Significant tax changes may be coming down the line for digital services and digital transactions in the Philippines!
While proposed legislation has not yet passed into law, the taxation of digital transactions is creating a lot of discussion across the Philippines economy and business sectors.
Importantly, the proposed new tax measures on digital services could have implications for both digital-based businesses and “traditional” businesses that utilise digital services as part of their daily operations.
In this article, we outline recent developments on the taxation of digital transactions in the Philippines and the potential implications for businesses.
The taxation of digital transactions and services has become a much bigger topic in the Philippines in recent times for two key reasons:
1. Growth of digital services in the Philippines
More and more businesses in the Philippines are transitioning all or parts of their business to digital. This includes digital accounting and bookkeeping services, marketing, deliveries, lending, employee management and of course, business meetings! This, together with the fact that the tech startup eco-system is growing quickly in the Philippines, means that the digital sector is becoming an important sector for the country and the Philippine economy.
Due to COVID-19, the transition to technology and digital services has happened much quicker than anyone could have imagined! Many companies are now exploring ways to leverage digital services to help balance the ship during these tough economic times. Online orders and restaurant deliveries is one example. Retail stores move to an e-commerce business model is another.
As digital services and digital transactions become more prevalent across the PH economy, lawmakers are now starting to explore how taxation can also be applied to this commercial activity. Since COVID-19, the government have a need to generate taxes, or revenues, from alternative sources to help aid the recovery in the Philippines.
Tax on Digital Transactions in PH – The Current Framework
There is currently no legislation that directly and specifically applies to digital/online transactions or services in the Philippines.
There are, however, some key pieces of legislation that are often referenced when talking about digital transactions and e-commerce businesses in the Philippines. These are outlined below.
- Revenue Memorandum Circular (RMC) No. 055-13 does not actually impose any additional or supplemental form of taxes on digital businesses. Instead, RMC 055-13 seeks to specify how the existing tax framework should be applied to the various forms of e-commerce business models – including online businesses/retailers, online intermediary service providers, online advertisements and online auctions. For more information on RMC 055-13, check out E-Commerce in the Philippines – Tax Compliance for Online Transactions.
- Revenue Memorandum Circular No. 60-2020 was introduced to focus specifically on the registration of businesses that are “into digital transactions through the use of any electronic platforms and media, [and] any other digital means”. You can also check out our recent article, Digital Businesses in the Philippines – BIR Registration, for a more detailed explainer on RMC 60-2020.
In circumstances where Philippines tax legislation did not provide specifically for digital services, there was always a possibility that taxation of the digital economy would come under the microscope of lawmakers!
An Act Imposing Value-added Tax on Digital Transactions in the Philippines, or, House Bill No. 7425
Various pieces of legislation have recently been introduced which seek to implement a taxation framework for digital services in the Philippines.
The Digital Economy Taxation Act of 2020, also known as the DETA 2020 Bill, introduced in May 2020, was one of the first to tackle the digital economy. This Bill targeted the digital economy by seeking to impose a value-added tax (VAT) on digital transactions such as services performed electronically, internet subscription services, digital advertising and much more. DETA 2020 Bill also required non-resident companies to establish an agent or representative office in the Philippines to act as a withholding agent.
Other legislation, primarily in the forms of a Bill, have also been proposed and discussed.
However, in August 2020, An Act Imposing Value-added Tax on Digital Transactions in the Philippines, or, House Bill No. 7425 was introduced and is currently undergoing plenary deliberations in the House of Representatives.
The House of Representatives has, however, recently stated that HB No.7425 is one of twelve economic measures that will be expedited to jumpstart the economy in the midst of COVID-19.
HB No.7425 proposes to substitute for all of the previous Bills (including the DETA 2020 Bill) regarding the taxation of digital transactions and services and outlines the proposed framework for taxing digital services and transactions in the Philippines.
What are Digital Services?
HB No. 7425 effectively aims to amend the existing National Internal Revenue Code of 1997, otherwise known as the Tax Code of the Philippines, by increasing the scope of the 12% VAT (standard rate of VAT in the Philippines) application to business transactions.
Section 1 of HB No.7425 proposes an amendment to Section 105 of the Tax Code and provides that the sale of goods and properties would now include those goods and properties that are “digital or electronic in nature” and services shall include services that are “rendered electronically”.
“Digital Services” includes any service that is delivered or subscribed over the internet or other electronic network and which cannot be delivered without the use of information technology.
HB No.7425 includes a long list of likely digital services, including online licensing of software, updates, add-ons, website filters, video games, mobile applications, webinars, webcasts, online marketplaces…. and many more!
Who is a Digital Service Provider?
HB No. 7425 provides that a digital service provider, or DSP, is a provider of digital services or goods, whether residents or non-residents of the Philippines, through operating an online platform or by making transactions for the provision of digital services on behalf of any person.
Under HB No.7425, a DSP could be a third party seller of goods and services through technology, a platform provider that uses the internet to deliver marketing messages, online auctions, subscription-based services and any supplier of goods or services that can be delivered via any form of information technology, including the internet.
Who is a Buyer of Digital Services?
This would cover any person who is residing in the Philippines and who purchases digital services in the Philippines from a Digital Service Provider for their own personal consumption or in the course of commercial trade or business.
Who Would Pay the VAT on Digital Services?
In the Philippines, as VAT is an indirect tax, the burden of the VAT payment can be passed on to the ultimate buyer of digital services. However, it will be the DSP that is required to charge the VAT and will be ultimately responsible for submitting VAT filings and remitting VAT payments to the BIR.
To find out more about the obligations of VAT payers in the Philippines, check out our Explainer on VAT for Corporations in the Philippines.
Non-Resident Digital Service Providers
Sec 2 of HB No. 7425 proposes a new Section in the Tax Code, “s.105-A”, which would provide that a non-resident DSP will be required to assess, collect and remit VAT to the BIR for digital transactions that course through the DSP’s online solution or platform.
The DSP would therefore be liable for the digital sale of goods or services through an online solution or platform (e.g. Saas), to an individual residing and availing of such taxable services in the Philippines.
Further, non-resident DSPs are not entitled to claim “creditable” input VAT and apply it against output VAT. Check out our previous article on VAT for Corporations in the Philippines to learn more about the applicability of input VAT and output VAT in the Philippines!
Finally, a non-resident digital service provider will be liable to register for VAT in the Philippines if annual gross sales or receipts of the digital service business exceed, or are likely to exceed, P3,000,000.
Finally, HB No. 7425 does provide for one VAT exemption for a specific type of digital service.
Under HB No. 7425, the electronic or online sale, importation, printing or publication of books, newspapers, magazines, etc, which appear at regular intervals with fixed prices or subscriptions and sale and which are not solely for paid advertising purposes, will be exempt from VAT.
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