VAT on digital services - what you need to know (2023)

It has been almost five months since community quarantine was implemented due to the COVID-19 pandemic. Most of us had no choice but to stay at home. Therefore, we were obligated to entertain, educate, and make ourselves useful in our homes. With the help of the internet and other electronic platforms, we can watch our favorite shows, go shopping, buy groceries, achieve our fitness goals, complete online classes, play online games, etc. Netflix, Google, Amazon, and even YouTube have somehow helped us through these difficult ones times to stay sane.

With this pandemic and community quarantine likely to continue through the end of this year, it is expected that the majority of our transactions will remain online. Businesses have adopted work-from-home hiring. Schools and universities have started using online platforms to conduct classes. Meetings are being held online and companies have started selling online. In fact, the pandemic has led to a "leap" - the widespread adoption of digital and online transactions.

Most ASEAN countries such as Malaysia, Indonesia, Vietnam and Singapore introduced their own digital services tax this year.

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The growth of the digital economy, combined with the government's need to generate resources to further combat the pandemic, resulted in Law No. 6,765, or Digital Economy Taxation Law, which was filed on May 19. The House Means and Means Committee has approved replacement legislation that will impose a VAT on sales of goods and services by foreign and domestic businesses conducted through electronic and digital platforms.

The bill aims to amend the National Federal Revenue Code (NIRC) to impose a 12% sales tax on digital transactions from non-resident digital service providers.

According to the Agent, “the person who, in the pursuit of a trade or business, carries out an exchange, barter, rental of goods or real estate, INCLUDING DIGITAL OR ELECTRONIC NATURE, provides services, INCLUDING ONE SUPPLIED ELECTRONICALLY, and the person who imports the goods , subject to Value Added Tax (VAT)”.

The draft law defines “digital service providers” and “digital services” subject to VAT. As indicated in the invoice, a "digital service provider" can be:

• A third party acting as an agent for goods or services offered by a supplier to a buyer and receiving a commission;

• A platform provider for a promotion that uses the Internet to deliver marketing messages to attract buyers;

• A series of online auctions conducted over the Internet in which the seller sells the product or service to the highest bidder;

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• A provider of digital services to a buyer for a regular subscription fee for use of the product or service; or

• A provider of electronic and online services that can be provided through an IT infrastructure such as the Internet.

"Digital Service" refers to any service provided or subscribed to over the Internet or other electronic network that cannot be obtained without recourse to information technology and the delivery of which service can be automated. This includes (a) online licensing of software, updates and add-ons, website filters and firewalls; (b) mobile apps, video games, online games; (c) webcast and webinars; (d) providing digital content such as music, files, images, text and information; (e) advertising platform, such as B. Online advertising space on an intangible media platform; (f) online platforms such as electronic marketplaces or networks for displaying and comparing prices of commercial products or services; (g) search engine services; (h) social networks; (i) Database and hosting, such as B. Website hosting, online data storage, file sharing and cloud storage services; (j) internet-based telecommunications; (k) online training such as distance learning, e-learning, online courses and webinars; (l) online newspaper and magazine subscriptions; and (m) payment processing services.

More importantly, the bill defines a "purchaser" as any Philippine resident who purchases taxable digital services in the Philippines from a digital service provider for personal consumption or for commerce or business. This definition may have taken into account the destination principle, which we use to determine whether or not a transaction with a non-resident is subject to VAT in the Philippines. This principle states that the transaction is taxed in the country where it is consumed or destined. As the services are consumed in the Philippines, they are subject to VAT regardless of where the seller is located or where the services were rendered.

Currently, online sales of goods and services are subject to VAT when made or performed in the Philippines. The bill retained the provisions of the Value Added Tax Act in this regard. In particular, Section 105 provides that services provided in the Philippines by non-resident aliens are deemed to be in the course of trade or business, regardless of the rules of regularity. Likewise, Section 108 states that the term “sale or exchange of services” means the provision of any type of service in the Philippines. Maintaining these provisions can be confusing when lawmakers intend to cover services provided outside of the Philippines.

Under current regulations, if a transaction with non-resident sellers is subject to VAT, the Philippine corporate buyer is also responsible for withholding and remitting the VAT to BIR. The new rules apply to transactions with private or B2C customers. However, non-business individuals will not be subject to the withholding rules and imposing that responsibility on them will understandably be an implementation nightmare. It is therefore proposed that any collection and remittance of VAT to the BIR should be carried out by the sellers themselves or their agents in order to be effective.

Under the proposed bill, any non-resident digital service provider engaged in the course of its trade or business in the sale or exchange of digital services defined in this bill will now be subject to VAT if: (1) gross sales or receipts for the past twelve (12) months, excluding those exempted under Section 109 of the Taxes Code, exceeded P3 million; or (2) there is reasonable grounds to believe that gross sales or revenue for the next 12 months, excluding of those exempt under Section 109 of the Tax Code, will exceed P3 million. He also mentioned that the BIR will set up a simplified and automated registration system for non-resident digital service providers.

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The big question now is: how can we force the non-resident supplier outside our tax jurisdiction to register under the VAT Act? And if they register under the VAT Act, are they considered businesses in the Philippines for income tax purposes? The current draft law does not provide for any changes to the income tax regulations. However, an impact on the definition of PE and business needs to be considered to avoid any unintended consequences.

The VAT registered non-resident digital service provider, regardless of billing requirements, may issue an electronic invoice or receipt subject to the rules and regulations of the Secretary of the Treasury on the recommendation of the Commissioner of Internal Revenue.

In addition, non-resident providers of digital services do not have to claim any chargeable entry tax.

Understandably, the government needs to raise more taxes to fund the public spending needed to combat this pandemic and its impact on our economy. We hope our lawmakers will carefully consider the proposal and consider the complexities of taxing digital transactions. Will the additional revenue offset the additional implementation and monitoring requirements that the government must implement? The additional tax will definitely hit Filipino consumers as it means higher subscription fees or more expensive goods and services from non-resident vendors. If the stressed middle class can no longer afford the additional expenses, they will probably be forced to cancel their subscriptions and no taxes will be due; or they can choose to pay the additional fees in exchange for the little pleasure they get from it. However, we know that Filipino consumers will ultimately bear the brunt of this tax.

Let's Talk Tax is a weekly newspaper column by P&A Grant Thornton aimed at keeping the public informed of various tax developments. This article is not intended to replace competent specialist advice.

Junaleen M. Magno is a senior member of the Tax Advisory and Compliance department at P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.

As published inbusiness world, dated 04.08.2020

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