Now streaming: VAT on digital services

This Christmas season, should we really stream or use digital services and “chill” following the enactment of RA 12023 or the Value-Added Tax (VAT) on Digital Services Law last Oct. 18, 2024?

As the wave of technology and digitalization transforms the commercial landscape, our lawmakers recognized the need to transform our tax system which was built on brick-and-mortar business model. Thus, following other countries, the Philippines enacted new legislative measures through RA 12023 to bring this growing digital economy into the tax net.

Let’s take a closer look first at the salient features of RA 12023.

Definition of Digital Services and Classification of Digital Service Providers (DSP)

The law defines digital services as any service supplied over the internet or other electronic networks using information technology, where the supply of the service is essentially automated. Local service providers or the VAT-registered resident DSPs that supply digital services to consumers are required to register with the BIR following the policies and procedures applicable to Philippine taxpayers as provided in relevant tax laws.

On the other hand, non-resident DSPs, which the law defines as digital service providers with no physical presence in the Philippines, must manually or electronically register for VAT to enable them to remit the 12-percent VAT on the digital services consumed in the Philippines if the consumers are non-VAT registered. The law reiterates that a non-resident DSP is required to register for VAT if the person’s gross sales for the past 12 months, excluding those exempted, have exceeded the required threshold or if there are reasonable grounds to believe that the gross sales for the next 12 months, excluding those exempted, will exceed the provided threshold.

Emphasized Difference of Non-resident DSPs

The law highlights the tax-implications on non-residents DSPs which include the following:

• A non-resident DSP required to register for VAT will be liable to remit VAT on the digital services consumed in the Philippines even if the consumers are non-VAT registered;

• A VAT-registered taxpayer will be liable to withhold and remit the VAT due on its purchase of digital services consumed in the Philippines from a non-resident DSP through a so-called Reverse Charge Mechanism;

• If a VAT-registered non-resident DSP is classified as an online marketplace or e-marketplace, it will also be liable to remit VAT on transactions involving non-resident sellers that go through its platform and;

• Non-resident DSPs are not allowed to claim creditable input tax.

Failure to Register Consequences

In any case where a company required to register fails to do so, the law authorizes the Department of Information and Communication Technology (DICT), through the national Telecommunications Commission (NTC), to block the digital services performed or rendered in the Philippines by the non-complying DSP.

Reality Check

Like any new law, challenges are expected in the implementation of RA 12023, and hopefully, the implementing rules and regulations (IRR) will provide clear guidelines. One anticipated challenge involves cases where both the non-resident DSP and the customer are not VAT-registered. In such situations, the law states that the customer is obligated to withhold and remit the VAT. However, this may be challenging, as compelling taxpayers in these cases to withhold and remit the VAT could be difficult. Therefore, the IRR should clearly outline the obligations of both non-resident DSPs and VAT-registered and non-VAT-registered customers.

Now that the holiday season is upon us, the number of online transactions will surely skyrocket as Filipino consumers utilize online marketplaces to do their shopping especially with competing online marketplaces offering huge discounts. With the passing of the law on VAT on digital services, the IRR should also clarify the obligations of non-resident DSP operating as online marketplaces. The law provides that online marketplaces will be liable for remitting VAT on transactions from non-resident sellers using their platform if they control key aspects of those transactions or if they perform any of the terms and conditions related to the supply of goods or are involved in the ordering or delivery of the goods. The IRR should clarify the terms used in RA 12023 to determine if this will impact the online consumption experience for individuals.

Another challenge will be the determination of the three-million threshold, as nonresident DSPs, especially startup companies, are very cautious to submitting to the BIR’s jurisdiction.

Knowing that the law will greatly impact non-resident DSPs, they will have to brace themselves for its implementation, as they have approximately six to seven months to prepare before the law takes effect, which is 120 days from the issuance of the IRR.

In addition to the efforts of legislators to improve tax laws in the country, full participation from covered taxpayers is essential for the effective implementation of laws like RA 12023, just as with any other law. Hence, we should not just chill and let the law implement itself. As taxpayers, we must remain engaged and involved in its implementation for the sake of national development.

Marione Nicole P. Bugarin is a Supervisor under the Tax Group of R.G. Manabat & Co., a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The firm has been recognized as a Tier 1 in Transfer Pricing Practice and in General Corporate Tax Practice by the International Tax Review. For more information, you may reach out to Marione Nicole P. Bugarin or Eugene M. Pulga through [email protected], social media or visit www.home.kpmg/ph.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity. The views and opinions expressed herein are those of the author and do not necessarily represent KPMG International or R.G. Manabat & Co.