The pandemic supercharged the growth of the digital economy; the implementation of community quarantines forced us to stay at home and encouraged the use of online platforms to obtain our basic needs. Many continue to heavily rely on the internet and digital services for education, work, and entertainment. There’s no denying that online transactions quickly became part of our new normal. And while these offer advantages to us as consumers, it allows foreign online retailers to penetrate the Philippine market without having to invest or employ Filipinos. Thus, to ensure fair competition between traditional and digital businesses, and further generate funding for the pandemic recover effort, legislators were swift to propose a tax on these digital businesses.
After a year, House Bill 7425, imposing a 12% value-added tax (VAT) on digital transactions, has now been approved on third and final reading. The bill amends Section 105 of the National Internal Revenue Code (NIRC) to impose VAT on goods and property, including those digital or electronic in nature and services including those rendered electronically. This bill will be transmitted to the Senate for further deliberation and approval.
The bill expands the coverage of persons liable to VAT under Section 105 A to include non-resident digital service providers. A digital service provider (DSP), as described under the House Bill, is a 1) third-party seller of goods and services who, through information-based technology or the internet, sells multiple products for its own account, or who acts as an intermediary between a supplier and buyer of goods and services collecting or receiving payment from a buyer on behalf of the supplier and receives a commission thereon, 2) platform provider for promotion using the internet to deliver marketing messages, 3) host of online auctions through the internet, 4) supplier of digital services for a regular subscription fee, and 5) supplier of electronic and online services delivered through an information technology (IT) infrastructure, such as the internet. These non-resident DSPs will be required to register for VAT if their gross sales or receipts for the past year exceed P3 million.
The bill also defines a digital service as “any service delivered or subscribed over the internet or other electronic network (that) can’t be obtained without the use of IT.” Digital services include online licensing of software, updates and add-ons; website filters and firewalls; mobile applications, video games, and online games; webcast and webinars; and the provision of digital content such as music, files, images, text, and information. In addition, online advertising space; electronic marketplaces; search engine services; social networks; internet-based telecommunication, database and hosting; and online training, publication subscriptions, and even payment processing services are also on the list.
The bill would exempt from VAT books and other printed material that are sold electronically or online. However, payments to nonresidents for digital services rendered in the Philippines are subject to 12% withholding tax at the time of payment.
The small-time online sellers with gross receipts or sales of not more than P3 million would still be exempted from VAT; thus, the cost of VAT will not be passed on to the buyers. But the online buyers from big digital businesses with sales or receipts of more than P3 million will have to shoulder the passed-on VAT from the purchased digital services and subscriptions. We can just hope that the bill can be further refined through its implementing rules and regulations, especially on the exemptions, monitoring, compliance, and penalties to be imposed to properly realize the objectives of the bill.
The bill will still take a few months to become law, so for now, you might as well add to cart the best “tita-finds” and binge-watch all trending shows before accepting the reality that tax is now keeping up with the digital economy.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Kristel Hope Avenido is a senior-in-charge of the Tax Advisory & Compliance division at the Davao office of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.