Tax Articles

Digital Services Tax – From the Seller's Perspective

By: Atty. Jomel N. Manaig

Atty. Jomel N. Manaig Partner   +632 8403-2001 loc. 140 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

Last month, I wrote an article entitled “Digital Services Tax – From the Buyer’s Perspective” wherein we took a peek at what the VAT on digital services actually mean for the Philippine based customers.

From then, the BIR released several tax issuances dealing with the implementation of the tax measure. Interestingly, it contained developments that would be of interest to digital service providers, specifically to nonresidents. For today, let’s explore the impact of the digital services tax to nonresident digital service providers (NDSP).

FIRST, the period for registration of NDSPs has been extended yet again to July 1, 2025. It is important for nonresidents to note that while the period of registration has been extended, the imposition of the VAT on digital services still commenced on June 2, 2025. This means that the lack of registration would not stop the imposition of VAT and the resulting obligation to comply with reportorial requirements – that is the filing of the VAT returns.

SECOND, the VAT on Digital Services (VDS) Portal is still not yet operational and the existing Online Registration and Update System (ORUS) has been down for an extended period. NDSPs have resorted to adopting manual means for their registration needs. Based on existing guidelines, the filing of the VAT return and the payment of VAT shall be done via the VDS Portal. Will the VDS Portal be operational before the inaugural filing period? Or will NDSPs be forced to appoint local tax representatives to manually file the VAT returns on their behalf?

Speaking of VAT returns, the THIRD development deals with the introduction of BIR Form No. 2550-DS. This is the quarterly VAT return that NDSPs are required to file regardless of whether their transactions are B2B or B2C. While the manner and rules for the filing of the tax return and payment of the VAT would be the subject of future issuances, a close look at BIR Form No. 2550-DS would solicit some curious observations:

1. With respect to NDSPs with purely B2B transactions, the filing of the VAT return would result in a nil payment since the VAT should have been withheld by the B2B buyer. So what would be the relevance in requiring NDSPs with purely B2B transactions to still file the return? Wouldn’t it be better and easier to focus on monitoring the proper withholding and remittance of the VAT by the B2B buyer rather than adding another layer of reportorial requirement for NDSPs?

2. BIR Form No. 2550-DS adopted a simplified way of reporting the relevant VATable transactions. Basically, the NDSP is required to report its gross sales for the quarter and deduct from it the gross sales subjected to withholding VAT. The difference/balance, if any, would then be subjected to VAT which would have to be paid by the NDSP.

However, if a B2B buyer would fail to withhold VAT then that particular sale would have to be reported as part of the difference/balance subject to VAT following the formula in the VAT return. This manner of computation raises some serious questions: Is the NDSP required to verify that the B2B buyer subjected the digital service to VAT? Is this an exception to the reverse charge mechanism? Does this mean that the obligation to pay the VAT is now passed onto the NDSP despite the B2B nature of the transaction?

I proffer that it should not be the case. The obligation to withhold is with the buyer and should not be shifted to the NDSP in B2B transactions.

3. NDSPs are required to report the gross sales in BIR Form No. 2550-DS. It should be noted that they are only required to put the total gross sales. The tax return does not require a breakdown – for now. Reporting the total amount without any schedule/list detailing its breakdown would do no good for the BIR so I believe that NDSPs would eventually be required to submit a summary list to accompany the tax return. This would be consistent with the reportorial requirements for ordinary VAT returns.

FOURTH, it is common for NDSPs, especially those using a subscription model, to require payments in advance (e.g. annual subscriptions). In a revenue issuance, it was revealed that the BIR expects NDSPs to shoulder and pay the VAT for existing contracts with advance payments for the portion of the digital services provided from June 2, 2025 onwards. The lack of control over the payment on the side of the buyer was used as the rationale for such requirement.

However, this transitory measure did not differentiate between B2B and B2C transactions. For B2B transactions, it would seem that there is yet another exception (albeit as part of transition) to the reverse charge mechanism. From a business standpoint, this is a concerning transitory measure for NDSPs, regardless of whether they are engaged in B2B or B2C transactions. The additional VAT burden that they are being required to shoulder is not part of the many considerations they took into account when deciding on the price of their digital services. Can they pass it on to their buyers? Or will they be forced to absorb the burden?

I hope that our NDSPs are fully aware of all these requirements. There are a lot of moving parts in the imposition of VAT on digital services. A lot of i’s to dot and t’s to cross.