Tax Articles

Clarifying VAT on digital transactions

By Atty. Rodel C. Unciano

Digital transaction is evidently increasingly popular not only in areas involving trade and business but in the entertainment industry as well. This is noticeable as seen in the rise of content creators all over the world and in every corner of the Philippines even in the most far-flung areas. Content creation has indeed become a source of living, and in fact, a good source of income too.

As these transactions give rise to income, tax is always attached to it. Since there is a flow of wealth, income tax is therefore due on income generated from it. And also, since there is a sale or performance of a service for a fee, the same is subject to value-added tax (VAT) as well under the current provisions of the Tax Code.

To further clarify the imposition of VAT on digital transactions, House Bill (HB) No. 4122 is being crafted in Congress which seeks to set a more definitive guidelines on the imposition of VAT on electronic or digital services. HB 4122 seeks to amend Section 105 and other VAT provisions of the Tax Code to expressly include in the scope of VATable transactions those services that are rendered through digital or electronic platforms.

As clearly provided under the current provisions of the Tax Code, the sale or exchange of services are subject to VAT in the Philippines only if such services are performed in the Philippines. Accordingly, if the services are not performed in the Philippines, the service fees arising from such services are exempt from VAT.

However, following the provisions of HB 4122, fees for services rendered or performed through digital or electronic platform as defined under the bill shall be subject to VAT in the Philippines even if the services are rendered by non-residents. Ergo, this is notwithstanding that such services are performed outside the Philippines. The only requirement is that the services must be consumed by a buyer in the Philippines.

Under the bill, the sale or exchange of services shall include supply of digital services by any person, whether resident or non-resident. Note that even a non-resident digital service provider is liable for assessing, collecting, and remitting the VAT on the transactions that go through its platform. It is likewise liable to register for VAT if its gross sales/receipts exceeded or there reasonable grounds to believe that gross sales/receipts would exceed the VAT exemptions threshold of three million pesos (P3,000,000.00). It shall designate a representative office or agent, which shall be a resident corporation registered under Philippine laws, to assist in compliance with the provisions of the Tax Code.

The bill defines digital service as any digital service that is delivered or subscribed over the internet or other electronic network and which cannot be obtained without the use of information technology and where the delivery of the service may be automated. It shall include online licensing of software, updates, and add-ons, website filters and firewalls; mobile applications, video games, and online games; webcast and webinars; provision of digital content such as music, files, images, text and information.

It shall also include advertisement platform such as provision of online advertising on intangible media platform; search engine services; social networks; database and hosting; internet-based telecommunication; online training such as provision of distance teaching, e-learning, online courses and webinars; online newspapers and journal subscription; and payment processing services.

Under the bill, a “digital service provider” is defined as a service provider of a digital service or good to a buyer, through operating an online platform for purposes of buying and selling of goods and services or by making transactions for the provision of digital services on behalf of any person. On the other hand, the term “buyer” refers to any person who resides or consumes taxable digital services in the Philippines from a digital service provider either for personal consumption or for trade or business purposes.

So, if digital services are consumed by a buyer in the Philippines either for personal consumption or for trade or business purposes, the fees arising therefrom shall be subject to VAT in the Philippines notwithstanding that such digital services are performed, rendered or created by non-residents and notwithstanding that such services are done outside the Philippines. The only requirements for the imposition of VAT are that the services are rendered through digital or electronic means, and that the digital services are consumed in the Philippines. What is probably challenging on the side of tax administration is the tracking of what is actually consumed in the Philippines.

Surely, this bill is a good measure to improve tax collections especially in this part of the world where Filipinos are so in love with social media. Hopefully, the advances in technology would also be able to provide our tax administrators a methodology in tracking what is due to our country, a methodology that is fair, reasonable and administratively feasible.