Last 2 October, President Ferdinand R. Marcos Jr. signed into law Republic Act (RA) 12023, one of the priority measures of his administration. It is a significant step towards modernizing the Philippine tax system in light of current advancements brought about by the digital economy. Amending relevant sections of the Philippine Tax Code, RA 12023 imposes a 12 percent value-added tax (VAT) on digital services consumed in the Philippines such as Netflix, Disney+, Spotify and Google, if services were delivered by non-resident service providers.
The law provides that “digital services delivered by non-resident digital service providers are considered performed or rendered in the Philippines if the digital services are consumed in the Philippines.” The said law defines “digital service” as any service that is 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 engine, online marketplace or e-marketplace, cloud service, online media and advertising, online platform, or digital goods. Finally, a “non-resident digital service provider” means a digital services provider that has no physical presence in the Philippines.
The following digital services, however, shall be exempt from VAT: (a) online courses, online seminars, and online trainings, rendered by private educational institutions, duly accredited by the Department of Education (DepEd), the Commission on Higher Education (CHEd), the Technical Education and Skills Development Authority (TESDA), and those rendered by government educational institutions; and sale of online subscription-based services to DepEd, CHEd, TESDA, and educational institutions recognized by said government agencies; and (b) services of non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries rendered through digital platforms.
Digital service providers (DSPs), whether resident or nonresident, shall be liable for assessing, collecting, and remitting the VAT on the digital services consumed in the Philippines. In addition, if the nonresident DSP is classified as an online marketplace or e-marketplace, it shall also be liable to remit the VAT on the transactions of nonresident sellers that go through its platform if such DSP controls the key aspects of the supply and either (i) sets, directly or indirectly, any of the terms and conditions under which the supply of goods is made; or (ii) is involved in the ordering or delivery of goods, whether directly or indirectly. However, in cases when the digital service delivered by a nonresident DSP is consumed by a VAT-registered taxpayer, a reverse charge mechanism shall be implemented. In such case, the VAT-registered taxpayer shall be liable to withhold and remit the VAT due on its purchase of digital services consumed in the Philippines from a nonresident DSP within 10 days following the end of the month the withholding was made. Notwithstanding the foregoing, nonresident DSPs are not allowed to claim creditable input tax.
DSPs, whether resident or non-resident, are required to register for VAT if their gross sales for the past 12 months other than those that are VAT-exempt have exceeded P3,000,000; or there are reasonable grounds to believe that their gross sales for the next 12 months other than those that are VAT-exempt will exceed P3,000,000. In case the DSP failed to register for VAT as required, the Commissioner of Internal Revenue has the power to block the digital services performed or rendered by the non-compliant DSP.
VAT-registered non-resident DSPs are required to issue a digital sales or commercial invoice for every sale, barter, or exchange of digital services in lieu of the general VAT invoice. Nevertheless, VAT-registered non-resident DSPs are not required to maintain a subsidiary sales journal and purchase journal.
RA 12023 is expected to generate P105 billion revenue for the next five years. In this regard, the law provides that 5 percent of the generated incremental revenue shall be allocated to and used exclusively for the development of creative industries.
The law shall take effect 15 days after its publication in the Official Gazette last 3 October 2024. The implementing rules and regulations shall be issued not later than 90 days from the effectivity of the law.
