Philippines’ House of Representatives Approved the Imposition of Value Added Tax on Digital Transactions
The Philippine’s plan to impose 12% Value Added Tax (VAT), a type of tax which is similar to gross sales tax (GST) in other jurisdictions, on digital transactions, including digital services, has reached another milestone as the Lower House of its Bi-Cameral Congress has approved on the third and final reading House Bill (HB) No. 7425. The measure seeks to clarify the imposition of VAT on Digital Service Providers (DSP) to facilitate the collection of taxes and generate tax revenues from other sources for the country to recover from the adverse impact of Covid-19.
The salient points of the Bill, which seeks to amend the National Internal Revenue Code of 1997 (Tax Code), include provisions on the the obligations of DSPs, the definition of digital services, an enumeration of specific digital transactions subject to VAT (and exceptions thereto), VAT registration, and certain withholding tax and invoicing rules.
Obligations of DSPs
At the forefront of this Bill is the amendment to the provision on those which seeks to make persons who are selling, bartering or exchanging electronic goods and/or those providing services electronically subject to VAT. In relation to this, the Bill also introduced a new provision which specifically provides the liability of DSPs to assess, collect and remit the 12% VAT on all its digital transactions which includes the sale or lease of digital or electronic goods and performance of digital services.
Digital Services, VAT and Exemptions
The Bill defined “digital services” as referring to any service that is delivered or subscribed over the internet or other electronic network. The said term includes online licensing of software, mobile applications, video and online games, provision of online media content, electronic marketplaces, search engine services, database and website hosting, and cloud storage services among others. It, however, clarified that the exemption from the imposition of VAT on the sale, importation, printing or publication of books, newspapers, magazines, review or bulletin shall still apply even if these goods are sold electronically or online.
VAT Registration of non-resident DSPs
As a consequence of the imposition of VAT on the said goods and services and the provision on the obligations of DSPs, the said Bill requires non-resident DSPs to register with the Bureau of Internal Revenue (BIR) if: a) the gross sales of the DSPs within the past twelve (12) months before the date of filing of VAT Returns exceeds Php 3M, or b) if the said threshold will be exceeded, based on reasonable grounds, within the next twelve (12) months. It should be noted though that as it is currently worded, the Bill is unclear if the computation of the said threshold for purposes of registration will include the global sales of the DSPs, or only those sales generated from consumers residing in the Philippines. Seemingly to facilitate the registration of said DSPs, the BIR is being required under the said Bill to establish a “simplified” registration system for these non-resident DSPs.
Withholding of VAT and Input Tax
In addition to the provisions discussed, the Bill also laid down the rules for the collection of the payment of VAT in case a service provider is a non-VAT registered non-resident DSP, and such service, which is subject to VAT was provided to the Government or any of its political subdivisions, instrumentalities, and agencies including GOCCs. According to the Bill, such transaction shall be subject to 12% withholding VAT. This means that instead of the DSPs collecting the VAT from its sale of services to the Government, et. al, the latter shall withhold such VAT and remit them directly to the BIR. It should be noted, though, that non-resident DSPs shall not be allowed to claim input VAT to reduce VAT liability whether or not they are registered with the BIR.
As for invoicing, the Bill allowed VAT registered non-resident DSPs to issue electronic invoice or receipt. The issuance of such electronic invoices and receipts, however, is subject to the rules and regulations to be prescribed by the Secretary of Finance.
While the Bill did not introduce new penal provisions, the penal provisions in the Tax Code could be used as basis for penalties as far as they are applicable.
It is also worthy to note that non-resident DSPs will only be subject to VAT under this measure after 180 days from effectivity.This can be considered as a grace period giving the DSPs an opportunity to to register with the BIR and adapt to the new tax rules.
Finally, it should be noted that it is expected that the end-consumers will be the ones who’ll shoulder the burden of the imposition of VAT. This is because the Tax Code classifies VAT as an indirect tax and thus, the burden to pay this could be shifted or transferred by the DSPs to its end-consumers.
For now, the DSPs should monitor the progress of this Bill to the Senate as the Upper House would need its approval before it could be presented to the Chief Executive for its enactment into law.
The full text of House Bill No. 7425 may be found here.