Tax Articles

Services Rendered by Non-Residents: VAT

By Atty. Fulvio D. Dawilan

Fulvio D. Dawilan Managing Partner   +632 8403 2001 loc.310 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

Services are generally subject to value-added tax (VAT) in the Philippines. However, this is not without limitation. While VAT is imposed on fees derived from the performance of services, our laws require, as a condition, that the service must be performed in the country to be covered by our VAT system. This is not simply a principle drawn from practice. It is the VAT law itself that provides that requirement. Hence, its implementation cannot simply be disregarded, unless the law is changed.

There could be an interplay of other principles – such as the cross-border doctrine or the destination principle – that may affect the VAT treatment of service transactions. But the basic requirement remains applicable. The activity that gives rise to the payment of service fee must be performed in the Philippines to be subject to VAT. Jurisprudence goes further by stating that, being an excise tax, the same can be levied by the government only when the acts, privileges, or businesses are done or performed within the jurisdiction of the Philippines. Hence, before any other rules could be applied in determining the VAT implication of a specific service transaction, a determination should be made first as to where the service is rendered.

On this basis, the government has the right to impose VAT on service fees if the related service is performed or to be performed in the Philippines. In other words, when the service is not performed or will not be performed in the Philippines, no VAT is imposable. Fees for services rendered outside the country should not be covered by the Philippine VAT system even if the consumption is in the country.

To reiterate, the basic rule requires that the service must be performed in the Philippines for VAT to be imposable on service fees. The imposition of VAT should not be based solely on the utilization, application, or consumption in the Philippines. To do so would disregard the basic requirement that the service must be performed in the Philippines.

And these rules apply to both resident and non-resident service providers. Having said that, a few deviations from this rule should be noted.

Special Treatment of Digital Services Rendered by Non-Residents: A different treatment applies to digital services, especially those rendered by non-residents. Based on a recently enacted law (RA No. 12023), digital services rendered by nonresident digital service providers shall be considered performed or rendered in the Philippines if the digital services are consumed in the Philippines. This makes the consumption in the Philippines the basis for the imposition of VAT on digital services rendered by non-residents.

But this is not actually a deviation from the basic rule – that the service must be performed in the Philippines to be subject to VAT. It still recognizes the “performance in the Philippines” as the basis for the imposition of VAT. It only expands the coverage of that phrase to include digital services consumed in the Philippines.

Hence, for digital services, a specific provision is provided in our VAT law as basis for the imposition of VAT based on place of consumption. Without that provision, there would have been no basis for imposing VAT on digital services, simply on the basis of consumption in the Philippines.

For all other services, there is no similar provision. In the absence of similar rule for all other types of services, these could not be taxed based on place of consumption. If there is an existing rule that would have also covered the digital services, and there would have been no need to modify the rule to specially capture digital services consumed in the country.

Services Rendered by Non-Residents to Registered Business Enterprises (RBEs): Before the enactment of CREATE, our tax authority had issued a number of rulings confirming the exemption from VAT on services rendered by non-residents to businesses registered with and operating within the economic and freeport zones – even if the service is rendered within the economic or freeport zone. This exemption was anchored on the interplay of the cross-border doctrine or the destination principle with the laws creating or recognizing these economic and freeport zones and the incentives provided to their locators.

Needless to say, these doctrines and principles are no longer applicable. Suffice it to say that the basis of those exemptions are no longer found in our tax incentive laws, particularly with the enactment of CREATE and CREATE MORE. Nonetheless, these new laws include as among the incentives available to registered export enterprises (REEs) and registered high-value domestic market enterprises (HVDMEs), their exemption from VAT on their importations.

One of the many questions I have received in relation to this VAT exemption on importation is – are services purchased from non-residents by REEs and HVDMEs covered by the VAT exemption on importation? That is not clear, but I believe they should enjoy exemption.

In relation to the imposition of VAT on digital services mentioned earlier, Revenue Memorandum Circular (RMC) No. 047-2025 had clarified that digital services rendered by non-resident digital service providers to REEs and HVDMEs are exempted from VAT, if the digital services are directly attributable to the registered activity or project of the buyer. While the subject of this RMC is the clarification of the application of digital services tax law, this specific pronouncement exempting digital services is based on the application of CREATE and CREATE MORE.

This reason for the exemption of digital services purchased from non-residents by REEs and HVDMEs should also apply to all other purchases of services from non-residents by REEs and HVDMEs. Hence, purchase of all types of services by REEs and HVDMEs from non-resident service providers should also enjoy exemption if said services are attributable to their registered projects or activities.