Tax Articles

Digital Tax Evolution: Digital Services Tax

By: Atty. Irwin C. Nidea, Jr.

Irwin C. Nidea Jr. Senior Partner   +632 8403-2001 loc.330 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

The law defines "digital services" broadly, encompassing a wide range of online offerings, including online search engines, marketplaces, cloud services, digital media advertising, and online platforms. Notably, it also extends to the sale of digital goods.

• VAT Inclusion: The law expressly includes digital services as a VATable transaction, ensuring that online service providers contribute to the tax base. For a long time, online services have escaped VAT scrutiny simply because the government did not know how to capture them.
• Liability of Digital Service Providers: Both resident and non-resident digital service providers (DSPs), as well as online marketplace operators, are now liable for the assessment, collection, and remittance of VAT on digital services.
• Registration Requirements: All DSPs, including non-resident providers, are required to register for VAT purposes. The Bureau of Internal Revenue (BIR) will establish a simplified registration system for non-resident DSPs. The implementing rules will be crucial if the BIR wants to simplify the system. In the digital economy, simplicity of compliance is key, especially if the government wants non-resident DSPs to comply and not to think of ways to hack the P3 Million threshold.
• Invoicing and Accounting: VAT-registered non-resident DSPs must issue digital sales invoices for each transaction. However, they are exempt from maintaining traditional accounting records.
• Reverse Charge Mechanism: VAT-registered taxpayers in the Philippines will be required to withhold and remit the VAT due on their purchases of digital services from non-resident DSPs.
• Exempt Transactions: The law extends VAT exemption for educational services to online courses, seminars, and training conducted by accredited institutions. Services provided by banks and non-bank financial institutions are also exempt.
• Government Payments: Government payments for services to non-resident suppliers who are not VAT-registered will be subject to a 12% withholding VAT.
• Suspension of Business Operations: The BIR, through the Department of Information and Communications Technology (DICT), will have the power to block digital services accessed in the Philippines if a provider fails to comply with the law.

• Administrative Complexity: Implementing the law effectively, especially for non-resident DSPs, may require significant administrative effort. What if non-resident DSPs who are covered by the threshold do not register? Is the DICT sophisticated enough to stop the operations of non-compliant DSPs?
• Impact on Consumer Prices: Finally, foreign digital service providers who significantly earn a lot from Philippine consumers are paying tax. But let us not forget that VAT is a passed-on tax. By its very nature, tax burden is passed on to consumers in the form of higher prices. So, you, who are subscribers to Netflix, Disney Plus, and the like are the end consumers who will absorb the brunt of the 12% VAT.
• International Cooperation: The Philippine government will need to work with other countries to ensure a level playing field and prevent double taxation.