What are Digital Services for VAT Purposes?
By: Atty. Euney Marie Mata-Perez on December 5,2024
Republic Act (RA) No. 12023, which imposed value-added tax (VAT) on digital services and amended several provisions of our National Internal Revenue Code (“Tax Code”), is a game changer in VAT taxation in the Philippines.
VAT is a transaction tax, and thus, for the government to be entitled to impose it, the transaction must occur, or the services must be rendered in the Philippines.
RA No. 12023, however, expanded the “nexus” of VAT taxation on digital services to provide that “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”.
This new rule now expands the term “performance or delivery of service” to include “consumption”. In other words, if the service is consumed or used by the customer or client in the Philippines, it shall be considered rendered or performed in the Philippines, and thus, the government shall have the right to impose VAT on those services. However, it should be emphasized that this new rule applies only to digital services, and not to all types of services.
What are digital services for VAT purposes then?
RA No. 12023 introduced a definition of “digital services” in Section 108-A of the Tax Code. It expressly provides that the term “digital service” shall refer to any service that is supplied over the internet or other electronic network with the use of information technology and where the supply of the service is essentially automated. Digital services shall include:
(1) Online search engine;
(2) Online marketplace or e-marketplace;
(3) Cloud service;
(4) Online media and advertising;
(5) Online platform; or
(6) Digital goods.
Dissecting the aforesaid definition, we note the following elements:
- The service must be supplied over the internal or other electronic network,
- The supply must be with the use of information technology, and
- The supply of the service is essentially automated.
The enumeration, although not exclusive, is telling. Under the statutory principle of “ejusdem generis” (of the same kind), only similar services should be subjected to VAT.
Thus, digital services should not cover services performed abroad using human skills, profession, and expertise, the performance of which entail man-hours, such as those rendered by professionals.
The phrase “where the supply of the service is essentially automated” which is in the law qualifies what service should be considered as “digital services” for VAT purposes. The use of the term “essentially” should mean that the nature of the services renders their supply essentially automated, involving minimal human intervention, and impossible to perform in the absence of information technology. Thus, services rendered or performed by professionals or human beings, using their skills and expertise, should be excluded.
The move to tax digital services based on the place of consumption has also been adopted by other countries, and thus, the Philippines is not alone in adopting the rule. The EU, for instance, has a similar imposition. In the EU, digital services are equated with “electronically supplied services” which cover services delivered over the Internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to perform in the absence of information technology. These services include the following:
- the supply of digitized products generally, including software and changes to or upgrades of software;
- services providing or supporting a business or personal presence on an electronic network such as a website or a webpage;
- services automatically generated from a computer via the Internet or an electronic network, in response to specific data input by the recipient;
- the transfer for consideration of the right to put goods or services up for sale on an Internet site operating as an online market on which potential buyers make their bids by an automated procedure and on which the parties are notified of a sale by electronic mail automatically generated from a computer; and
- Internet Service Packages (ISP) of information in which the telecommunications component forms an ancillary and subordinate part.
It is also clear in the EU that services of professionals, such as lawyers and financial consultants, who advise clients by e-mail, are excluded. Also, the following are excluded, among others: (a) teaching services, where the course content is delivered by a teacher over the Internet or an electronic network (namely via a remote link); (b) advertising services, in particular as in newspapers, on posters and on television; (c) telephone helpdesk services; and (d) teaching services purely involving correspondence courses, such as postal courses. (Source: https://taxation-customs.ec.europa.eu/system/files/2016-11/information_microbusinesses_euvat_2015_en.pdf)
It should also be noted the United Nations Conference on Trade and Development or UNCTAD, citing the OECD in its UNCTAD Technical Notes on ICT for Development:: International Trade in ICT Services and ICT-enabled Services: Proposed Indicators from the Partnership on Measuring ICT for Development , distinguished ICT services from ICT-enabled services. ICT services are viewed to include telecommunication services, computer services-computer software, licenses to produce/distribute computer software. “ICT-enabled services” are those performed with use of technology or telecommunications systems, such as human resource management, payroll, accounting, architectural design, research, editing, education, and so on. Digital services should be equated with ICT services only.
In sum, in implementing RA No. 12023, care should be exercised so that VAT will be imposed only on what are truly “digital services” and not on other types of services which are not within the contemplation of the law.
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 the Chair of the Tax Committee of the Management Association of the Philippines. She acknowledges the contributions of Mr. Joshua Rizlan A. Simbillo and Ms. Elaisha Nelle C. Espinosa 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