Reshaping e-commerce

Despite the promise of convenience and growing popularity of electronic commerce (e-commerce), the widespread use of digital trade platforms has proven to be a challenging endeavor for the government especially in shaping regulatory policies. A welcome progress on this endeavor is the passage of Republic Act (RA) No. 11967 or the “Internet Transactions Act (ITA) of 2023” which took effect on December 20, 2023.

The ITA aims to institute the promotion and maintenance of a robust e-commerce environment in the country by building trust between online merchants and online consumers as a policy of the State. Apart from its thrust to institutionalize an E-Commerce Bureau and to delineate rights and obligations of parties in internet transactions, it is notable that Section 5 of the ITA mandates that a person who engages in e-commerce, who avails of the Philippine market to the extent of establishing minimum contacts herein, shall be subject to applicable Philippine laws and regulations and cannot evade legal liability in the Philippines despite lack of legal presence in the country. The ITA requires E-retailers or online merchants to issue paper or electronic invoices or receipts for all sales. A transitory period of 18 months from the effectivity of the ITA is given to allow all affected online merchants, e-retailers, e-market places and digital platforms to comply with the requirements of the ITA. Despite the absence of any specific provisions dealing with taxation, it can be gleaned from the ITA’s requirement to issue invoices or receipts for all sales that the government may already be laying the groundwork for imposing taxes on digital services. 

Efforts towards imposing taxes on digital services

Still pending with the Committee of Ways and Means of the Philippine Senate is House Bill (HB) No. 4122, which aims to impose 12% VAT on digital services provided by digital service providers (DSP). Digital Service Providers (DSPs) are service providers that operate online platforms for the purpose of buying and selling goods or services, or for facilitating transactions related to the provision of digital services on behalf of individuals. Thus, this includes non-resident foreign entities which are engaged in the performance of all kinds of services in the Philippines for a fee whether rendered electronically or otherwise. A senate bill (SB No. 250) is also being evaluated by the same committee proposing the imposition of VAT on any person (including non-resident DSPs) who sells, barters, exchanges, leases goods or properties including those digital or electronic in nature or those rendering services including those rendered electronically.

Aside from these bills, the Bureau of Internal Revenue (BIR) in a recent issuance, Revenue Memorandum Circular (RMC) No. 5-2024, introduced the concept of International Service Provision (ISP or cross-border services). According to the BIR, an ISP is a service-based company which operates in various countries providing services to clients. The income earned is allocated to the countries where services are performed taking into account factors such as time spent, resources utilized, or value created in each jurisdiction. ISP includes consulting services, IT outsourcing, financial services, telecommunications, engineering and construction, education and training, tourism and hospitality, and “other similar services” referring to all other services where service is being provided, processed, or performed overseas and then utilized, applied, executed, or consumed within the Philippines.

The RMC provides that the source of income is determined by the location where the underlying business activities that produced the income actually took place. The RMC further provides that in cases where transactions occur in multiple stages across different taxing jurisdictions, it becomes imperative to ascertain whether the particular stages occurring in the Philippines are so integral to the overall transaction that the business activity would not have been completed without them. Thus, if the income generating activities in the Philippines are deemed essential, the income derived from these activities would be considered as sourced from the Philippines, irrespective of where the payment is ultimately received. The RMC then reiterated the rule that income generated by the foreign company providing the services, which are considered to be sourced within the Philippines, shall be subject to income tax and consequently to final withholding tax. For VAT, the income payment is subject to withholding VAT if the service is utilized for a recipient within the Philippines even if the service provider is located outside the Philippines. While there may be questions on the authority of the BIR to categorically impose such taxes only on the basis of the Supreme Court’s decision in the Aces Philippines Cellular Satellite Corp. v. Commissioner of Internal Revenue (G.R. No. 226680), it is clear that the government is taking steps to impose taxes on e-commerce transactions. 

Synergy in implementation

It shall be interesting how the government shall build and strengthen its framework in regulating e-commerce transactions. Nonetheless, to ensure smooth implementation of regulating e-commerce transactions and even possibly imposing Philippine taxes on such activities, synergy must be established between the BIR and the E-Commerce Bureau that will be created pursuant to the ITA to ensure the development and to maximize opportunities brought by the growing e-commerce industry in the Philippines.

Kim Michael G. de Jesus
KPMG in the Philippines

Kim Michael G. de Jesus 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 in General Corporate Tax Practice by the International Tax Review. For more information, you may reach out to Kim Michael G. de Jesus or Maria Myla S. Maralit through, social media or visit

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 KPMG International or KPMG in the Philippines.