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Almost there: VAT on digital services

Last week, the Senate, in a unanimous vote, approved on third and final reading Senate Bill No. 2528, which seeks to impose a 12% value-added tax (VAT) on digital services delivered by either resident or nonresident digital service providers with no physical presence in the Philippines.

According to the Department of Finance, the bill is expected to bring in P83.8 billion in revenue from 2024 to 2028. The final step to reaping this additional revenue is the approval of the President once the bill is forwarded to his office.

Let’s look at the proposed changes to the National Internal Revenue Code (Tax Code).

VAT ON DIGITAL SERVICES
The bill proposes to add a proviso in Section 105 of the Tax Code stating that any person who, in the course of trade or business, renders services, including digital services, is subject to VAT. An additional proviso states that digital services delivered by nonresident digital service providers are considered performed or rendered in the Philippines if the digital services are consumed in the Philippines. This additional proviso will cover digital services even if rendered or performed outside the Philippines, as they are subject to Philippine VAT rules for as long as they are consumed in the Philippines.

DEFINITION OF DIGITAL SERVICE AND DIGITAL SERVICE PROVIDER
The bill provides that “digital service” refers to 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. These services include but are not limited to: (1) online search engines; (2) online marketplaces or e-marketplaces; (3) cloud services; (4) online media and advertising; (5) online platforms; and (6) digital goods.

On the other hand, “digital service provider” refers to a resident or nonresident supplier of digital services to a consumer who consumes digital services subject to VAT in the Philippines. A nonresident digital service provider has no physical presence in the Philippines.

If the bill is signed by the President and becomes law, the Philippine VAT rules will extend to cover e-commerce firms such as Amazon, Shein, Rakuten, Taobao, AliExpress, and Temu, even if they do not have a physical presence in the Philippines.

VAT REGISTRATION OF DIGITAL SERVICE PROVIDER
Under the bill, both resident and nonresident digital service providers are required to register for VAT purposes if their gross sales for the past 12 months have exceeded P3 million or if there are reasonable grounds to believe that their gross sales for the next 12 months will exceed P3 million.

To aid the registration of nonresident digital service providers since they do not have a physical presence in the Philippines, the bill will mandate the Bureau of Internal Revenue (BIR) to establish a simplified automated registration system.

REMITTANCE OF VAT TO BIR
When nonresident digital service providers provide digital services to consumers who are VAT-registered, the latter is liable to withhold and remit to the BIR the VAT due on its purchases of digital services consumed in the Philippines from nonresident digital service providers within 10 days following the end of the month the withholding was made.

On the other hand, when nonresident digital service providers required to be registered for VAT transact with consumers who are non-VAT-registered, the former must remit the VAT on the digital services that are consumed in the Philippines.

In addition, if a VAT-registered nonresident digital service provider is classified as an online marketplace or e-marketplace, it must also remit VAT on the transactions of nonresident sellers that go through its platform, provided that it controls key aspects of the supply and performs any of the following: (a) it sets, either directly or indirectly, any of the terms and conditions under which the supply of goods is made; or (b) it is involved in the ordering or delivery of the goods, whether directly or indirectly.

Please note that VAT-registered nonresident digital service providers are not allowed to claim creditable input tax.

Meanwhile, resident digital service providers are liable for remitting VAT to BIR on digital services consumed in the Philippines.

VAT-EXEMPT TRANSACTIONS
The bill proposes to include as VAT-exempt transactions online courses, online seminars, and online training rendered by private educational institutions duly accredited by DepEd, CHED, and TESDA, as well as those rendered by government educational institutions and the sale of online subscription-based services to DepEd, CHED, TESDA, and educational institutions recognized by such government agencies.

Likewise, bank and nonbank financial services rendered through the various digital platforms are VAT-exempt.

BLOCKING OF NONCOMPLIANT DIGITAL SERVICE PROVIDERS
The bill seeks to expand the power of the Commissioner of Internal Revenue to suspend the business operations of taxpayers, which will include the blocking of digital services provided to the Philippines by a digital service provider who is noncompliant with the tax rules. Such shall be implemented by the Department of Information and Communications Technology through the National Telecommunications Commission.

TAKEAWAYS
If signed into law, tax revenue collections will certainly increase, and so will the additional burden for taxpayer-consumers, for they may be required to withhold and remit VAT, and take on the additional expense of VAT on digital services.

Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.

 

Nikkolai F. Canceran is a partner from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.

pagrantthornton@ph.gt.com