Think VAT before adding to cart

By Glenn Del Rosario

The convenience of purchasing products through e-commerce platforms or e-marketplaces, binge-watching favorite shows through streaming services, and storing and managing data through the cloud are just some of the hassle-free ways that digital services have revolutionized various aspects of our daily lives. In this fast-evolving digital landscape, market competition has intensified, driving business leaders to innovate to stay relevant and create value in different ways.

While the digital ecosystem is rapidly transforming to keep pace with changing consumer demands, a recent development may prompt one to think twice before "adding to cart."

Last Jan. 17, 2025, the Bureau of Internal Revenue (BIR) issued Revenue Regulations 3-2025, which outlines the Implementing Rules and Regulations (IRR) of Republic Act 12023 or the VAT on Digital Services (VDS) Act. The law imposed a 12-percent VAT on all digital services consumed in the Philippines, regardless of whether the digital service provider (DSP) has a physical presence in the country, except for certain educational services and services rendered by financial institutions or intermediaries. This means that even non-resident DSPs (NDSP) must comply with the new VAT regulations.

Under the law, NDSPs are required to register with the BIR within the prescribed period (by April 2) through the VAT on Digital Services (VDS) portal. This is a welcome development as the online platform simplifies the compliance process, making it easier for NDSPs to register and file VAT returns. To further reduce the administrative burden, the law also provides the option to appoint a resident agent to handle matters, including recordkeeping and filing of tax returns.

The regulations adopted the reverse charge mechanism only for business-to-business transactions, requiring the consumer to account for VAT regardless of whether it is VAT-registered. For business-to-consumer (B2C) transactions, the responsibility shifts to the NDSP. Nonetheless, both the DSP and consumer should secure documentation and information about each other to properly apply the provisions of the regulations. There is a presumption that a transaction is B2C if the NDSP is unable to establish the status of its buyer. Knowing your customer procedures may help DSPs verify the status of the buyer and enhance compliance.

Although the reverse charge mechanism has been a long-established practice — taxpayers withhold 12 percent VAT on income payments to nonresidents and claim it as additional input VAT in their VAT returns, resulting in a zero effect in their financial position — its implementation for NDSPs brings coherence to its application. With the passage of the IRR and the requirement that the invoice is issued with a separate VAT amount, the option to shoulder withholding VAT or deduct VAT from total payment due to the nonresident is not even a question. We should expect a uniform treatment in the withholding VAT on payment to NDSPs from all withholding agents.

However, the VDS Act poses a considerable burden on a DSP classified as an e-marketplace. Based on the regulations, they are liable for filing the VAT return and paying the 12 percent VAT due based on the gross sales of nonresident participating merchants for digital services consumed in the Philippines. E-marketplace operators should then require their sellers to disclose their digital sales in the Philippines and ensure that the VAT is recovered from participating merchants. This could mean that the merchants need not register as NDSPs with the BIR since the e-marketplace DSP will be liable on their behalf. What could be the impact on the e-marketplace DSP if the tax authority finds that one of its participating merchants does not properly report its gross sales?

All NDSPs will be subject to VAT after 120 days from effectivity of these regulations (June 1). The government projects that the VDS Act can help generate P100 billion in revenues in the first five years of its implementation. Nonetheless, it is imperative to consider the additional burden that may be passed on to end-buyers, consumers and subscribers of such digital services.

As published in The Manila Times on 3 February 2025. Glenn Del Rosario is a Senior Manager at the Tax & Legal practice of Landicho Abela & Co. (Deloitte Philippines).