Finance Secretary Ralph G. Recto lauded on Thursday new legislation ensuring the equitable tax treatment of businesses providing digital services in the Philippines and boosting much-needed revenue collection in the process.
Republic Act 12023 or the Value-Added Tax on Digital Services was signed into law by President Ferdinand R. Marcos, Jr. the day before, 2 October 2024.
The law levels the playing field between local and foreign digital service providers (DSPs) by mandating a 12 percent VAT on all digital services consumed in the Philippines. At present, only local DSPs are subject to paying the 12 percent VAT.
Digital services include online search engines, marketplaces, cloud services, online media, online advertising, and digital goods.
“With this law, we say that if your presence in the Philippine market is as real as your profits, then your tax responsibility should also be equally tangible. But make no mistake. We are not imposing new taxes. We are simply strengthening the authority and streamlining the process of the BIR to collect value-added tax on digital services,” President Marcos Jr. said during the ceremonial signing of the law.
“This is not a new tax mechanism. We are just merely correcting the current system that creates an unfair advantage to foreign digital service providers and weakens the country’s tax base, forgoing much-needed revenues that could have been used to fund crucial public services, infrastructure, and other socio-economic programs,” Finance Secretary Ralph Rector said.
“By doing this, we foster fairness, competition, and inclusion in our tax system and marketplace. Whether you are a local entrepreneur or a global giant, everyone will play by the same rules,” he added.
The new law strengthens the Bureau of Internal Revenue’s (BIR) authority to collect the VAT on digital services by providing measures on how foreign DSPs can comply with the law under the Philippine Tax Code.
Foreign DSPs whose gross sales the past year exceeded P3 million are required to register for VAT.
Furthermore, foreign DSPs are required to designate a representative office or agent––a resident corporation registered under Philippine law to assist in compliance with the provisions of the Tax Code. Non-compliant businesses will be temporarily suspended.
In the interest of public service delivery, a 5 percent VAT is imposed on registered foreign DSPs providing services to the government.
To support the Marcos, Jr. administration’s priority to keep education accessible and affordable for all, the law exempts educational services, including courses, webinars, and other digital educational offerings, from the VAT.
Moreover, digital services sold on a subscription basis to educational institutions recognized by the Department of Education (DepEd), the Commission on Higher Education (CHED), and state universities and colleges (SUCs) are also not subject to VAT.
With the new law in place, the Department of Finance (DOF) expects an estimated revenue collection of P7.25 billion in 2025, at 50 percent compliance.
From 2025 to 2029, the estimated revenue collected from the measure amounts to around P102.12 billion, which will fund projects that directly benefit the Filipino people, such as more school buildings, roads, and hospitals as well as supporting vital socio-economic programs.
For the next five years from the law’s effectivity, 5 percent of the collected revenue will be used exclusively for the local creative industries’ development to foster innovation and empower the next generation of Filipino creators and entrepreneurs.
A transition period of 120 days from the effectivity of the law’s implementing rules and regulations (IRR) will enable the BIR to establish implementation systems before the VAT is imposed on foreign DSPs.
The IRR will be promulgated 90 days from the effectivity of the Act.
