assets.
RR No. 3-2025 also provides that for VAT purposes, “digital goods” also comprise cloud and IT infrastructure, e-commerce platforms and payment processing, targeted digital marketing and analytics, communication tools and collaborative software, e-learning platforms and professional networking, data analytics and Artificial Intelligence (AI) for business insights, cybersecurity and regulatory compliance, masking and encryption services, system maintenance and digital optimization services, online consultations through digital platform, and interactive media like online gaming and Augmented and/or Virtual Reality (AR/VR) experiences.
Situs of taxation
The digital services shall be considered performed, rendered, supplied or delivered in the Philippines, and thus subject to 12% VAT, if the buyer or user is located in the Philippines. It is imposed regardless of residence of the digital service provider (“DSP”).
In determining whether the digital service is consumed in the Philippines, RR No. 3-2025 provides that the following information, among others, may be used:
- Payment information;
- Residence information of the buyer;
- Access information; or
- Any other information to establish the most reliable determination of the buyer’s location.
In the event that the abovementioned information is contradictory, the DSP should provide at least two pieces of non-conflicting evidence of where the service is consumed.
VAT registration and payment
For VAT registration purposes, both resident and nonresident DSPs must register for VAT if their gross sales or receipts exceed, or are expected to exceed, PhP3,000,000 within a 12-month period. Nonresident DSPs shall register through the VAT on Digital Services (“VDS”) Portal without needing a local representative, but they may appoint a third-party service provider. For VAT purposes, the appointment of a third-party service provider does not classify the nonresident DSP as a foreign corporation doing business in the Philippines.
For purposes of filing VAT returns and VAT payment, RR No. 3-2025 differentiates resident VAT-registered DSPs from nonresident VAT-registered DSPs.
Resident VAT-registered DSPs must file the VAT return and pay the VAT due, regardless whether the buyer is engaged in business located in the Philippines or not. Nonresident VAT-registered DSPs are required to file the VAT returns and pay the VAT due through the VDS Portal if the buyer is not engaged in business located in the Philippines. If their
buyer is either (1) a person engaged in business located in the Philippines, or (2) the government of the Philippines or any of its political subdivisions, instrumentalities, or agencies, including government-owned and controlled corporations, the buyer shall electronically file the tax return, and withhold and pay the corresponding VAT due.
In the case of unregistered nonresident DSPs providing digital services to persons engaged in business located in the Philippines, the burden of filing the return and paying VAT shifts to the buyer.
RR No. 3-2025 also sets out the rules on DSPs classified as electronic marketplaces (“e-marketplaces”).
Resident VAT-registered DSPs classified as e-marketplaces with nonresident participating merchants or sellers are required to electronically file the return and pay the VAT due based on the gross sales of the nonresident merchants or sellers on digital services consumed or used in the Philippines.
Nonresident VAT-registered DSPs classified as e-marketplaces shall be responsible to electronically file the return and pay VAT similar to the immediately preceding rule if: (a) they set any of the terms and conditions under which the supply of digital services is made; or (b) they are involved in the ordering or delivery of digital services, that is having influence over the conditions of delivery, transmission of approval to supplier, and provision of order fulfillment services.
Pursuant to Section 14 of RR No. 3-2025, all nonresident DSPs required to register for VAT shall register with the BIR within sixty (60) days from the effectivity of the regulations through the VDS Portal, and shall immediately be subject to VAT after 120 days from the effectivity of the regulations.
VAT-exempt transactions
RR No. 3- 2025 reiterated the provisions of the law on VAT-exempt digital service transactions which are as follows: (1) educational services rendered by private educational institutions accredited by the Department of Education (DepEd), Commission on Higher Education (CHED), Technical Education and Skills Development Authority (TESDA), and those rendered by government educational institutions; (2) sale of online subscription-based services to DepEd, CHED, TESDA and educational institutions recognized by the said government agencies; and (3) services of bank, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries that are rendered through digital platforms.
In addition to the law, RR No. 3-2025 provided that services of Virtual Asset Service Providers (VASPs) registered and classified as Non-Bank Financial Institutions shall be VAT-exempt. Digital service transactions of other VASPs, however, shall be subject to VAT.
Invoicing Requirements
Both resident and nonresident VAT-registered DSPs shall issue sales or commercial invoices for every sale, barter, or exchange of digital services. Nonresident VAT-registered DSPs may issue electronic sales or commercial invoices and are not required to secure an Authority to Print from the BIR.
Raida Argeli G. Grefiel is an Associate of Mata-Perez, Tamayo & Francisco (MTF Counsel). 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
By: Atty. Raida Argeli G. Grefiel on February 13,2025
The Bureau of Internal Revenue (“BIR”) issued Revenue Regulations (RR) No. 3-2025 on January 16, 2025, the awaited regulations implementing the provisions of Republic Act (“RA”) No. 12023, which imposed a 12% value-added tax (“VAT”) on gross sales derived from the sale or exchange of digital services in the Philippines.
