Tax Articles

VAT on Digital Services

By: Atty. Mabel L. Buted

Mabel L. Buted Partner   +632 8403-2001 loc.160 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

After numerous discussions among various stakeholders, the imposition of VAT in the country on the digital services provided by nonresidents finally came into play last year. Beginning yesterday, June 2, 2025, all nonresident digital service providers (DSPs) shall immediately be subject to VAT. Here is what we know about the VAT on Digital Services Act so far.

The new law expanded the coverage of services considered performed in the Philippines that are subject to VAT to include the digital services rendered by nonresidents consumed in the country.

Digital services refer to any services that are supplied over the internet or other electronic network with the use of information technology, and where the supply of such services is essentially automated. These include digital goods such as downloads of digital contents, subscription-based supplies of contents, supply of software services and maintenance, and licensing of content. Digital services are considered consumed or used in the Philippines if the buyer is located in the Philippines. This means that services considered digital are subject to VAT if such are consumed by a buyer in the Philippines, regardless of the place where the nonresident DSP operates.

Under the implementing revenue regulations, the manner in which the VAT on digital services is paid and remitted to the tax authority will depend on the type of transaction – if it is a B2C (Business-to-Consumer) transaction or a B2B (Business-to-Business) transaction. In a B2C transaction, the nonresident DSP pays and remits directly the tax. On the other hand, in a B2B transaction, it is the Philippine customer engaged in business that is liable to pay and remit the VAT due by withholding the tax, which the law describes as a reverse charge mechanism. In a B2B transaction, instead of paying the tax to the nonresident, the buyer withholds the amount of VAT and pays it directly to the tax authority. The buyer, in turn, claims the amount remitted as creditable input tax.

The law provides that nonresident DSPs shall be liable to register for VAT if the gross sales for the past 12 months or for the next 12 months have exceeded P3,000,000.00. Later, it was clarified by the tax authority in a revenue memorandum circular that this rule applies to all nonresident DSPs exceeding the threshold amount, even if it is not the nonresident DSPs that are responsible in the payment and remittance of VAT, i.e., in B2B transactions where the buyer engaged in business pays the tax. Further, all nonresident DSPs are required to file tax returns, be it in B2C or B2B transaction.

The registration shall be made through the VAT on Digital Services (VDS) Portal of the BIR. To date, the VDS is not yet completed. Prior to the roll-out of the portal, registration shall be done through the BIR’s Online Registration and Update System (ORUS).

With all these rules in place, there might be challenges in requiring even the nonresidents engaged purely in B2B transactions, wherein VAT is paid and remitted directly by the Philippine buyer, to register and file tax returns. What would their registration certificates and tax returns look like? In any case, for these nonresidents engaged purely in B2B transactions, their tax returns should reflect zero amount of VAT payable.

There are also some questions that ought to be clarified.

Still on the requirement of registration, some nonresident DSPs had already previously obtained one-time Taxpayer Identification Number (TIN) for use in some prior applications with the BIR. What happens to their previously-issued TINs, and what should these nonresident DSPs need to do with their registration numbers?

If it happens that the gross sales of digital services of nonresidents for the past 12 months and in the next 12 months do not exceed P3,000,000.00, will VAT or withholding VAT still apply?

The Act was enacted to boost government revenues and to level the playing field between our domestic suppliers who pay VAT on their sale to Philippine consumers and the nonresident sellers who did not levy VAT previously. As with other laws, to be fully effective, the new law must be equally efficiently administered. We hope that our administrators address the challenges brought by the implementation of the new law to ease the burden on the compliance requirements imposed on the nonresident DSPs. We also hope that the tax authority provides further clarification on the questions raised.