Philippines: Imposition of VAT on Digital Transactions
In September 2021, the House of Representatives of the Philippines approved House Bill (HB) 7425 upon its third reading. HB 7425 seeks to impose a 12% value-added tax (VAT) on digital transactions in the Philippines.
HB 7425 proposes to amend section 105 of the National Internal Revenue Code (the Tax Code) to:
- consider digital or electronic goods as "taxable goods";
- consider services that are rendered electronically as "taxable services"; and
- add a new provision wherein non-resident digital service providers will be liable for assessing, collecting and remitting VAT on transactions that go through their respective platforms.
Digital service providers
The HB 7425 provides that a "digital service provider" is a:
service provider of a digital service or good to a buyer, through operating an online platform for purposes of buying and selling of goods or services or by making transactions for the provision of digital services on behalf of any person.
According to HB 7425, a "digital service provider" may be:
- a third party who through information-based technology or the Internet, sells products for its own account (such as a seller of goods and services);
- one who acts as an intermediary between a supplier of goods and services (such as a merchandiser or retailer), who collects or receives payment for such goods and services from a buyer on behalf of the supplier and receives a commission thereon;
- a platform provider for promotion that uses the Internet to deliver marketing messages to attract buyers;
- a host of online auctions conducted through the Internet, where the seller sells the product or service to the person who offers the highest price for it;
- a supplier of digital services to a buyer in exchange for a regular subscription fee over the usage of the said product or service; or
- a supplier of goods or electronic and online services that that can be delivered through an information technology infrastructure, such as the Internet.
On the other hand, the "buyer" is "any person who resides or consumes taxable digital services in the Philippines from a digital service provider either for personal consumption or for trade or business purposes".
"Digital service" is generally defined in HB 7425 as:
any service that is delivered or subscribed over the Internet or other electronic network and which cannot be obtained without the use of information technology and whether the delivery of service may be automated.
Therefore, according to HB 74225, digital services include:online licences for software updates, add-ons, website filters and firewalls;
- mobile applications, video games and online games; and
- webcasts and webinars.
Further, HB 7425 also includes the following as digital services:
- the provision of digital content, such as music, files, images, text and information;
- advertisement platforms, such as the provision of online advertising space or intangible media platform;
- online platforms such as electronic marketplaces or networks for the sale, display and comparison of the price of trade products or services;
- search engine services;
- social networks;
- databases and hosting, such as website hosting, online data warehousing, file sharing and cloud storage services;
- internet-based telecoms;
- online training, such as the provision of distance teaching, e-learning, online courses and webinars;
- online newspapers and journal subscription; and
- payment processing services.
Section 108Section 108 of the Tax Code, which includes a definition of the phrase "sale or exchange of services", will be amended to expressly state that "sale or exchange of services" relates to the performance of services for others for a fee, remuneration or consideration, whether rendered electronically or otherwise. The following were also added to the enumeration of services under section 108:
- supply by any resident or non-resident of digital services, such as online advertisement services, provision for digital advertising space and any other facility or service for the purpose of online advertisement;
- supply by any resident or non-resident of digital services in exchange for a regular subscription fee over the usage of said product or service; and
- supply of electronic and online services that can be delivered through an information technology infrastructure, such as the Internet.
Section 109Consistent with the proposed amendments of the other provisions to include digital goods and services among taxable goods and services, section 109 of the Tax Code, which lists the exempt transactions, will be amended to include the following among the exempt transactions, provided they comply with the other requirements stated in said section:
- online courses and webinars; and
- electronic or online sales of books, newspapers and magazines.
Such transactions will be made exempt if they comply with the other requirements stated in section 109.
A non-resident digital service provider may be subject to VAT for digital services provided; however, HB 7425 provides that the non-resident digital service provider may not claim creditable input VAT.
A non-resident digital service provider that, in the course of trade or business, engages in the sale or exchange of digital services must register for VAT if:
- its gross sales or receipts for the past 12 months before the date of filing of VAT return, other than those exempt from VAT, have exceeded 3 million pesos ($58,725); or
- there are reasonable grounds to believe that its gross sales or receipts for the next 12 months from date of filing of VAT return, other than those exempt from VAT, will exceed 3 million pesos.
Section 114The bill also proposes to amend section 114 of the Tax Code, which relates to return and payment of VAT, to impose 12% withholding VAT on payments to non-residents for services rendered in the Philippines (unless they are duly registered with the Bureau of Internal Revenue (BIR)). This amendment applies to all non-residents and not only to non-resident digital service providers.
The BIR must establish a simplified automated registration system for non-resident digital service providers. Subject to rules and regulations to be prescribed by the Department of Finance (DOF), a VAT-registered non-resident digital service provider may issue an electronic invoice or receipt.
If HB 7425 is passed into law, its implementation rules and regulations shall be promulgated by the DOF upon recommendation of the BIR, and in coordination with the Department of Information and Communications Technology.
VAT is territorial in nature and should apply only when the sale takes place in the Philippines, or the services are rendered in the Philippines. With the proposed amendments to the Tax Code, it appears that digital goods and digital services will be considered sold or rendered in the Philippines if the buyer is a Philippine resident or "consumption" is within the Philippines. It is not clear how the provisions may be implemented (or specifically how the VAT will be collected) if the non-resident digital service provider does not register in the Philippines. Finally, non-resident digital service providers will have to consider whether registration for VAT purposes will trigger income tax issues and other "doing business" requirements.
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