RA 12023 and the VATization of Online Services

By: John Joseph Cedo – Business Unit 3

VAT on Digital Services

As technology progresses, digital services become increasingly important, providing convenience through mobile platforms via products such as music and movie streaming. Because our current tax system is primarily built to accommodate traditional types of business, it has become important to rethink the current tax regime to meet the gaps caused by new technologies.

Republic Act (RA) 12023, which specifies additional standards for the implementation of value-added tax (VAT) on digital services, has been signed into law. This means that online purchases made through digital marketplaces and platforms that were previously exempt from VAT are now VAT-able. This rule applies to streaming services such as Netflix and Amazon Prime, as well as purchases made through e-commerce websites such as Shopee and Lazada.

According to the law, these include any service provided via the Internet or other electronic networks that uses information technology and is essentially automated, such as online search engines, online marketplaces, cloud services, online media and advertising, online platforms, or digital goods.

Furthermore, a digital service provider is a resident or foreigner who provides digital services to a consumer in the Philippines that is liable to VAT. A nonresident digital service provider (NDSP) is a digital service provider with no physical location in the Philippines. Digital services provided by NDSPs will be considered performed or rendered in the Philippines if they are consumed herein. While resident digital service providers continue to incur and submit the 12% output VAT, NDSPs will be taxed depending on whether the digital service user is VAT-registered.

The NDSPs will send the VAT to the Bureau of Internal Revenue (BIR) on behalf of consumers who are not registered for VAT. The law imposes a “reverse charge mechanism” on consumers who are registered for VAT, requiring them to send the VAT to the BIR within ten days of the month in which the VAT was withheld. The seller used to be in charge of submitting and paying VAT under the standard VAT process, but now the buyer of digital services is in charge of doing so.

Another distinction is that NDSPs are specifically prohibited from claiming the same as tax credits, whilst VAT-registered users of digital services are permitted to claim the same as input tax.

Additionally, the law exempts the following digital services from VAT: 

• Online subscription-based services sold to the aforementioned government agencies and other educational institutions approved by them; 
• Online educational services from private educational institutions duly accredited by the Department of Education, Commission on Higher Education, or Technical Education and Skills Development Authority; and 
• Online services are offered by banks, non-bank financial intermediaries carrying out quasi-banking functions, and non-bank financial intermediaries, including those delivered through various digital platforms.

Digital service providers now have special requirements for registration and invoicing: they must be VAT-registered. Additionally, NDSPs will be subject to a simplified, automated registration procedure. If a digital service provider fails to register, the BIR, in collaboration with the National Telecommunications Commission and the Department of Information and Communications Technology, may prohibit digital services that are provided or carried out in the Philippines.

Reference/s:

Understanding VAT on digital services. (n.d.). Deloitte Philippines.