Philippines: Draft legislation to impose VAT on digital services

Proposed 12% value added tax (VAT) on the sale of digital services

Proposed 12% value added tax (VAT) on the sale of digital services

House Bill No. 4122 (also called the Digital Services Tax Bill) proposes to impose 12% value added tax (VAT) on the sale of digital services, such as the hosting of online auctions and platforms, subscription-based online services, and supplies of goods and online services.

Under the bill, a non-resident digital service provider (NDSP) would be liable for assessing, collecting, and remitting 12% VAT on the transactions that go through its platform. In addition, payments to non-resident foreign corporations for services rendered in the Philippines generally would be subject to a 12% withholding tax at the time of payment.

The new obligation would apply only to the extent an entity is not otherwise already 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 that are VAT exempt) exceed (or are reasonably expected to exceed) PHP3 million.

KPMG observation

Monitoring compliance with subjecting NDSPs to 12% VAT likely will prove challenging to regulators. For businesses that consume 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 would constitute the gross receipts of the NDSP to be subjected to VAT. Buyers of digital services also may find it difficult to withhold VAT on digital transactions, especially for individual customers.

In case registering as a VAT taxpayer is not required, NDSPs must have a local representative to assist in the NDSP's compliance with the obligation to collect the 12% VAT. Questions on the culpability of the NDSP and local representative during an examination involving the transaction may be an issue moving forward.

Read a February 2023 report prepared by the KPMG member firm in the Philippines


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