The Philippine government has been studying how to capture the potential value-added tax (VAT) leakages in the digital economy. Among those that may be affected are services offered by global tech giants such as Netflix, Inc. — GABBY JONES/BLOOMBERG

By Charmaine A. Tadalan, Reporter

THE House Ways and Means Committee on Wednesday approved a measure that would impose a 12% value-added tax (VAT) on digital services, particularly those offered by foreign technology companies such as Facebook, Netflix, Inc., Alibaba’s Lazada and Alphabet’s Google.

The move to tax the digital economy comes as the government seeks new sources of revenues after tax collections plunged due to the coronavirus pandemic.

“Based on the estimates, it (will generate) P10.66 billion (in annual revenues). Around P9.31 billion will come from transactions with non-residents and around P1.36 billion will come from (local companies),”  Finance Assistant Secretary Dakila Elteen M. Napao said during the House panel’s hearing on Wednesday. “This is on top of the existing VAT on e-commerce that is being collected.”

The bill will be sponsored in the plenary next week, House Ways and Means Committee Chairman and Albay Rep. Jose Ma. Clemente S. Salceda said in a phone message.

Under the measure, all digital transactions will be subjected to a 12% VAT. This would apply to service providers that operate online platforms for buying and selling, supply online advertisement services, and provide digital services in exchange for a subscription fee, among others.

The bill said digital services include mobile apps, video and online games, online software licensing, webinars, search engine services, social networks, electronic marketplaces, file sharing and cloud storage services, advertising platform, website-hosting, internet-based telecommunication, online training, e-learning, online newspapers and payment processing services.

The digital economy has been booming in the Philippines, as the lockdown measures forced people to stay at home and businesses to close brick-and-mortar shops.

Many small businesses have expressed dismay at the government’s plan to tax digital services, but Mr. Salceda assured the digital transaction tax will not affect them.

“If your net income as a sole proprietor is below P250,000, you are exempt from paying and filing income taxes. So, the small Facebook online seller will not be taxed. I guarantee you,” he said in a statement.

Mr. Salceda also noted under the VAT law, businesses with gross sales below P3 million are exempted.

The bill also states that non-resident digital service providers that sell digital services in the Philippines should register for VAT if their gross sales or receipts in the last 12 months have exceeded P3 million or “there are reasonable grounds to believe” their gross sales or receipts will exceed P3 million in the next 12 months.

The digital transaction tax measure is one of the House panel’s priorities, along with the proposal to tax Philippine Offshore Gaming Operations and update the road users’ tax.

Based on his tax impact analysis, Mr. Salceda said 76.91% of the revenues will come from upper middle-income families and above, while 20.38% will come from households that earn at least P100,000 but below P250,000 annually. Only 0.04% of all revenues will come from the bottom 20% of the population.

“This is the mildest imposition you can make when the country is in severe need of new revenues. And it covers a mostly discretionary spending,” he said.

Mr. Salceda noted the bill does not impose new taxes, rather it seeks to capture VAT that should have been imposed on digital transactions under the present tax code.

“We imposed no new taxes. We’re simply clarifying that they should be ‘VATed.’ In general, if you sell, you pay VAT, unless you fall under the exemptions for small businesses,” Mr. Salceda also said.

AAMBIS-OWA Rep. Sharon S. Garin, House Ways and Means Committee vice chairperson, said during the hearing the bill intends to “level the playing field” by covering foreign corporations.

“What we’re addressing here is… the service providers from outside because they are gaining profit from us and from our constituents and hindi sila nagbabayad ng tax (they’re not paying tax),” she said. “While kung dito ka nag-bebenta, mag-babayad ka ng tax. (While if you do business here, you’re subject to tax).”

No counterpart measure has so far been filed in the Senate, but a resolution has been introduced asking the Senate Ways and Means Committee to study the possibility of collecting taxes from the digital economy as a way to generate revenues for the government’s pandemic response. 

Senate President Pro Tempore Ralph G. Recto, however, said in a phone message that the proposal “will be difficult to implement.”

“Having said that I do not think it is wise to impose new taxes at this time,” he said.

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