VAT on Digital Services

Republic Act No. 12023

Executive Summary

Republic Act No. 12023, signed on 2 October 2024, amends key sections of the National Internal Revenue Code of 1997 to explicitly subject digital services consumed in the Philippines to the standard 12% Value-Added Tax (VAT). The law takes effect on 18 October 2024, with Implementing Rules and Regulations (IRR) due within 90 days and nonresident digital service providers (DSPs) becoming fully VAT-liable 120 days after IRR issuance.

Scope and Definitions

• Digital services include any automated services delivered over the internet or electronic networks using information technology, such as online search, marketplace platforms, cloud services, digital advertising, digital goods, and other online platforms.

• A Digital Service Provider (DSP) may be resident or nonresident. A nonresident DSP is defined as one with no physical presence in the Philippines.

VAT Liability and Registration

• All DSPs supplying digital services consumed in the Philippines must assess, collect, and remit 12% VAT.

• Nonresident DSPs must register for VAT if their gross sales in the past or anticipated 12 months exceed PHP 3 million.

• The Bureau of Internal Revenue (BIR) is tasked with establishing a simplified, automated registration portal for nonresident DSPs.

Transaction Types and Compliance

• Business-to-Consumer (B2C): If the consumer is not VAT-registered, the nonresident DSP must collect and remit VAT directly to the BIR.

• Business-to-Business (B2B): For VAT-registered customers, the VAT is collected through a reverse-charge mechanism, where the buyer withholds and remits the VAT.

• Online Marketplaces: If a platform is classified as an online marketplace and controls terms or delivery, it must remit VAT on behalf of nonresident sellers transacting on the platform.

Invoicing and Bookkeeping

• VAT-registered nonresident DSPs must issue digital sales or commercial invoices per transaction, detailing the date, reference number, customer identity, VAT-inclusive amount, and tax breakdown.

• Nonresident DSPs are exempt from maintaining subsidiary sales and purchase journals.

Enforcement and Penalties

• The BIR, with support from the DICT and NTC, has the authority to block or suspend digital services of non-compliant DSPs.

Revenue Allocation

• 5% of incremental VAT collected under this law is allocated to the development of creative industries under RA 11904, for five years. Afterward, the revenue returns to the General Fund.

Implications and Commentary

• The law ensures parity between local and foreign digital service providers by applying consistent VAT obligations.

• Key considerations for nonresident DSPs include determining customer VAT status, monitoring VAT thresholds, and understanding platform responsibilities.

• The law addresses VAT only; income tax implications remain a separate matter for future reform.

Conclusion and Next Steps

1. Monitor the BIR for the launch of the VAT registration portal.

2. Prepare internal systems for invoicing, VAT collection, and reporting.

3. Review contractual arrangements if acting as an online marketplace.

4. Stakeholders in creative industries should track funding opportunities from earmarked VAT revenues.