Streamlining the Philippines’ tax regime by taxing digital services

It is undeniable that we are currently living in a dynamic landscape of the digital era. The impact and significance of digitalization in our daily lives have become more apparent through the years. As a country, we have heavily relied on digital service providers (DSP), especially during the height of the COVID-19 pandemic. And such reliance continues as many Filipinos depend on various online platforms and digital services to access their basic needs.

Senate Bill (SB) 2528 or the Digital Services Tax bill seeks to address the gap between traditional and digital businesses by providing guidelines for imposing and collecting value-added tax (VAT) from DSPs. These guidelines are essential to enable the government to effectively monitor and collect VAT from persons or entities conducting business through digital platforms.

Under SB 2528, a new section designated as Sec. 108-A provides for the Persons Liable in the Provision of Digital Services which mandates DSPs, whether resident or nonresident, to be liable for assessing, collecting and remitting the VAT on the digital services consumed in the Philippines. Further, the bill defines digital services as any service provided over the internet or other electronic networks using information technology and when the transaction is essentially automated. Digital services include, but are not limited to:

1) Online search engines;

2) Online marketplaces or e-marketplaces;

3) Cloud services;

4) Online media and advertising;

5) Online platforms; or

6) Digital goods.

However, the following services would be exempt from the regime:

1) Educational services, including online services, online seminars and online training rendered by duly accredited private institutions or government educational institutions;

2) Sale of online subscription-based services to listed government institutions and recognized educational institutions; and

3) Services of banks, non-bank financial intermediaries performing quasi-banking functions and other non-bank financial intermediaries, including those rendered through digital platforms.

The bill further provides that a nonresident DSP required to be registered for VAT under the measure shall be liable for the remittance of VAT on the digital services that are consumed in the Philippines if the consumers are non-VAT registered. However, if the consumers are VAT-registered, the provision on “reverse charge mechanism” shall apply, which will make a recipient of the goods or services liable to pay the VAT instead of the DSP.

This is not the first time that the Philippines has tried to subject foreign DSPs to 12 percent VAT. SB 2528 is just one of several iterations of the VAT on digital services bill that the Philippines has considered in the past two years. Because of failure to successfully enact a digital services tax bill into law, the country is losing out on much-needed revenues. To put it into perspective, the Senate failed to pass a similar measure in 2023, which could have raised nearly P18 billion in additional tax collection estimated for 2024 as discussed by Department of Finance Assistant Secretary Dakila Napao during a public Senate hearing.

Undoubtedly, digitalization has played a huge role in the growth of the Philippine economy in 2023 as digital adoption was considered one of the contributing factors in the development of the financial services sector. Based on the Financial Inclusion Dashboard (1st quarter, 2023) of the Bangko Sentral ng Pilipinas (BSP), digital channels are expected to continue to grow, with data showing that 60 percent of Filipino adults who have a mobile phone and internet access have done a digital financial transaction. As digitalization becomes increasingly prevalent in our country, our tax regime must also evolve accordingly.

Speaking of evolution, the bill, if passed into law, will introduce an interesting change in how we treat the rules on situs of taxation. The bill defines nonresident DSPs as those that do not have “physical presence” in the Philippines. Even so, it treats digital services delivered by nonresident DSPs as being performed or rendered in the Philippines if the digital services are consumed here.

This part of the bill seems to echo the Bureau of Internal Revenue’s (BIR) pronouncements in Revenue Memorandum Circular (RMC) 5-2024, which caused furor from earlier this year, as it stretched the prevailing situs rules to cover a list of cross-border transactions, including services “provided, processed or performed overseas and then utilized, applied, executed or consumed within the Philippines,” subject to examination of all the components of the transaction, as clarified in RMC 38-2024. Whether or not this will widely define how we treat digital services in the future remains to be seen.

Finally, it is important to note that SB 2528 does not introduce additional taxes; rather, its hope is to strengthen and streamline the BIR’s mandate to collect VAT on digital transactions. It outlines measures for both resident and nonresident DSP to comply with VAT requirements specified in the Tax Code. Clarifying this and the other ambiguities in the bill would hopefully strike a balance between the interests of the government and taxpayers – by enabling the government to generate additional revenue and prevent overburdening taxpayers and scaring off foreign investors.

Randel Rainer Leander is a Supervisor from the Tax Group of KPMG in the Philippines (R.G. Manabat & Co.), a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The firm has been recognized as a Tier 1 in Transfer Pricing Practice and in General Corporate Tax Practice by the International Tax Review. For more information, you may reach out to Randel Rainer Leander or Maria Myla Maralit through [email protected], social media or visit www.home.kpmg/ph.