Last month, I received an email from my cloud services provider stating that my monthly cloud subscription will be increasing from P149 a month to P179, a 20% increase. While no further explanation was provided, I could only surmise that it is associated with increased global costs, being the usual reason given by suppliers to their customers. Just recently, the value-added tax (VAT) on digital services was passed into law under Republic Act (RA) No. 12023 last October 2, 2024. Could this drive another increase in our subscription-based internet services?
With the passage of RA No. 12023, the government targets that an additional estimated P105 billion in revenues over the next five years will be collected from the implementation of VAT on digital services, wherein a portion thereof is dedicated to the improvement of local creative industries under the Philippine Creative Industries Development Act.
As VAT is by nature a passed-on tax, how does this impact consumer behavior on online entertainment and shopping? In consideration of ease of doing business and taxpayer compliance, what are the potential compliance challenges of consumers and digital service providers and how to effectively address these challenges?
Defining the coverage of digital services
Under the International VAT/Goods and Services Tax (GST) Guidelines issued by the Organisation for Economic Co-operation and Development (OECD), the overarching purpose of VAT is to impose a broad-based tax on final consumption of international transactions, focusing on trade in services and intangibles, to minimize risks on double taxation and inconsistencies on VAT treatment for cross-border transactions. Similarly, the “destination principle” on VAT treatment in the Philippines provides that goods or services consumed within the Philippines are subject to VAT unless otherwise exempted.
Digital services, as defined by RA No. 12023, are services that are supplied through the internet or other electronic networks with the use of technology and where the services are essentially automated, which include online search engines, marketplaces, cloud services, media or advertising, online platforms, and other digital goods, among others. The law covers all digital service providers who are either resident or non-resident suppliers of digital services.
This means that your everyday entertainment, shopping, cloud storage, and even online dating services may be subject to VAT when such service is consumed in the Philippines, whether the service provider is located within or outside the Philippines. Exemptions from VAT include digital services provided by bank and non-bank institutions and educational services, online courses, seminars, and trainings rendered by private educational institutions accredited by the Department of Education, Commission of Higher Education, or Technical Education and Skills Development Authority.
Defining the registration, invoicing, and tax filing compliance for NDSPs
With the law targeting tax collection from non-resident digital service providers (NDSPs), perhaps one of the salient changes under RA No. 12023 is the requirement for NDSPs to register as VAT taxpayers with the Bureau of Internal Revenue (BIR) for purposes of collecting and remitting the VAT on digital services. The registration for NDSPs is through a simplified automated registration system.
Moreover, RA No. 12023 requires that the digital invoices issued by the NDSPs should contain the date of the transaction, reference number, customer identification, a brief description of the transaction, and the total amount of the transaction inclusive of VAT, including a breakdown of the sales price for mixed transactions (e.g., VAT-exempt, VAT zero-rated, VATable).
Generally, the NDSPs are liable for the remittance of any VAT, including those NDSPs classified as online marketplaces or e-marketplaces, provided 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. For business-to-business transactions, the buyers, being the VAT-registered taxpayers engaged in business, are liable to withhold and remit the VAT due on the purchase of digital services consumed in the Philippines under a reverse charge mechanism.
The OECD guidelines highlight minimal compliance costs for business and administrative costs for the tax authorities and flexibility of systems for taxation in adapting to technological and commercial developments. It would be beneficial to align with the guidelines; for instance, the registration information may be limited only to the business name, contact information, registered business address overseas, official websites, and a national identification number. Likewise, the registration process and the tax filing system may be automated.
Defining the next steps
Though not a new tax, imposing VAT on digital services rendered by NDSPs is in response to the growing shift in the avenue of doing business and in levelling the playing field of local and foreign digital service providers rendering services in the Philippines.
As we wait for the issuance of the Implementing Rules and Regulations, we take note of certain points for clarification, such as the definition and coverage of digital automated services and the guidance on the delineation of transactions under consolidated contracts or global master agreements that cover different tax jurisdictions. For instance, some software subscriptions include technical service support that is usually rendered outside the Philippines. Will this be included in the coverage of digital services?
On the other hand, with regards to the registration of NDSPs for VAT, will the P3 million threshold for local VAT registration be used, as it would seem that the registration of the NDSPs is the determining factor whether the transaction is subject to VAT or percentage tax?
It is our hope that the Implementing Rules and Regulations and the related BIR issuances provide clear guidelines on how to properly navigate the tax compliance on digital services.
As published in Mindanao Times, dated 28 October 2024
