Philippine Senate to Impose 12% VAT on Foreign Digital Service Providers

Philippine Senate to Impose 12% VAT on Foreign Digital Service Providers

by May 22, 2024

The Philippine Senate has passed a bill mandating a 12% value-added tax (VAT) on digital services provided by companies without a physical presence in the country.

Senate Bill No. 2528, which received unanimous approval from all 23 senators, stipulates that nonresident digital service providers must collect and remit VAT on transactions with Filipino customers.

This legislation requires nonresident digital service providers and electronic marketplaces to register with the Bureau of Internal Revenue (BIR) for VAT remittance.

Digital services are defined as those delivered over the internet or other electronic networks using information technology, including online search engines, marketplaces, cloud services, media and advertising, platforms, and digital goods.

If enacted, the bill could affect e-commerce firms such as Amazon, Shein, Rakuten, Taobao, AliExpress, and Temu, which currently operate without a physical presence in the Philippines. The BIR commissioner is authorised to block or suspend services of digital providers failing to withhold and remit the VAT mandated by the Philippine Senate.

Certain services are exempt from this tax, including online courses, seminars, and training programs provided by private educational institutions accredited by the Department of Education and the Commission on Higher Education. Services offered by banks and nonbank financial intermediaries, even those provided through digital platforms, are also exempt.

The bill includes a reverse charge mechanism, obligating VAT-registered taxpayers receiving digital services from nonresident businesses to withhold and remit VAT to the BIR. Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort noted that this measure “would level the playing field with local market players in terms of taxation and increase the government’s source of recurring revenues.”

The Department of Finance anticipates the bill will generate P83.8 billion in revenue from 2024 to 2028. The House of Representatives passed a similar measure in November 2022.

John Paolo R. Rivera

John Paolo R. Rivera

However, there are concerns about the economic impact. John Paolo R. Rivera, president and chief economist at Oikonomia Advisory & Research, Inc., cautioned that while the measure “will increase tax revenues, it may be detrimental to businesses as this is an additional burden that they may pass to consumers, making products more expensive.”

Additionally, the Senate approved Senate Bill No. 2560, the proposed Anti-Financial Account Scamming Act (AFASA), which imposes tougher penalties on the misuse of financial accounts for criminal activities.

The bill prescribes jail time of at least six years and fines up to P500,000 for money mule schemes. Fraud offenders may face up to 12 years in prison and a minimum fine of P1 million. Those committing economic sabotage could be sentenced to life imprisonment and fined between P1 million and P5 million.

Both measures are among the Legislative-Executive Development Advisory Council’s priority bills.



Featured image credit: Edited from Freepik