8 Features of Republic Act No. 12023 – VAT on Digital Services Law Philippines

By: Garry Pagaspas, CPA

With the advent of advanced technology, sales of goods and services has been automated online worldwide through digitalization without much interaction among buyers and sellers. For buyers, this gave much advantage for being able to acquire goods and services from outside the country, while local suppliers are challenged for competition within and outside Philippines. On the other side, it made the government realized the seemingly inequality on taxation between local suppliers paying taxes on sales while giving undue advantage for non-resident suppliers deriving income through digital platform from Philippine buyers without paying taxes on them in Philippines. These inequalities paved way to the legislation of Republic Act No, 12023 – Value Added Tax (VAT) on Digital Services Law in Philippines (RA 12023 -VAT on Digital Services Philippines) that is aimed to level the playing field among digital service providers – local and foreign. By this present, let us share the basic features of Republic Act No, 12023 – Value Added Tax (VAT) on Digital Services Law in Philippines as follows:

1. Classified and defined digital services and digital services providers

RA 12023 -VAT on Digital Services Philippines now classified digital services as among those services subject to 12% value added tax in Philippines. By definition, “digital services” shall refer to any service supplied over the internet or other electronic network with the use of information technology and where the supply of the service is essentially automated. Digital services shall include online search engines; online marketplace or e-marketplace; cloud services; online media and advertising; online platforms; or digital goods. For the purpose and by implication, digital service providers would refer to those who supply digital services subject to 12% value added tax in Philippines and is further classified as resident or non-resident – those that has no physical presence in Philippines.

In a Press Release of the Department of Finance dated September 28, 2024, it cited among digital service providers some popular streaming services such as Netflix, Disney+, and online shopping sites such as Shein, Temu and Amazon who will now have to pay for VAT on their digital services that are consumed in Philippines.

2. Imposed 12% VAT on non-resident digital services providers consumed in Philippines

Under RA 12023 – VAT on Digital Services Philippines, digital service providers are liable for 12% value added tax on their supply of digital services – whether residents on non-residents. This seems plain and simple for resident digital service providers who have a registered local entity in Philippines while for non-residents, this seems totally new, if not challenging. Accordingly, non-resident digital services providers are now subject to 12% VAT under RA 12023 – VAT on Digital Services Philippines and the following special rules apply:

• if Ph buyer is non-VAT registered, remit 12% VAT to the BIR;
• If Ph buyer is VAT registered, impose 12% VAT and buyer will withhold and remit 12% VAT to BIR;
• If classified as online marketplace or e-marketplace, they will also be liable to remit 12% VAT on transactions on non-resident sellers that go through the platform.

RA 12023 -VAT on Digital Services Philippines specifically provides that non-resident digital service providers are not allowed to claim creditable input VAT.

Notably, prior to RA 12023 -VAT on Digital Services Philippines, 12% VAT on services of non-residents normally apply to those services being rendered in the Philippines, regardless of whether they are regularly rendered in Philippines. Under RA 12023 -VAT on Digital Services Philippines, digital services of non-residents through their digital platforms are considered services performed in Philippines if such services are consumed in the Philippines.

3. Imposed further tax compliance obligations on non-resident digital services providers

RA 12023 -VAT on Digital Services Philippines requires the following tax compliance obligations upon non-resident digital services providers:

• Registration as VAT taxpayer in Philippines and for the purpose, BIR is to establish simplified automatic registration system for non-resident digital service providers. On comment, I would suppose this should be based on VAT threshold (e.g. PhP3M) under the rules.
• Registering and maintaining books of accounts relative to its registration, but not required subsidiary sales and purchases journal that is usually required for VAT registered taxpayers in Philippines.
• Registering and issuance of Sales Invoice for digital services to Philippine buyers with the following specified details that should indicates on the sales invoice in lieu of the requirements under Section 113(b) paragraphs 1 to 4: Date of the transaction; transaction reference number; Identification of the customer; brief description of the transaction, and the total amount with the indication that such amount includes the VAT.

Notably, penalties would be imposed for non-compliance of the above by the digital service providers in Philippines.

4. VAT exemption on digital services in Philippines

While RA 12023 -VAT on Digital Services Philippines imposes 12% VAT on digital services consumed in Philippines, it nevertheless imposed the following exemptions:

• digital services with respect to sale of online subscription-based services to DepEd, CHED and TESDA and to Ph educational institutions duly accredited by such agencies; and,
• services of banks, non-bank financial intermediaries and other non -bank financial intermediaries rendered through digital platforms.

5. Ph local buyers’ obligation to withhold VAT on payments to digital service providers

Considering the peculiarity of non-residents who do not have physical presence, RA 12023 -VAT on Digital Services Philippines imposed the following withholding tax obligations to local buyers in the Philippines:

• Withhold of 12% VAT on non-registered non-resident digital service providers for payments by government or any of its political subdivisions, instrumentalities or agencies including government owned and controlled corporations (GOCCs); and,
• Withholding of 12% VAT of VAT registered buyers in the Philippines.

Notably, the above are added withholding tax obligations imposed under RA 12023 -VAT on Digital Services Philippines while the rest of the withholding VAT rules would seem to remain in place such as 5% creditable VAT on government money payments to local VAT suppliers.

6. Funding for the development of creative industry in Philippines

Under RA 12023 -VAT on Digital Services Philippines 5% of incremental VAT revenues on digital services for the first five (5) years from effectivity of the law will be allocated and exclusive used for the development of creative industries in the Philippines.

7. Eyed to generate PhP80B to PhP145 B of revenues for 2025 to 2028.

As Sec of Finance puts it during its Press Release dated Sept. 28, 2024, RA 12023 – VAT on Digital Services Law in Philippine projects around PhP80B to PhP145B of VAT revenues for the period 2025 to 2028, depending on the compliance of digital services providers and related taxpayers.  

8. Power to block digital services of non-residents in coordination with DICT through NTC

RA 12023 -VAT on Digital Services Philippines provides that the power of the Commissioner of Internal Revenue to suspend operations shall include the blocking of digital services performed or rendered in the Philippines by a digital service provider which shall be implemented by the Department of Information and Communications Technology (DICT) through the National Telecommunications Commission (NTC).

Disclaimer.

The above features are lifted from the author’s understanding and personal take of the provisions of RA 12023 -VAT on Digital Services Philippines summarized for better appreciation of its provisions. The author suggests reading through the provisions of RA 12023 -VAT on Digital Services Philippines and watch-out for the implementing rules to be issued soon for further details.

Author’s Profile:

Garry Pagaspas, CPA is a currently the Managing and Tax Partner of G. Pagaspas Partners & Co. CPAs (independent member firm of Allinial Global, 2^nd largest accounting association worldwide based on International Accounting Bulletin’s 2023 released survey) based in Makati City with Global Outsourcing offices in Kalibo, Aklan. He is likewise the President at Tax and Accounting Center, Inc., the training and consulting company he founded in relation to his passion for teaching and helping out Ph entrepreneurs and foreign investors to Philippines.

Views in this article is personal to the author, not equivalent to a professional opinion and does not represent that of the organizations he is connected with. For your feedback or related concerns on staff leasing or employer of record in Philippines, you may send mail at info(@)taxactgcenter.ph (please exclude open and close parenthesis on the @ sign.