Differentiating ‘digital goods’ and ‘digital services’ for VAT purposes
By: Atty. Euney Marie J. Mata-Perez on March 20, 2025
THE Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) 3-2025, prescribing policies and guidelines for the implementation of Republic Act (RA) 12023, the law which imposes value-added tax (VAT) on digital services by amending several provisions of our National Internal Revenue Code (Tax Code).
Under RA 12023, “digital services delivered by nonresident digital service providers shall be considered performed or rendered in the Philippines if the digital services are consumed in the Philippines” and thus, subject to 12-percent VAT.
RA 12023 defined “digital services” in Section 108-A of the Tax Code as any service supplied on the internet or other electronic network with the use of information technology, and where the supply of the service is essentially automated. The law enumerated that digital services shall include, but are not limited to, online search engine, online marketplace or e-marketplace, cloud service, online media and advertising, online platform or digital goods.
Significantly, the enumeration included “digital goods,” but RA 12023 did not define the term separately.
In this regard, it is RR 3-2025 which defines digital goods as intangible goods delivered or transferred in digital form, including sounds, images, data, facts or combinations thereof. They shall include, but are not limited to, digital content purchases (downloads of e-books, music, videos, software, applications, digital media, e-games, online courses); subscription-based supplies of content (news, music, streaming media, online gaming, online courses); digital art; supplies of software services and maintenance (antivirus software, digital data storage, etc.); licensing of content (access to specialized online content such as publications and journals, software, cloud-based systems, etc.); telecommunication and broadcasting services; and virtual assets.
RR 3-2025 also defines “digital services” to include cloud and IT infrastructure, such as data storage and web hosting, 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 for business insights, cybersecurity and regulatory compliance, masking and encryption services (e.g., virtual private network services), system maintenance and optimization for digital services, online consultations through a digital platform (i.e., website, applications, e-marketplace) and interactive media, like online gaming and augmented and/or virtual reality experiences.
The definitions are expansive, and include the supply of software services and maintenance, licensing of content, telecommunication and broadcasting services, as well as “online consultations through a digital platform,” system maintenance for digital services and professional networking.
However, digital services should cover a sale of service delivered on the internet with very minimal, or almost no human intervention, or a high degree of automation. RA 12023, which provides that the service should be “essentially automated,” is consistent with this general definition.
This means digital services must be either entirely automatic, for example, a consumer clicks “buy now” on the website and the content downloads onto their device, or basically automatic, because the small amount of manual process involved does not change the nature of the supply from an e-service (https://www.sage.com/en-gb/blog/a-guide-to-vat-for-digital-services/).
Not to be confused
Digital goods should not be confused with digital services. Not all services supplied using the internet should result in the service being considered a “digital service,” or even a “digital good,” for VAT purposes.
For example, services of lawyers and consultants who advise clients through email or provide professional courses where the content is delivered by a teacher on the internet should not be considered digital services or digital goods. Likewise, teleconsulting by medical practitioners should not fall in the definition. Such services are not essentially automated, but rather require a high degree of human intervention.
Section 10 of RR 3-2025 enumerates services which are excluded from the definition of digital services. These include educational services such as online courses, and sale of online-based subscription services by private educational institutions, duly accredited by the Department of Education, the Commission on Higher Education, the Technical Education and Skills Development Authority, and those rendered by government educational institutions and services of banks, nonbank financial intermediaries performing quasi-banking functions, and other nonbank intermediaries provided by different digital platforms.
The exclusion, however, does not expressly mention services rendered by professionals, such as lawyers, accountants and architects, which require a high degree of human intervention.
Taiwan, Singapore, Vietnam and Indonesia have also started to impose a similar tax on digital services. Thus, imposing VAT on digital services allows the Philippines to be competitive and acknowledges the valuable impact of digital services on the economy.Advertisement
However, in implementing the law, there is a risk that regulators would adopt an expansive definition of what constitutes “digital services” or “digital goods.” This may not fall within the contemplation of the law and may result in the improper imposition of VAT on these types of services or products.
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 the chairman of the Tax Committee of the Management Association of the Philippines. She acknowledges the contribution of Raida Argeli Grefiel in this article. Email the author at info@mtfcounsel.com or visit www.mtfcounsel.com.