• 1000

Benjamin Franklin once said, “In this world, nothing can be said to be certain, except death and taxes”. I came across this quote in high school but it was only until now, as I continue to appreciate taxation law, that I truly understand what Mr. Franklin meant.

Indeed, the government has the inherent power to tax. As the tax reform efforts of the government continue, the Philippine Congress is still actively looking into how our current tax system can be updated to keep up with current business practices and innovations. Transactions and services rendered online are not an exception especially with the rise of electronic transactions during the COVID-19 pandemic. Indeed, online services offer convenience - making it easier for us to stay at home in compliance with the health authorities’ recommendations and still accomplish things which we used to do personally before COVID-19 suddenly changed how we do things. As such, it is not surprising that there are several bills and resolutions on the taxation of digital transactions filed in the lower house, namely, House Bill (HB) Nos. 4531, 6765, 6944 and House Resolution (HR) No. 685. However, on 18 August 2020, the Committee on Ways and Means submitted to the House of Representatives HB No. 7425 (the Bill) which would serve as a substitute of all the abovementioned bills on the digital transactions tax.


Digital services defined

Unlike the current provisions of the Tax Code, as amended, on Value-Added Tax (VAT) which do not specifically make mention of online or electronic transactions, the Bill seeks to introduce amendments imposing twelve percent (12%) VAT on Digital Service Providers (DSPs), whether resident or non-resident, on their sales of goods or properties which are digital or electronic in nature and those electronically rendered services in the Philippines.

Digital services are more specifically defined as services delivered or subscribed over the internet or other electronic network, which cannot be obtained without the use of information technology. Such contemplates online licensing of software, webinars, search engine services, social networks, and the provision of digital content and information, among others.

In fact, the Bill includes the following in the definition of sales of services, among others: 1) Supply of advertising space and other services for the purpose of online advertisement;  2) Supply of digital services in exchange of a regular subscription fee; and 3) Supply of electronic or online services which can be delivered through an IT infrastructure such as the internet.

Note, however, that the imposition of the 12% VAT on digital transactions will not include the electronic or online sale, importation, printing or publication, of books and any newspaper, magazine, review or bulletin which appears at regular intervals with fixed prices or subscription and sale and which is not devoted principally to the publication of paid advertisements as provided for under Section 109 (R) of the Tax Code.


DSPs liable for 12% VAT

The Bill defines a DSP as a service provider of digital services or goods, whether residents or non-residents of the Philippines, through operating an online platform or by making transactions for the provision of digital services to a certain buyer (i.e. any person who resides in the Philippines and who acquires taxable digital services in the Philippines either for personal consumption or for business purposes). DSPs may include:  1)  A third party who sells products for its own account, or for others as an intermediary through information-based technology or the internet; 2) A platform provider for promotion/marketing messages through internet; 3) A host of online auctions conducted through the internet; 4) A supplier of digital services to a buyer in exchange of a regular subscription fee over the usage of the said product or service; and 5) A supplier of goods or online services that can be delivered through an information technology infrastructure, such as the internet.


The requirement for Nonresident DSPs to register as VAT taxpayers

Under the Bill, a nonresident DSP is required to register as a VAT taxpayer if its gross sales for digital services for the past 12 months before the date of filing of the VAT return have exceeded PHP3 Million or if there are reasonable grounds to believe that the gross sales of its digital services for the next 12 months from the date of filing of the VAT return will exceed PHP3 Million. The Bureau of Internal Revenue (BIR) will come up with a simplified registration system for the non-resident DSPs. Further, such VAT-registered nonresident DSPs may issue an electronic invoice or receipt subject to the rules prescribed by the Secretary of Finance upon the recommendation of the Commissioner of Internal Revenue.


VAT registered nonresident DSP’s treatment of input VAT

It is worth noting that one of the unique features of this bill is that non-resident DSPs are prohibited from claiming input tax as credits against output VAT liability. This is unlike other VAT registered taxpayers who can claim input taxes as credits against output tax to determine the VAT payable for a certain period.


Withholding VAT for nonresident DSPs who are not VAT registered

VAT registered nonresident DSPs are the ones obliged to collect and remit the VAT for electronic transactions. On the other hand, nonregistration with the BIR does not exclude these nonresident DSPs from payment of VAT as it can be inferred from the Bill that nonresident DSPs who are not VAT registered shall be subject to 12% withholding VAT on services rendered in the Philippines.



The Bill provides for a transition period of 180 days from the effectivity of the Act before VAT can be imposed to nonresident DSPs.

The government’s efforts for our tax laws to keep up with technology and globalization is indeed commendable. Imposing a digital tax on these large DSPs can certainly help the government raise more revenues to fund our COVID-19 response efforts and our Build Build Build Projects. However, as VAT is an indirect tax, the burden of shouldering such VAT on digital transactions may ultimately be borne by consumers. There should also be clearer guidelines on how VAT shall be collected from the nonresident DSPs and whether an entity must be set up in the Philippines solely for the purpose of meeting VAT compliance requirements. Another interesting question would be how the change in the definition of sale of services would affect the situs rules on sales of services for income tax purposes. Hopefully, these items can be clarified before Congress finalizes the proposed law on taxing digital transactions. 

Jalen Nicole V. Balalio is an Associate from the Tax Group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email ph-inquiry@kpmg.com