VAT meets the Cloud: RA 12023 redefines the digital economy in the Philippines

The 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 added to the country’s Gross Domestic Product (GDP). More Filipinos now engage with digital services, such as streaming, e-commerce, and online banking. Platforms like Netflix, Lazada, and GCash are now integral to their daily lives, making digital services a lifeline for education, work, and retail. The COVID-19 pandemic only accelerated this trend.

With this surge in digital services, the Government found the opportunity to raise tax revenues. It was also necessary to provide similar treatment between local and foreign-based digital service providers. These laid the foundation for the enactment of RA 12023 imposing VAT on digital services. It stands as a significant response to the evolving digital landscape.

Digital giants like Netflix, Amazon, and Google are now subject to 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, the Commission on Higher Education, or the Technical Education and Skills Development Authority. Banks and non-bank financial intermediaries remain exempt from VAT even on their online services.

The law brings up an interesting nuance on the services abroad rendered by foreign businesses. Are digital services a subset of the controversial cross-border services, which the Bureau of Internal Revenue (BIR) coined early this year? The BIR, in its issuances, refers to activities performed abroad. RA 12023, in turn, refers to services that are digital in nature. Only services that are essentially automated and delivered through the Internet are subject to VAT. For instance, consulting services delivered through the Internet may be considered cross-border services but these 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 VAT. The service providers must remit the VAT on their services to clients that are not subject to VAT. If they are e-marketplace operators, they must remit the VAT on the transactions coursed through their platforms. To incur this obligation, they must, however, have control over the key aspects in the conclusion of the 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 VAT? The answer lies in a forthcoming innovation. The BIR is set to roll out a simplified, automated registration system specifically for them. This streamlined process will play a crucial role in easing compliance 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 BIR may block these digital services through the National Telecommunications Commission. The regulations 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 by foreign-based service providers are considered to be performed in the Philippines if they are consumed in the Philippines. However, this opens a lot of questions: what exactly defines “consumption”? Is it the residence of the consumer or the location of payment? The law remains vague on this point, leaving us in suspense until the regulations clarify things.

Beyond VAT, this raises another critical issue — 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 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 favor 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 the income tax provisions in the future. Until then, the law sits at the crossroads of VAT and income tax, leaving us to wonder what the future holds for the digital tax landscape in the Philippines.

As we wait for further regulations, the digital tax landscape feels like it is awaiting a major software update — until then, we will be watching closely to see how this new feature will function in practice.

The views and opinions expressed in this article are those of the author. This article 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 of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW).

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jpcabais@accralaw.com