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As featured on PhilStar:  The Uncharted Waters of Taxing Digital Services


Digitalization has transcended the boundaries of nations and has connected people now more than ever. In fact, the Organization for Economic Cooperation and Development (OECD) has recognized new business models which render traditional tax and regulatory principles and requirements unsuitable in certain instances. For example, Section 108 of the Tax Code, as amended provides that VAT of 12% shall be imposed on gross receipts derived from the sale or exchange of services, including the use or lease of properties.  “Sale or exchange of services” means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration. However, digital services such as those rendered online (i.e., those accessible remotely/virtually to Philippine consumers) are seemingly outside the ambit of this definition of sale or exchange of service for purposes of imposing VAT. Generally, for non-resident foreign corporations (NRFC) to be subject to VAT in the Philippines, the NRFC should perform the service in the Philippines under current legislation. This puts NRFCs rendering digital online services accessible to customers in the Philippines in a precarious situation since the online services are rendered remotely without any presence of the NRFC service provider in the Philippines. Thus, one may ask, how do current local regulations characterize online services accessible to Philippine customers for purposes of imposing 12% VAT?

Past BIR rulings have been consistent that digital online services performed through servers outside of the Philippines, albeit provided for the benefit of customers in the Philippines, are characterized as services rendered outside of the Philippines. Such treatment makes the transaction outside of the taxing jurisdiction of the Philippines. Recently, a new Supreme Court Decision was promulgated on the matter. The Supreme Court decided last year that income-generating activity is considered as rendered within the Philippines when income generation is dependent on the operations of facilities situated in the Philippines. In this case, the petitioner failed to prove that satellite airtime fee payments are foreign-sourced given that an essential step in completing the service relies heavily on facilities located in the Philippines.

The digital model of doing business poses a myriad of challenges to tax regulators. The world becoming borderless through the digital economy makes it challenging for regulators to monitor taxable presence let alone impose taxes on entities with dealings in a territory other than its domiciliary country. Indeed, countries such as the Philippines are now trying to keep up with the digital times.

In fact, in certain foreign territories, taxes on Permanent Establishment (PE) presence through digital services have been imposed. The Philippines is also trying to craft legislation to impose a tax on digital services. However, in the Philippines, House Bill (HB) No. 4122 which is also called the Digital Services Tax Bill aims to impose 12% VAT on the sale of digital services such as the host of online auctions and platforms, subscription-based online services, supplier of goods and online services. Under this house bill, a non-resident digital service provider (NDSP) is liable for assessing, collecting and remitting 12% VAT on the transactions that go through its platform. The same bill provides that in general, payments to NRFCs for services rendered in the Philippines shall be subject to a 12% withholding tax at the time of payment. On the other hand, a buyer is a person residing/consuming taxable digital services in the Philippines.

Exceptions are when entities are required to register for VAT such as when gross sales or receipts of such digital service provider for the past 12 months from the date of filing of the VAT return other than those exempt exceed PHP3 Million or when there is a reasonable belief that gross sales or receipts for the next 12 months from the date of filing of the VAT return (other than those that are VAT exempt, will exceed PHP3 Million.

The need to register as a VAT taxpayer depends on the BIR’s ability to establish a simplified automated registration system for NDSPs.

This model of imposing VAT on digital transactions can still be strengthened to clarify gray areas. Monitoring compliance with the rule to subject NDSPs to 12% VAT shall be challenging for the regulators. Buyers of digital services also may find it difficult to withhold VAT on digital transactions, especially for individual customers. For businesses that avail of digital services in the Philippines, there are complex business models whereby the income payor in the Philippines would not be privy to service fees/commissions charged by entities doing business outside of the Philippines which should constitute the gross receipts of the NDSP to be subjected to VAT.

In case registering as a VAT taxpayer is not required, NDSPs are also liable to have a local representative which shall assist in the NDSP's compliance with the Tax Code provisions. Questions on the culpability of the NDSP and local representative during an examination involving the transaction may be an issue moving forward.

The efforts of the Philippine Congress to tax digital services are worthy of attention and should be given importance. While this is a welcome tax measure to augment the government's efforts to increase collections, such measures should be well thought out and properly clarified and implemented, especially on how such 12% VAT shall be collected for NDSP.


Kristabelle T. Capa
KPMG in the Philippines

Kristabelle T. Capa is a Supervisor from the Tax Group of KPMG in the Philippines (R.G. Manabat & Co.), a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The firm has been recognized as a Tier 1 in Transfer Pricing Practice and General Corporate Tax Practice by the International Tax Review. For more information, you may reach out to Kristabelle T. Capa or Maria Myla S. Maralit through ph-kpmgmla@kpmg.com, social media or visit www.home.kpmg/ph.

This article is for general information purposes only and should not be considered professional advice to a specific issue or entity. The views and opinions expressed herein are those of the author and do not necessarily represent KPMG International or KPMG in the Philippines.