Understanding VAT on digital services

By: Mary Rose Pascual and Elajnah Gabrielle Guerrero

REPUBLIC Act (RA) 12023, which provides additional requirements for the imposition of value-added tax (VAT) on digital services, has now been signed into law. This means that online purchases from digital marketplaces and platforms that have not been subject to VAT for the longest time are now VAT-able. Streaming services like Netflix and Amazon Prime, as well as purchases from e-commerce sites such as Shopee and Lazada, are covered by this law.

But what exactly are digital services? Under the law, these include any service supplied over the internet or other electronic networks using information technology and where the supply of the service is essentially automated, such as online search engines, online marketplaces, cloud services, online media and advertising, online platforms, or digital goods.

Furthermore, a digital service provider refers to a resident or nonresident supplier of digital services to a consumer who uses digital services subject to VAT in the Philippines. A nonresident digital service provider (NDSP) is a digital service provider that has no physical presence in the Philippines. Digital services delivered by NDSPs will be considered performed or rendered in the Philippines if these are consumed herein.

RA 12023 outlines which digital service providers are covered and how VAT will be collected. While resident digital service providers incur and remit the 12 percent output VAT as usual, NDSPs will be taxed based on whether the consumer of the digital service is VAT-registered.

For non-VAT registered consumers, the NDSPs will remit the VAT to the Bureau of Internal Revenue (BIR). For VAT-registered consumers, the law introduces a "reverse charge mechanism" wherein the consumer is liable to remit the VAT to the BIR 10 days following the end of the month when the VAT was withheld. In the usual VAT mechanism, the seller is responsible for filing and paying VAT; however, this responsibility is now shifted to the purchaser of digital services.

Another difference is that VAT-registered consumers of digital services may claim the same as input tax, while NDSPs are explicitly disallowed from claiming the same as tax credits.

VAT-registered NDSPs classified as online/e-marketplaces are further liable to remit the VAT on the transactions of nonresident sellers that go through their platform, subject to the condition that the online marketplace controls the terms and conditions of the supply of goods and is involved in the ordering or delivery of the goods.

Additionally, digital service providers that are not required to be VAT-registered may be imposed a withholding percentage tax, the rate of which will be determined by the Secretary of Finance.

The law also provides the following VAT-exempt digital services: online educational services from private educational institutions duly accredited by the Department of Education, Commission on Higher Education, or Technical Education and Skills Development Authority; the sale of online subscription-based services to the mentioned government agencies and other educational institutions recognized by them; and online services provided by banks, non-bank financial intermediaries performing quasi-banking functions, and non-bank financial intermediaries, including those rendered through different digital platforms.

The registration and invoicing requirements specifically for digital services providers are as follows: they are now expressly required to be VAT-registered, and for NDSPs, a simplified automated registration system will be implemented. Failure to register may lead to the blocking of digital services performed or rendered in the Philippines by the BIR in cooperation with the Department of Information and Communications Technology and the National Telecommunications Commission.

This law aims to generate at least P80 billion in revenues, 5 percent of which will be allocated to and used for the development of creative industries, as defined under RA 11904. However, in terms of tax administration, the technological readiness of the Philippines to implement the provisions of the law should be considered. Although the automated registration for NDSPs provides a convenient avenue for them to register, there may be some uncertainty on the side of the taxpayers, given that the country's digital infrastructure is not as advanced compared to other countries. Furthermore, monitoring taxpayer compliance, especially on the registration of NDSPs, may pose challenges due to their lack of physical presence in the Philippines.

It is hoped that the implementing rules to be issued under this law will address key questions and provide clarity for taxpayers, especially for NDSPs. The requirement for VAT-registered consumers to remit taxes via the reverse charge mechanism marks a shift from the usual practice, where sellers typically handle VAT remittance and filing. Clear guidance on this aspect — as well as on the expected changes in digital service pricing and other administrative responsibilities — will be crucial to ensure smooth compliance and minimize any potential confusion among affected taxpayers.

As published in The Manila Times on 07 October 2024. Mary Rose Pascual is a Tax & Legal Partner and Elajnah Gabrielle Guerrero is an Assistant Manager, both at the Tax & Legal practice of Deloitte Philippines. To learn more about the VAT on Digital Services Law, join Deloitte Philippines’ inaugural tax summit, Tax Reforms Unlocked: Opportunities and Implications for Taxpayers, which will be held on Tuesday, 19 November 2024. Register here: https://deloi.tt/3Btvt9b