Last October 2, President Ferdinand R. Marcos Jr. signed into law Republic Act (RA) 12023, one of the priority measures of his administration. This is an important step toward modernizing the Philippine tax system in light of current advancements brought about by the digital economy. Amending relevant sections of the Philippine Tax Code, RA 12023 imposes a 12 percent value-added tax (VAT) on digital services consumed in the Philippines such as Netflix, Disney+, Spotify and Google, if the services were provided by providers non-resident services.

The law provides that “digital services provided by non-resident digital service providers shall be deemed to be performed or rendered in the Philippines if the digital services are consumed in the Philippines.” The said law defines “digital service” as any service provided over the Internet or other electronic network using information technology and where the provision of the service is essentially automated. Digital services must include an online search engine, online marketplace or electronic marketplace, cloud service, online media and advertising, online platform or digital goods. Finally, a “non-resident digital service provider” means a digital service provider that does not have a physical presence in the Philippines.

The following digital services are, however, exempt from VAT: (a) online courses, online seminars and online training, provided by private educational institutions, duly accredited by the Department of Education (DepEd), the Higher Education Commission (CHEd). ), the Technical Education and Skills Development Authority (TESDA) and those rendered by public educational establishments; and sale of online subscription services to DepEd, CHEd, TESDA and educational institutions recognized by said government agencies; and (b) the services of non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries rendered via digital platforms.

Digital service providers (DSPs), whether resident or non-resident, will be responsible for assessing, collecting and remitting VAT on digital services consumed in the Philippines. Additionally, if the non-resident DSP is classified as an online marketplace or e-marketplace, it will also be liable for VAT on the transactions of non-resident sellers that pass through its platform if that DSP controls key aspects of the supply and either (i) fixes, directly or indirectly, the terms and conditions under which the supply of goods is made; or (ii) is involved in the ordering or delivery of goods, whether directly or indirectly. However, in cases where the digital service provided by a non-resident DSP is consumed by a VAT-registered taxpayer, a reverse charge mechanism will be implemented. In this case, the VAT registered taxpayer will be required to withhold and remit the VAT due on its purchase of digital services consumed in the Philippines from a non-resident DSP within 10 days following the end of the month in which the withholding was been carried out. Notwithstanding the above, non-resident DSPs are not permitted to claim deductible input tax.

DSPs, whether residents or non-residents, are required to register for VAT if their gross sales for the last 12 months other than those exempt from VAT exceeded P3,000,000; or there are reasonable grounds to believe that their gross sales for the next 12 months, other than those exempt from VAT, will exceed P3,000,000. In the event that the DSP has not registered for VAT as required , the Commissioner of Internal Revenue has the authority to block digital services executed or rendered by the non-compliant DSP.

Non-resident VAT registered DSPs are required to issue a digital sales or commercial invoice for each sale, barter or exchange of digital services instead of the general VAT invoice. However, non-resident VAT-registered DSPs are not required to keep a sales log and a branch purchases log.

RA 12023 is expected to generate P105 billion in revenue over the next five years. In this regard, the law provides that 5 percent of the additional revenues generated will be allocated and used exclusively for the development of creative industries.

The law will come into force 15 days after its publication in the Official Journal on October 3, 2024. The implementing rules and regulations will be published no later than 90 days from the entry into force of the law.