Soon taking effect: The 12% VAT on digital services

As the digital economy continues to expand, governments worldwide are adapting their tax systems to keep pace. The Philippines is no exception. Starting on June 2, digital services consumed within the country will be subject to a 12% Value-Added Tax (VAT), following the signing of Republic Act (RA) No. 12023 and its implementing rules. This landmark legislation targets non-resident digital service providers (NRDSPs), bringing previously untaxed online transactions into the formal tax system.

From streaming subscriptions and cloud storage to online advertising and software services, this VAT imposition will affect a wide range of services used by individuals and businesses alike. Consumers may have to pay higher prices; meanwhile, foreign digital service providers face new registration, reporting, and compliance obligations in the Philippines.

In this article, I will discuss the key features of RA No. 12023 and its implementing rules, and what this means for local consumers, businesses, and non-resident service providers.

UNDERSTANDING THE LEGAL FRAMEWORK
RA No. 12023 was introduced to impose VAT on digital services consumed within the Philippines. This forward-thinking measure aims to create a level playing field for both domestic and foreign digital service providers while harnessing the immense revenue potential of the growing digital economy.

The Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) No. 3-2025, RR 14-2025, and Revenue Memorandum Circular (RMC) No. 47-2025, outlining the implementing rules for the registration and compliance requirements for NRDSPs.

In a nutshell, “digital services,” as defined by RR 3-2025, are those supplied over the internet or other electronic networks, where the service is primarily automated. RMC No. 47-2025 further clarifies that only those specified digital services under the law are subject to VAT.

Digital services will start being subject to VAT on June 2. Those who do not register by June 1 may incur penalties and at worst, face potential suspension of their business activities, thus, serving as a crucial compliance deadline for NRDSPs.

REGISTRATION, INVOICING AND VAT REMITTANCE
For NRDSPs, this new VAT regime comes with crucial registration and reporting obligations. The BIR has introduced the VAT on Digital Services (VDS) Portal, which serves as the primary platform for NRDSPs to register, file VAT returns, and remit VAT on taxable digital transactions within the Philippines. Until the portal is fully operational, providers are required to use the Online Registration and Update System (ORUS) to register. Alternatively, those with a local representative can register manually with Revenue District Office No. 39 – South Quezon City.

RA 12023 also outlines the VAT treatment for different transaction types, with distinct responsibilities for Business-to-Business (B2B) and Business-to-Consumer (B2C) interactions. In B2B transactions, the Philippine-based business consumer or buyer is responsible for accounting and remitting the 12% VAT under a reverse charge mechanism using BIR Form No. 1600-VT. The VAT remitted using this form may then be applied as input VAT credit by the Philippine business consumer. Conversely, in B2C transactions, the NRDSP is directly liable for the VAT and must file and remit it through the VDS Portal. The BIR has not required a specific format for NRDSP invoices, but they must include key details: the date of the transaction, transaction reference number, identification of the buyer (including the TIN, if applicable), a brief description of the transaction, and the total amount, including VAT. In the RMC, however, the BIR introduced some flexibility on the invoice amount. If the NRDSP cannot include the VAT amount on the invoice, it must include a note indicating that the local business buyer is responsible for accounting and remitting the VAT.

CHALLENGES AND PRACTICAL IMPLICATIONS
The implementation of VAT on digital services presents significant challenges for NRDSPs. These providers must review and possibly adjust their invoicing systems to comply with the new Philippine requirements. For B2B transactions, NRDSPs will need to clearly indicate on their invoices that the local buyer is responsible for VAT while for B2C transactions, they will need to ensure that VAT is either included as a separate line item or stated as part of the total amount.

Another challenging point is the requirement for NRDSPs to file tax returns with the BIR even if they are only engaging in B2B transactions, where the VAT remittance obligation already falls on the Philippine consumer. While I can appreciate that the goal is enable the BIR to collect information on the total digital services transactions in the Philippines to ensure accurate compliance and monitoring, this seems like something that can still be accomplished by imposing a less onerous reporting obligation on the NRDSPs. Something like a summary list of sales that local VAT taxpayers are filing may be considered.

On the other hand, Philippine business consumers face increased compliance burdens due to the VAT on digital services. These businesses must ensure accurate VAT calculations, proper documentation, and timely remittance of VAT to the BIR. Smaller enterprises, especially, may face difficulties in managing these added requirements, adding to their overall compliance costs. Furthermore, businesses unfamiliar with the reverse charge VAT system may be caught off guard by their obligation to self-assess and remit VAT on imported digital services, further complicating their operational and financial processes.

As a consumer, I’m already feeling the impact of recent price hikes announced by some well-known NRDSPs. While the VAT increase may seem small on a per-transaction basis, it accumulates over time, making subscriptions and online purchases noticeably more expensive. Consequently, I’ve become more discerning about the services I subscribe to and carefully consider what I can do without.

Amid the unofficial and partial results of the recent elections, there’s a prevailing sense of cautious optimism that the BIR will live up to its commitment, “Sa tamang buwis, pag-asenso’y mabilis.” The expectation is that as the government increases tax collection efforts, citizens will see tangible improvements in public services and infrastructure. While the immediate impact of VAT may be an added financial burden, there’s hope that these efforts will contribute to broader economic growth and, ultimately, help enhance our quality of life.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for speci fi c advice.

Elinelle D. Saldaña is a senior associate at the Tax Services department of Isla Lipana & Co., the Philippine member firm of the PwC network.

elinelle.d.saldana@pwc.com