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Filipinos’ growing reliance on online platforms has driven massive growth in the Philippine digital economy. This is evident in the 7.7% increase in the gross value the sector added to the country’s GDP in 2023. More Filipinos engage with digital services such as streaming, e-commerce and online banking, and platforms like Netflix, Lazada and GCash are now integral to daily lives. The covid-19 pandemic only accelerated this trend.

With this surge in digital services, the government had the opportunity to raise tax revenues. It was also necessary to apply similar treatment to local and foreign-based digital service providers. These factors laid the foundation for the enactment of Republic Act (RA) 12023 on 2 October 2024, imposing a VAT on digital services.

Digital giants like Netflix, Amazon and Google are now subject to a VAT on their services. The law describes them as service providers through the “internet or other electronic networks with the use of information technology and where the supply of the service is essentially automated”. Online educational services are not covered, provided they are accredited by the Department of Education, Commission on Higher Education, or the Technical Education Skills and Development Authority. Banks and non-bank financial intermediaries remain exempt from a VAT even on their online services.

The law brings up an interesting nuance: Are some services delivered over the internet a subset of controversial cross-border services, which the Bureau of Internal Revenue (BIR) addressed last year? The BIR in its issuances refers to activities performed abroad. RA 12023 refers to a VAT on services that are digital in nature, that is, where their supply is essentially automated. This could mean that consulting services, say, delivered through the internet may be considered cross-border services but are not digital services.

A significant feature of RA 12023 is how it handles VAT collection, especially for foreign-based service providers. Their clients who are VAT-registered must withhold and remit the VAT. The service providers must remit the VAT on their services to clients that are not VAT-registered. If they are e-marketplace operators, they must remit the VAT on the transactions directed through their platforms. To incur this obligation they must, however, have control over key aspects of these transactions, specifically in the setting of terms and conditions for the supply of goods, or in the placing of orders or delivery of such goods.

So, how exactly will they remit the VAT? The answer lies in the BIR’s forthcoming simplified, automated registration system specifically for foreign-based service providers.

Both foreign and local-based service providers should register as VAT taxpayers. They face the possibility of being temporarily prevented from engaging in their activities should they fail to comply with this obligation. The regulations also need to clarify if foreign-based providers still need to register if their clients are VAT-registered.

What makes RA 12023 even more intriguing is its stance on how digital services supplied by foreign-based service providers are considered to be performed in the Philippines if they are consumed in the Philippines. This poses a number of questions: What does “consumption” mean exactly? Is it the residence of the consumer or the location of payment that counts? The law remains vague on this point.

Beyond a VAT, another critical issue is will this definition of consumption influence where income tax is levied? Under section 42 of the tax code, services are taxable where they are performed. Now that digital services are subject to a VAT, does this mean the income earned will also be subject to income tax? The courts have ruled that tax statutes should be interpreted strictly against the government and in favour of taxpayers, meaning tax statutes should be clear when a tax is imposed. Until then, income tax and VAT should remain distinct unless otherwise specified.

At present, RA 12023 only amends the VAT provisions of the tax code, leaving the income tax provisions unchanged. But as the digital economy continues to evolve, this balance may shift if congress decides to amend income tax provisions in the future.

For now, we wait for further regulations to clarify how this new regime will function in practice.

The views and opinions expressed in this article are those of the author. This article, which first appeared in a newspaper of general circulation in the Philippines, is for general informational and educational purposes only and not offered as, and does not constitute, legal advice or legal opinion.

Jill Eileen P Cabais is an associate of the tax department at Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW) in Metro Manila