Philippines: Preparing for VAT on digital transactions – 12% VAT to digital service providers (DSP) that operate through online platforms
On September 21,2021, the Senate of the Philippines passed on third reading House Bill 7425 seeking to amend Section 105 of the National Internal Revenue Code (NIRC) by imposing 12% value-added tax (VAT) to digital service providers (DSP) that operate through online platforms. The Bill aims to generate new funding sources to assist the government’s COVID-19 response efforts. Bureau of Internal Revenue (BIR) has been tasked to establish a simplified automated registration system for nonresident digital service providers to improve efficiency and reduce administrative burden.
What we know so far
DEFINITION
1.Digital service providers (DSP)
A service provider of digital services or goods, whether residents or non-residents of the Philippines, through operating an online platform or by making transactions for the provision of digital services to a certain buyer (i.e., any person who resides in the Philippines and who acquires taxable digital services in the Philippines either for personal consumption or for business purposes).
DSPs may include:
- A third party who sells products for its own account, or for others as an intermediary through information-based technology or the internet;
- A platform provider for promotion/marketing messages through internet;
- A host of online auctions conducted through the internet;
- A supplier of digital services to a buyer in exchange of a regular subscription fee over the usage of the said product or service; and
- A supplier of goods or online services that can be delivered through an information technology infrastructure, such as the internet.
2.Sale or exchange of services
The performance of all kinds of services in the Philippines, whether rendered electronically or otherwise, including:
- Supply by resident or non-resident of digital services such as online advertisement services
- Supply by resident or non-resident of subscription-based services
- Supply of electronic and online services delivered through IT infrastructure (internet)
GENERAL INFORMATION
| Effectivity | The Bill provides for a transition period of 180 days from the effectivity of the Act before VAT can be imposed to nonresident DSPs. |
| Tax Rate | 12% |
| Scope |
a) Goods or properties including those digital or electronic in nature b) Services including those rendered electronically
Digital services includes,
Digital content (e.g., music, files, images, text, and information)
|
| VAT Exemptions |
a) Sales below PHP 3 million
b) Electronic or online sale/ importation/ publication of books/ newspaper/ magazine / review or bulletin appearing at regular intervals with fixed prices or subscription and sale not devoted principally to the publication of paid advertisements
c) Educational services including online courses and webinars, and books and other printed materials which are sold electronically or online which are not devoted principally to the publication of paid advertisements |
VAT REGISTRATION
Nonresident DSPs who are not registered are liable to register for VAT if:
a) The sales exceed the registration threshold of PHP 3 million, or
b) They have reasonable grounds to believe that gross sales/ receipts for next 12 months from date of filing VAT return will exceed P3 million.
The Bill clarifies that nonregistration with the BIR does not exclude nonresident DSPs from payment of VAT. Payments to non-VAT registered non-residents for services rendered in the Philippines are still subject to 12% withholding VAT at the time of payment.
COMPLIANCE
VAT registered nonresident DSPs are obliged to collect and remit the VAT for electronic transactions. They may issue electronic invoice or receipt subject to the rules to be prescribed. However, for treatment of treatment of input VAT, VAT registered nonresident DSPs subject to the 12% VAT on digital transactions are prohibited from claiming input tax as credits against output VAT liability. This is unlike the rules in the EU VAT Law where taxpayers who can claim input taxes as credits against output tax to determine the VAT payable for a certain period.