IN BRIEF:
• As more countries legislate on the imposition of consumption tax on digital services, the Philippines joins the list with the recent signing of Republic Act No. 12023, commonly known as the VAT on digital services law.
• The law defines digital service providers (DSPs) as the suppliers of digital services consumed in the Philippines, and sets certain VAT obligations upon them, both resident and non-resident.
• The far-reaching effects of the new law are to be felt more by non-resident DSPs who are assigned unprecedented VAT responsibilities.
The digital economy significantly changed the landscape of doing business worldwide, and with this change comes the obvious need for governments to regulate, as well as the opportunity to conceptualize measures for raising revenue. As more countries legislate on the imposition of consumption tax on digital services, the Philippines joins the list with the recent enactment of Republic Act No. 12023, commonly known as the VAT on digital services law.
This new law took effect on Oct. 18. According to the Department of Finance, the initiative is set to generate an estimated P16-billion VAT collection annually, and somehow level the playing field between traditional and digital businesses.
It introduces amendments to the general VAT provisions of the Tax Code, putting emphasis on ‘digital service’ as among the services subject to VAT. It defines digital service as any service supplied over the internet or other electronic network with the use of information technology, describing the supply as essentially automated. Included in the definition of digital service are online search engines, online marketplace or e-market places, cloud services, online media and advertising, online platforms, and digital goods.
DEFINING DIGITAL SERVICE PROVIDERS
The law defines digital service providers (DSPs) as the suppliers of digital services consumed in the Philippines, and sets certain VAT obligations upon them, both resident and non-resident.
Resident DSPs, being local service providers, are presumed to have been operating within the purview of the old VAT provisions. Thus, for them, the new law would serve as a reaffirmation of the obligation to report and remit VAT.
The far-reaching effects of the new law are to be felt more by non-resident DSPs who are assigned unprecedented VAT responsibilities. These responsibilities are anchored on the core of the law, which treats digital services by non-resident DSPs as performed or rendered in the Philippines, provided that they are consumed in the country, thus subjecting them to VAT.
VAT IMPLICATIONS
The following are VAT implications of the new law as far as non-resident DSP transactions are concerned, highlighting what transacting parties should be on the lookout for:
VAT registration. The law requires non-resident DSPs to register with the BIR for VAT purposes if their gross sales for the past three months exceed P3 million or if there are reasonable grounds to believe that their gross sales for the next 12 months will exceed the same threshold. The actual requirements and process for VAT registration are not yet clearly set out. In any case, non-resident DSPs are advised to watch out for the ‘simplified automated registration system’ that the BIR is tasked with establishing.
Invoicing and accounting. The law requires non-resident DSPs to issue VAT invoices for digital services consumed in the Philippines. In any case, the law ensures that a non-resident DSP’s invoice is simplified in terms of contents as compared to mandatory contents of a regular local invoice. A non-resident DSP invoice only needs to reflect the date, transaction reference number, consumer identification, brief description of the transaction, amount, and breakdown of sale price by component if subject to VAT at 12%, VAT zero-rated, or VAT exempt, if necessary. Non-resident DSPs are advised to be on standby for announcements on when the government will operationalize the invoicing requirement. For accounting purposes, non-resident DSPs are not required to maintain subsidiary sales and purchase journals.
VAT payment. The law lays down the manner of VAT remittance, which depends on whether the non-resident DSP transacts with a non-VAT consumer or VAT-registered consumer in the Philippines. For transactions with non-VAT registered consumers, the non-resident DSPs are the ones required to directly remit the VAT to the BIR. For transactions with VAT-registered consumers, these consumers are the ones supposed to withhold VAT and remit the same to the BIR. This process is referred to as the “reverse charge mechanism,” a similar mechanism to our existing withholding VAT. The BIR will likely soon release mechanics for VAT payment, whether via direct remittance or reverse charge. In either case, transacting parties are advised to assess whether the imposition of VAT on the digital services would have an effect on agreed pricing between them.
Special rule for online marketplaces or e-marketplaces. Online marketplaces may also be required under the law to remit the VAT on behalf of their non-resident sellers, if the online marketplaces are involved in setting the terms and conditions of supply, or are involved in the ordering or delivery of goods.
RECOGNIZING THE FAR-REACHING EFFECTS OF VAT ON DIGITAL SERVICES
For the very first time, a Philippine law calls the attention of non-resident businesses, DSPs in particular, to comply with its VAT requirements such as registration, invoicing, and more importantly, VAT payment. The law even goes on to say that, in case of failure to register and non-compliance, the BIR, through the Department of Information and Communications Technology, can suspend business operations by blocking access to their digital services in the Philippines.
At the same time, the law subtly calls the attention of Philippine customers transacting with DSPs. With a tax ecosystem that encourages taxpayers to comply, Philippine customers, especially businesses placed on the receiving end of tax audits, should assess its implications from various angles. Questions around the consequences of transacting with unregistered non-resident DSPs, transacting with DSPs that issue non-compliant VAT invoices, and the applicability and proper implementation of the reverse charge mechanism are just some of the valid concerns consumers should recognize in view of the recent VAT law development.
The effects of the VAT on digital services law are far-reaching. For now, taxpayers can expect further clarifications to come from the tax authority as it designs the rules and regulations for effective implementation.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.
Atty. Victor C. De Dios is a tax principal of SGV & Co.