The Republic Act No. 12023, which took effect on 18 October, introduces amendments to the general VAT provisions of the Tax Code. It defines digital service as any service provided over the Internet or electronic networks using information technology, primarily in an automated way. This includes online search engines, e-marketplaces, cloud services, online media and advertising, digital platforms, and digital goods. The far-reaching effects of the new law are to be felt more by non-resident DSPs who are assigned unprecedented VAT responsibilities.
The Philippines enacted Republic Act No. 12023, commonly known as the VAT on digital services law
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Author: Ivana Picajkić
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Content accuracy validation date:
20.11.2024
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These are the VAT implications of the new law as far as non-resident DSP transactions are concerned:
- VAT registration: Non-resident digital service providers (DSPs) must register with the BIR for VAT if their gross sales exceed P3 million in the past three months or are expected to exceed that amount in the next 12 months. The specific registration process is not yet clear, but DSPs should stay informed about the upcoming 'simplified automated registration system' being developed by the BIR.
- Invoicing and accounting: Non-resident digital service providers must issue VAT invoices for services consumed in the Philippines. These invoices are simpler than regular local invoices and must include: date, transaction reference number, consumer identification, brief description of the transaction, amount, and breakdown of sale price by VAT status (12%, zero-rated, or exempt, if applicable). DSPs should await announcements regarding the start of this invoicing requirement. For accounting, they do not need to maintain subsidiary sales and purchase journals.
- VAT payment: The law outlines how VAT must be paid based on whether a non-resident digital service provider deals with a non-VAT consumer or a VAT-registered consumer in the Philippines. For non-VAT consumers, the DSP must directly pay the VAT to the BIR. For VAT-registered consumers, they must withhold the VAT and pay it to the BIR, using a process called the "reverse charge mechanism," similar to the existing withholding VAT.
The BIR is expected to provide details on these payment methods soon. Both parties should consider how VAT may affect their agreed pricing.
- Special rule for online marketplaces or e-marketplaces: Online marketplaces might be obligated to forward VAT on behalf of their non-resident sellers if they play a role in establishing the terms and conditions of the sale, or if they are involved in the ordering or delivery of goods.
The effects of the VAT on digital services law are far-reaching. For now, taxpayers can expect further clarifications to come from the tax authority as it designs the rules and regulations for effective implementation.
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