含羞草社区

Under a landmark law, the Philippine legislature has amended certain provisions of the national tax code to capture digital services coming into the country from abroad.

The upshot of these amendments is that the country’s 12% value-added tax (VAT) now clearly encompasses digital services provided by non-resident providers but which are consumed in the Philippines.

The law is Republic Act (RA) No.12023. It was signed by the president of the Philippines on 2 October 2024, and took effect on 18 October 2024, just 15 days after its publication.

The legislators who sponsored the bill that became RA No.12023 have made pronouncements that the reforms were not formulated in isolation and, in fact, were meant to align with international best practices. These legislators say the reforms bring Philippine VAT policy in line with global standards and also enhance revenue generation.

Legislative context

By way of background, services rendered abroad by non-resident service providers are generally out of reach of the Philippine VAT system. The critical determining factor for VAT taxability of services is place of performance.

RA No.12023 amends the tax code to make it clear that digital services rendered by non-resident service providers (DSPs) but consumed in the Philippines are within the coverage of the VAT.

The law states that “digital services delivered by non-resident digital service providers shall be considered performed or rendered in the Philippines if the digital services are consumed in the Philippines”.

The amendments

The new law expressly includes the provision of digital services as VAT-taxable transactions. It introduces a new section in the tax code that sets forth the liability of persons providing digital services, including non-resident DSPs.

Before discussing the key stipulations of the new law, here are some of the underlying definitions.

Digital service: The term “digital service” is broadly defined under RA No.12023 as any service that is supplied over the internet, or another electronic network with the use of information technology, and where the supply of the service is essentially automated.

It includes but is not limited to:

• Online search engines;
• Online marketplaces or e-marketplaces;
• Cloud services;
• Online media and advertising;
• Online platforms or digital goods.

Non-resident: The term “non-resident digital service provider” is defined under the new law as a digital service provider that has no physical presence in the Philippines.

Points of reform

RA No.12023 introduces an entirely new provision of the tax code that lays down the design contours of a VAT system that involves or impacts non-resident digital service providers, as follows:

• In a business-to-consumer (B2C) scenario: if the consumers are non-VAT registered, the non-resident DSP required to be registered for VAT shall be liable for the remittance of VAT on the digital services that are consumed in the Philippines.
• In a business-to-business (B2B) scenario: a reverse charge mechanism is introduced, and it applies if the Philippine consumers of non-resident DSPs are VAT-registered, in which case the VAT-registered consumers shall be liable to withhold and remit the VAT on their purchase of digital services from non-resident DSPs.
• In an online marketplace or e-marketplace scenario: A VAT-registered non-resident DSP classified as an online marketplace or e-marketplace shall also be liable to remit the VAT on transactions of non-resident DSPs that go through its platform, provided it controls key aspects of the supply and performs any of the following:

1. 1. It sets, either directly or indirectly, the terms and conditions under which the supply of goods is made; or
   2. It is involved in the ordering or delivery of goods, whether directly or indirectly.

Simplification

Registration, thresholds and exemptions: The law mandates the establishment of a simplified automated Bureau of Internal Revenue registration system for non-resident DSPs. VAT-registered non-resident DSPs are exempt from maintaining regular accounting records and subsidiary journals, although they are required to issue digital sales or commercial invoices for every transaction.

The threshold for VAT registration is the same for all DSPs, including non-resident DSPs. They are required to register, either electronically or manually, for VAT if:

• Their gross sales (excluding exempt sales) for the past 12 months exceeds the current VAT threshold of PHP3 million (app. USD51,000); or
• There are reasonable grounds to believe that their gross sales for the next 12 months will exceed the threshold.

Note that the law reinforces traditional VAT exemptions. It excludes from the application of the VAT:

• Educational services, including online courses, online seminars and online trainings rendered by duly accredited private educational institutions and those rendered by government educational institutions.
• Sale of online subscription-based services to certain government agencies (Department of Education, Commission on Higher Education, Technical Education and Skills Development Authority) and educational institutions recognised by said government agencies.
• Services of bank, non-bank financial intermediaries performing quasi-banking functions, and other non-bank intermediaries, including those rendered through different digital platforms.

Failure of a person to register with the Bureau of Internal Revenue as required can be met with extraordinary measures. The Commissioner of Internal Revenue has the power to temporarily close an establishment for a period of not less than five days, lifted only by compliance with requirements in the closure order.

The commissioner’s power to suspend includes the authority to block digital services accessed in the Philippines, with the co-operation of the Department of Information and Communications Technology (DICT) through the National Telecommunications Commission.

Implementation

Rules and regulations: RA No.12023 mandates the Department of Finance, on the recommendation of the Bureau of Internal Revenue and in co-ordination with the DICT and the telecommunications commission, on consultation with stakeholders, to issue rules and regulations no later than 90 days from the law’s effectivity.

Non-resident DSPs are to be immediately subject to VAT after a further 120 days from the effectivity of the implementing rules and regulations.

The Bureau of Internal Revenue has circulated the first draft of the implementing rules and regulations drafted by the technical working group that was formed by the commissioner immediately after the passage of the law.

Public consultation has also commenced, with the first hearing scheduled on 12 November 2024.

Refining the rules

Finer points that may need further clarification in the implementing rules include:

• The determination of customer location (would there be a hierarchy of information or indicators, presumptions or even fallback rules, for the DSP to make this determination?).
• The determination of the status of a customer (that would allow the DSP to quickly conclude that a B2B scenario exists).
• Whether guidance from the tax authorities would take into account the broader regulatory context including privacy laws.

The draft regulations are expected to undergo a number of iterations following the public consultations. It is hoped that the rules will be sufficiently simplified and remain aligned with international best practices that have been proven to increase voluntary compliance.

Taxpayers, on the other hand, will need to pay significant and sustained attention to the formulation and actual implementation of the rules, given the challenges in compliance, particularly for businesses faced with obligations in multiple jurisdictions.

OCAMPO AND SURALVO LAW OFFICES
6F Liberty Center Bldg, 104 HV Dela Costa St
Salcedo Village, Makati City
Metro Manila 1227, Philippines
Tel. +632 8800 6157
Email: info@ocamposuralvo.com