Digital Services in the Philippines are now subject to a 12% Value Added Tax

Republic Act No. 12023, enacted on October 2, 2024, introduces significant changes to the tax framework for digital service providers (DSPs) operating in the Philippines. By imposing a 12% value-added tax (VAT) on digital services, the law aims to create a more equitable environment for local businesses while generating significant revenue for government initiatives.

Non-resident DSPs are now required to register for VAT if their gross sales exceed PHP3 million (around 50,000 EUR) in the previous 12 months, or if they expect to exceed this threshold in the coming year. This requirement applies even if they have no physical presence in the Philippines. To facilitate compliance, the Bureau of Internal Revenue (BIR) will implement a simplified automated filing system. DSPs are required to issue digital sales invoices for each transaction conducted with consumers in the Philippines. These invoices must comply with specific guidelines set by the BIR to ensure transparency and accountability of transactions.

Non-resident DSPs are required to calculate, collect and remit VAT for services consumed in the Philippines. This includes various digital offerings such as streaming services, online marketplaces, and cloud computing solutions. For business-to-business (B2B) transactions involving VAT-registered users, the responsibility to remit VAT shifts to the user. These businesses must withhold and remit the VAT to the BIR within 10 days after the end of the month in which the service was purchased (“reverse charge”). This mechanism ensures that the tax revenue goes to local companies, thus avoiding an excessive burden on foreign DSPs.

The law imposes severe penalties for non-compliance, including fines and possible suspension of business operations in the Philippines. The BIR is empowered to block digital services of vendors who fail to register or comply with VAT regulations. The BIR is likely to increase its scrutiny of digital transactions and service providers, making it imperative for DSPs to maintain accurate records and ensure compliance with all tax obligations. By imposing VAT on both local and foreign DSPs, RA 12023 aims to level the playing field and ensure that all service providers contributing to the Philippine digital economy have similar tax responsibilities. This is particularly important for local companies that have previously struggled to compete with larger foreign companies that do not face the same tax obligations. With local DSPs now operating under similar tax conditions as their foreign counterparts, there is potential for increased market share and competitiveness among Philippine-based companies. The implementation of RA 12023 is expected to generate approximately PHP105 billion (ca 2 Bln. EUR) over five years. These revenues will be critical in funding various government initiatives aimed at improving public services and infrastructure. A portion of these revenues - provided 5% - will be allocated to support the Malikhaing Pinoy Program, which focuses on promoting local creative industries such as arts, crafts, and cultural heritage projects. This initiative could spur growth in sectors that often rely on digital platforms for marketing and sales.

In summary, Republic Act No. 12023 significantly reshapes the landscape for digital service providers in the Philippines by imposing comprehensive tax obligations designed to ensure compliance and fairness in the digital economy. While these changes may present challenges related to registration and invoicing requirements, they also present opportunities for local businesses to thrive in a more competitive environment. By promoting a fairer marketplace and generating critical government revenue, this legislation marks a critical step in modernizing tax regulations in line with evolving digital commerce trends.

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Your point of contact in the Philippines: Lutz Kaiser

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