Tax Articles

VAT on Digital Services: Party Obligated to Remit

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

Republic Act No. 12023 (“RA 12023”) became effective on October 18, 2024, following its publication in the Official Gazette on October 3, 2024. While the new law includes the VAT treatment of digital services in general, in essence, the subject of this new law is the digital services supplied by non-resident digital service providers (“NRDSPs”) that are consumed in the Philippines. Resident digital service providers are already covered by the existing VAT laws, with or without this new law.

While the law is already effective, the enforcement and compliance are not immediate. From October 18, 2024, there is a period of 90 days for the Department of Finance (“DOF”) and the Bureau of Internal Revenue (“BIR”) to issue the rules and regulations to implement the same. Following one hundred twenty (120) days from the effectivity of the rules and regulations, NRDSPs will immediately be subject to VAT.

Hence, assuming that the DOF/BIR will maximize the 90 days for the crafting and issuance of the implementing revenue regulations, NRDSPs will become subject to VAT beginning June 2024. But if the revenue regulations are issued earlier than 90 days, NRDSPs will also start complying with the new law earlier.

One feature of this new law that needs to be understood well relates to the responsibly in the remittance of VAT to the tax authority. The fact that the supposed taxpayer is a non-resident, plus the possibility that there could be more than two parties involved in a digital transaction, and considering the severe penalty, including suspension and closure, that could be imposed for violation - requires even more clarity in each party’s responsibility.

Who has the obligation to remit the VAT due on digital services supplied by NRDSPs? It’s hybrid – either the NRDSP (the non-resident supplier itself or e-marketplace) or the Philippine customer, depending on the circumstances. Let me discuss this further in relation to the proposed implementing revenue regulations.

The proposed revenue regulations anchor the determination of the party responsible for the remittance of VAT on digital services rendered by NRDSP on whether the transaction involved is business to business (“B2B”) or business to consumer (“B2C”). A B2B transaction involves the supply of digital services to persons engaged in business in the Philippines, including the government or any of its political subdivisions, agencies or instrumentalities, and GOCCs. A B2C transaction, on the other hand, involves the supply of digital services to persons not engaged in business located in the Philippines. In a B2B transaction, the responsibility for the remittance of the VAT due rests upon the customer, who should withhold and remit the VAT due. And that obligation applies whether or not the NRDSP is VAT-registered. On the other hand, in a B2C transaction, it’s the responsibility of the NRDSP (the supplier or the e-marketplace) to collect and remit the VAT due.

In short, following the proposed revenue regulations, the responsibility for the remittance of VAT on digital services delivered by non-residents depends on whether the Philippine buyer is engaged in business in the Philippines or not. This disregards the VAT registration status of the buyer – whether VAT registered or not.

We had, in fact, been advocating this approach as the basis in identifying who is responsible for the remittance of VAT, when the law was being crafted. The party responsible for the remittance of VAT due from the digital services of non-residents was discussed extensively when the bill was being discussed in the Senate. I and some colleagues from the private practice suggested that the withholding tax mechanism should be applied as the primary mode of collecting the VAT. It is only when the NRDSP deals with consumers (not engaged in business) that the NRDSP will be required to collect and remit the VAT. That is easier from compliance and enforcement perspectives. We thought that the BIR would support that. But they did not - so, unfortunately, that was not carried in the law.

What does the law say? The new Sections 108-B and 114(D) of the National Internal Revenue Code set the rule on who is liable to remit the VAT on digital services provided by NRDSPs – and these provisions are very clear on who has that obligation. If the buyer is VAT registered, it has the obligation to withhold the VAT. The responsibility to report the VAT rests with the buyer and not with the non-resident seller. On the other hand, if the consumer is non-VAT registered, it shall be the responsibility of the NRDSP to remit the VAT. That means that the NRDSP should collect the VAT from its customers and pay the same to the BIR.

Incidentally, among the reasons used to justify limiting the withholding of VAT to VAT-registered customers is that there is no interest or incentive to withhold on the part of non-VAT registered taxpayers since they are unable to claim input tax credit for the VAT withheld. Also, small businesses (those not required to register for VAT purposes) would also be excluded from the withholding VAT obligation. Hence, all businesses were not intended to be covered by the reverse charge mechanism or withholding VAT on digital services.

In short, based on Sections 108-B and 114(D), the determination of who has the responsibility to remit the VAT is anchored on the VAT registration status of the buyer – and not on the B2B or B2C nature of the transaction. There seems to be a conflict between the proposed implementing regulations versus the provisions of the law they seek to implement.

Perhaps, in a B2C transaction, there is no difference because persons not engaged in business are generally non-VAT registered. So following both the law and the proposed regulations, the responsibility for payment of the VAT is imposed on the NRDSP. That is not so in a B2B transaction. Some businesses are outside the VAT system – being subject to other types of business taxes. They are not VAT registered – hence, based on the law they don’t have the duty to withhold VAT on digital services. Apparently, the proposed revenue regulations seek to include even those non-VAT registered businesses as withholding agents.

I personally favor the remittance of VAT on VATable services rendered by non-residents through the withholding tax mechanism – as proposed in the implementing rules. Among other reasons, (i) it would be easier for our tax authority to enforce compliance from taxpayers within its jurisdiction and (ii) the withholding VAT approach is aligned with the existing practice of collecting VAT for the other types of VATable services rendered by non-residents. Sadly, while this was what we wanted, this is not supported by the provision of the law – and the law should prevail. I believe there are some portions of the proposed regulations that need to be modified and clarified. This is one of them.