Legal Updates

By.  Atty. Raegan L. Capuno

Are you a binge-watcher of movies and videos on popular digital platforms like Netflix, Disney+, Prime Video, and HBO, or an online shopper using digital applications like Alibaba, Temu, Zalora, Amazon, or eBay? If so, Republic Act (R.A.) No. 12023, popularly known as the VAT on Digital Services which was signed into law on October 2, 2024, will significantly impact these daily routines and shopping activities, at least on the cost of availing these services, because the Philippines has taken a major step by extending the imposition of twelve percent (12%) value-added tax (VAT) to non-resident digital service providers (DSP).

The Philippine VAT system adopts the place of consumption as the situs of VAT, meaning, that when goods or services are consumed or destined to be consumed in the Philippines, VAT is imposed. Thus, all services, including digital services, consumed in the Philippines should be imposed of VAT. Hence, R.A. No. 12023 is technically not a new tax law because it merely emphasizes the rule on situs of VAT, specifically those rendered by non-resident DSP.

R.A. No. 12023 is also a welcome development because prior to this law, local DSPs were subjected to 12% VAT while non-resident DSPs operating remotely or outside the Philippines were not taxed with the same. This law will level the playing field between local and non-resident DSPs in terms of VAT imposition and collection.

While the vision of this law is laudable, it is unfortunate that like any other tax or imposition, the burden is borne by the final consumer. It is thus expected that subscription prices or fees to avail of these digital services will rise due to R.A. No. 12023.

Key Features of R.A. No. 12023

I. The Imposition

Under the law, “digital service” is 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 include online search engine, online marketplace or e-marketplace, cloud service, online media and advertising, online platform, or digital goods.

DSP, on the other hand, is a resident or non-resident supplier of digital services to a consumer who uses digital services. “Non-resident DSP” means a DSP that has no physical presence in the Philippines.

The DSPs, whether resident or non-resident, are liable to 12% VAT of the gross sales derived from digital services consumed in the Philippines.

II. VAT of Non-Resident DSP

 The VAT obligations of non-resident DSP would depend on their registration as well as that of the consumer, viz:

1. If a non-resident DSP who is required to be registered as VAT provides services to non-VAT-registered consumers, the non-resident DSP is liable to remit the VAT on the digital services consumed in the Philippines; and

2. If a non-resident DSP provides services to a VAT-registered consumer, then the VAT-registered consumer is liable to withhold and remit the VAT due on its purchase of digital services consumed in the Philippines within ten (10) days following the end of the month the withholding was made. This procedure is known as the Reverse Charge Mechanism in Digital Services.

In addition, if a VAT-registered non-resident DSP is classified as an online marketplace or e-marketplace, said non-resident DSP is also liable to remit the VAT on the transactions of non-resident sellers that go through its platform provided that it controls key aspects of the supply and performs any of the following:

a. It sets, either directly or indirectly, any of the terms and conditions under which the supply of goods is made; or

b. It is involved in the ordering or delivery of goods, whether directly or indirectly.

Non-resident DSP, however, are not allowed to claim creditable input tax.

III. Exempt Transactions

Certain digital services are VAT-exempt under R.A. No. 12023. These are online courses, online seminars, and online trainings, rendered by private educational institutions, duly accredited by the Department of Education (DepEd), the Commission on Higher Education (CHED), the Technical Education and Skills Development Authority (TESDA), as well as the sale of online subscription-based services to DepEd, CHED, TESDA, and educational institutions recognized by said government agencies.

Services rendered through different digital platforms of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries are also VAT-exempt.

IV. Other Features

The law now recognizes and mandates the issuance of digital sales or commercial invoices for every sale of digital services by the VAT-registered non-resident DSP.

The Commissioner of Internal Revenue’s power to suspend business operations due to violations of VAT laws now includes the power to block the digital services performed or rendered in the Philippines by DSPs. This action is implemented by the Department of Information and Communications Technology (DICT), through the National Telecommunications Commission (NTC).

V. What’s Next?

The Department of Finance, upon the recommendation of the Commissioner of Internal Revenue and in coordination with the DICT and NTC, will promulgate the implementing revenue regulations within ninety (90) days from the effectivity of the law. Part of the implementing rules is the establishment by the BIR of a simplified automated registration system for non-resident DSP.

This article is only for informational and educational purposes.  It is not intended as a legal advice or opinion. For assistance and legal queries, please contact Atty. Raegan L. Capuno (rlc@srmo-law.com).