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Digital Tax Evolution: Digital Services Tax

By: Atty. Irwin C. Nidea, Jr.

"The Digital Services Tax Law represents a significant step towards a more equitable and sustainable digital economy in the Philippines. As the digital landscape continues to evolve, the government will need to monitor the impact of this legislation and adapt its approach as necessary."

 

 
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 Irwin C. Nidea Jr.
Senior Partner

  +632 8403-2001 loc.330
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The digital landscape is constantly evolving, and the Philippine government has taken a significant step towards adapting to these changes with the passage of Republic Act No. 12023, otherwise known as the Digital Services Tax Law. This new legislation introduces a Value-Added Tax (VAT) on digital services, targeting both domestic and foreign providers operating in the Philippines.
923_Digital_V2.jpgThe 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.
The Digital Services Tax Law introduces several key features:
  • 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.
This legislation aims to ensure that digital service providers, who benefit from the Philippine market, contribute their fair share to the tax system. By levying VAT on digital services, the government hopes to boost revenue streams and fund essential public services.
The implementation of the Digital Services Tax Law presents both challenges and opportunities. Concerns include:
  • 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. 
The Digital Services Tax Law represents a significant step towards a more equitable and sustainable digital economy in the Philippines. As the digital landscape continues to evolve, the government will need to monitor the impact of this legislation and adapt its approach as necessary. This legislation signifies a clear message that the Philippines is ready to embrace the challenges and opportunities of the digital age and will not wait for Pillar 2 to take effect before it impose VAT on NDSPs, ensuring that both the government and its citizens benefit from the innovations of the digital economy.

 

The author is a senior partner of Du-Baladad and Associates Law Offices, a member-firm of WTS Global. 

The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at This email address is being protected from spambots. You need JavaScript enabled to view it. or call 8403-2001 local 330.