Finance Secretary Ralph G. Recto on Wednesday lauded new legislation ensuring equitable tax treatment of digital business enterprises helping boost much-needed revenue collection to aid national development.
Republic Act 12023 or the Value-Added Tax on Digital Services was signed into law by President Ferdinand R. Marcos, Jr. on Wednesday, 2 October 2024.
The legislation levels the playing field between local and foreign digital service providers (DSPs) by mandating a 12 percent value-added tax on all digital services consumed in the Philippines. At present, only local DSPs are subject to 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,” the President 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,” Recto 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 value-added tax on digital services by providing measures on how foreign DSPs can comply with the value-added tax requirements under the Philippine Tax Code.
Foreign DSPs whose gross sales or receipts for the past year have exceeded PHP 3 million are required to register for value-added tax.
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 value-added tax 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 value-added tax.
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 value-added tax.
With the new law in place, the Department of Finance projects revenue collection of P7.25 billion in 2025, at 50 percent compliance.
The estimated collection from the measure from 2025 to 2029 amounts more or less P102.12 billion which will be poured into projects directly benefiting the Filipino people such as building more schools, roads, and hospitals as well as vital socio-economic programs.
Five percent of the projected revenue collection in the next five years will be used exclusively for the local creative industries’ development to foster innovation and empower the next generation of Filipino creators and entrepreneurs.
There will be a transition period of 120 days from the law’s implementing rules and regulations (IRR) to allow 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.
