ON October 3, Republic Act (RA) 12023 was signed into law, which imposes value-added tax (VAT) on gross sales derived from the sale or exchange of digital services, amending provisions in the National Internal Revenue Code of 1997 (Tax Code). With the passage of RA 12023, the Philippines joins Singapore, Indonesia, Malaysia and Thailand, which have earlier levied their own VAT from digital services.
The Philippine government expects to collect P105 billion in taxes within five years from the law’s implementation.
Digital service
Section 105 of the Tax Code on VAT on services contains amendments: “Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, including digital services, and any person who imports goods shall be subject to the VAT imposed in Sections 106 to 108” of the Tax Code.
A new definition of what constitutes “digital service” is added to Section 108-A of the Tax Code, referring to any service supplied over the internet or other electronic network with the use of information technology, and where the supply of the service is essentially automated. Such service shall include online search engine, online marketplace or e-marketplace, cloud service, online media and advertising, online platform and digital goods.
Also added to Section 108-B of the Tax Code is a definition of “Digital Service Provider,” or DSP, as a resident or nonresident supplier of digital services to a consumer who uses digital services subject to VAT in the Philippines.
Meanwhile, Section 108-C of the Tax Code, as amended by RA 12023, defines a nonresident digital provider as a digital service provider that has no physical presence in the Philippines.
Section 105 of the Tax Code was also revised with a new situs rule (for VAT purposes): “Digital services delivered by nonresident digital service providers are considered performed or rendered in the Philippines if the digital services are consumed in the Philippines.” This new rule is necessary to include digital services within the ambit of our VAT regime, since being a transaction tax, VAT can be imposed legally only on services performed within the Philippines.
How the VAT is collected
As a general rule, DSPs, whether resident or nonresident, shall withhold and remit the VAT on digital services consumed in the Philippines. However, the liability to remit the VAT is shifted to a VAT-registered consumer in transactions with a nonresident DSP. In that case, the VAT-registered consumer must remit the VAT on its purchase from the nonresident DSP within 10 days following the end of the month the withholding was made. This means this withholding tax obligation arises only if the consumer is in business itself, or in back-to-back or B2B transactions.
Furthermore, a VAT-registered nonresident DSP classified as an online marketplace or e-marketplace is liable to remit VAT on the transactions of nonresident sellers that go through its platform, if either of the two conditions below exist:
1. The DSP controls key aspects of the supply of goods, sets the terms and conditions under which the supply of goods is made, directly or indirectly.
2. The DSP is involved in the ordering of delivery of goods, directly or indirectly.
VAT registration, invoicing
To place them within the ambit of our VAT system, DSPs are required to register with our Bureau of Internal Revenue. It is also required for any provider of digital goods or services if gross sales exceed the P3,000,000 threshold for the past or ensuing 12-month period.
DSPs are, likewise, required to issue a digital sales invoice or commercial invoice for every sale, barter or exchange of digital service, containing date of transaction, transaction reference number, identification of consumer, brief description of transaction and total amount with an indication that such amount includes the VAT.
If the sale includes services subject to VAT and some are VAT zero-rated or VAT-exempt, the invoice shall indicate the breakdown accordingly.
Nonresident DSPs, however, shall not be allowed to claim creditable input VAT (Section 113(C) of the Tax Code, as amended).
Failure to register shall be meted with the penalty of temporary closure for not less than five days, including the blocking of digital services performed or rendered in the Philippines by a DSP. The order of closure shall be lifted only upon compliance with the requirements prescribed by the Commissioner of Internal Revenue.
Under the amendment, VAT-exempt transactions include educational services conducted through online courses, online seminars and online training, as well as services of banks, nonfinancial intermediaries performing quasi-banking functions and other nonbank financial intermediaries rendered through digital platforms.
RA 12023 is thus historic, in a sense, and seeks to place on equitable footing foreign and local DSPs.
Euney Marie J. Mata-Perez is a CPA lawyer and managing partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She has been ranked as one of the top 100 lawyers of the Philippines by Asia Business Law Journal, and is the incoming chairman of the tax committee of the Management Association of the Philippines. She acknowledges the contributions of lawyers Raida Argeli G. Grefiel and Joshua Rizlan A. Simbillo in this column. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. Email the author, [email protected], or visit MTF website, www.mtfcounsel.com.
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