Supply of digital goods subject to VAT
RR No. 3-2025 adopted the definition of “digital services” set out in RA No. 12023 which refers to any service supplied over the internet or electronic network with the use of information technology (“IT”) and where the supply of service is automated.
The law specified that digital services include the supply of digital goods without defining what are “digital goods”. In this regard, RR No. 3-2025 defines digital goods to refer to intangible goods that are delivered or transferred in digital form, including sounds, images, data, facts, or combinations thereof. This further includes digital content purchases, subscription-based supplies of content, digital art, supplies of software services and maintenance, licensing of content, telecommunication and broadcasting services, and virtual assets.
RR No. 3-2025 also provides that for VAT purposes, “digital goods” also comprise cloud and IT infrastructure, e-commerce platforms and payment processing, targeted digital marketing and analytics, communication tools and collaborative software, e-learning platforms and professional networking, data analytics and Artificial Intelligence (AI) for business insights, cybersecurity and regulatory compliance, masking and encryption services, system maintenance and digital optimization services, online consultations through digital platform, and interactive media like online gaming and Augmented and/or Virtual Reality (AR/VR) experiences.
Situs of taxation
The digital services shall be considered performed, rendered, supplied or delivered in the Philippines, and thus subject to 12% VAT, if the buyer or user is located in the Philippines. It is imposed regardless of residence of the digital service provider (“DSP”).
In determining whether the digital service is consumed in the Philippines, RR No. 3-2025 provides that the following information, among others, may be used:
- Payment information;
- Residence information of the buyer;
- Access information; or
- Any other information to establish the most reliable determination of the buyer’s location.
In the event that the abovementioned information is contradictory, the DSP should provide at least two pieces of non-conflicting evidence of where the service is consumed.
VAT registration and payment
For VAT registration purposes, both resident and nonresident DSPs must register for VAT if their gross sales or receipts exceed, or are expected to exceed, PhP3,000,000 within a 12-month period. Nonresident DSPs shall register through the VAT on Digital Services (“VDS”) Portal without needing a local representative, but they may appoint a third-party service provider. For VAT purposes, the appointment of a third-party service provider does not classify the nonresident DSP as a foreign corporation doing business in the Philippines.
For purposes of filing VAT returns and VAT payment, RR No. 3-2025 differentiates resident VAT-registered DSPs from nonresident VAT-registered DSPs.
Resident VAT-registered DSPs must file the VAT return and pay the VAT due, regardless whether the buyer is engaged in business located in the Philippines or not. Nonresident VAT-registered DSPs are required to file the VAT returns and pay the VAT due through the VDS Portal if the buyer is not engaged in business located in the Philippines. If their
buyer is either (1) a person engaged in business located in the Philippines, or (2) the government of the Philippines or any of its political subdivisions, instrumentalities, or agencies, including government-owned and controlled corporations, the buyer shall electronically file the tax return, and withhold and pay the corresponding VAT due.
In the case of unregistered nonresident DSPs providing digital services to persons engaged in business located in the Philippines, the burden of filing the return and paying VAT shifts to the buyer.
RR No. 3-2025 also sets out the rules on DSPs classified as electronic marketplaces (“e-marketplaces”).
Resident VAT-registered DSPs classified as e-marketplaces with nonresident participating merchants or sellers are required to electronically file the return and pay the VAT due based on the gross sales of the nonresident merchants or sellers on digital services consumed or used in the Philippines.
Nonresident VAT-registered DSPs classified as e-marketplaces shall be responsible to electronically file the return and pay VAT similar to the immediately preceding rule if: (a) they set any of the terms and conditions under which the supply of digital services is made; or (b) they are involved in the ordering or delivery of digital services, that is having influence over the conditions of delivery, transmission of approval to supplier, and provision of order fulfillment services.
Pursuant to Section 14 of RR No. 3-2025, all nonresident DSPs required to register for VAT shall register with the BIR within sixty (60) days from the effectivity of the regulations through the VDS Portal, and shall immediately be subject to VAT after 120 days from the effectivity of the regulations.
VAT-exempt transactions
RR No. 3- 2025 reiterated the provisions of the law on VAT-exempt digital service transactions which are as follows: (1) educational services rendered by private educational institutions accredited by the Department of Education (DepEd), Commission on Higher Education (CHED), Technical Education and Skills Development Authority (TESDA), and those rendered by government educational institutions; (2) sale of online subscription-based services to DepEd, CHED, TESDA and educational institutions recognized by the said government agencies; and (3) services of bank, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries that are rendered through digital platforms.
In addition to the law, RR No. 3-2025 provided that services of Virtual Asset Service Providers (VASPs) registered and classified as Non-Bank Financial Institutions shall be VAT-exempt. Digital service transactions of other VASPs, however, shall be subject to VAT.
Invoicing Requirements
Both resident and nonresident VAT-registered DSPs shall issue sales or commercial invoices for every sale, barter, or exchange of digital services. Nonresident VAT-registered DSPs may issue electronic sales or commercial invoices and are not required to secure an Authority to Print from the BIR.
Raida Argeli G. Grefiel is an Associate of Mata-Perez, Tamayo & Francisco (MTF Counsel). 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