Philippines: Proposed legislation regarding VAT on cross-border provision of digital services

The Philippines Senate on 6 February 2024 accepted Senate Bill (SB) No. 2528 for consideration. The bill includes provisions requiring nonresident digital services providers (DSP) to register for and collect value added tax (VAT).

SB No. 2528 is one of several iterations of a VAT digital services bill that the Philippines has considered in the past two years. The Philippines tax authority is expected to issue implementing rules and regulations (IRR) to clarify the regime. 

Scope

The bill would impose a 12% VAT on digital services consumed in the Philippines. Digital services refer to any service provided over the internet or other electronic networks using information technology and when the transaction is essentially automated. Digital services include, but are not limited to:

• Online search engines
• Online marketplaces or e-marketplaces
• Cloud services
• Online media and advertising
• Online platforms
• Digital goods

However, the following services would be exempt from the regime:

• Educational services, including online services, online seminars, and online training rendered by duly accredited private institutions or government educational institutions
•  Sale of online subscription-based services to listed government institutions and recognized educational institutions
• Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries, including those rendered through digital platforms

B2B v. B2C

Nonresident DSPs would be required to charge and collect VAT for their services made to final consumers (B2C sales)

For services made to businesses (B2B sales), the business customers would be required to self-assess and remit the applicable VAT.

The bill further provides that:

• If a nonresident DSP is not VAT-registered but the customer is VAT-registered (B2B), the customer would withhold the VAT.
• If both the nonresident DSP and customer are not VAT-registered (B2C), the customer would withhold the VAT. 

Customer location

The bill does not provide details on how to determine if a customer is located or if services are consumed in the Philippines. 

Marketplace rules

If a VAT-registered DSP is classified as an online marketplace or e-marketplace, it would be liable to remit the VAT on the transactions of nonresident sellers that go through its platform if it controls key aspects of the transaction and performs any of the following:

• It sets, either directly or indirectly, any of the terms and conditions under which the sale is made
• It is involved in the ordering or delivery of the goods, whether directly or indirectly

Registration

A DSP will be required to register for VAT if its gross sales exceed PHP 3 million in a 12-month period.

The bill does not provide any details on whether such registration would have income tax implications (i.e., permanent establishment (PE) risk).

The bill does not include a requirement to appoint a fiscal representative. Rather, the tax authority would establish a simplified registration system for DSPs. 

VAT invoicing

A VAT-registered nonresident DSP is required to issue a “digital sales or commercial invoice” for every sale. The invoice would need to include the following information:

• Date of the transaction
• Transaction reference number
• Identification of the consumer
• Brief description of the transaction
• The total amount with the indication that such amount includes VAT
• If the sale of digital services includes some services which are subject to VAT, and some that are VAT zero-rated or VAT-exempt, the invoice or receipt needs to clearly indicate the breakdown of the sale price between its taxable, exempt, zero-rated, and components subject to VAT. The calculation of the VAT on each portion is to be shown on the invoice.

Penalties

The following provides an overview of the potential penalties applicable in case of non-compliance:

• Failure to register: Blocking of digital services
• Late registration: No penalty mentioned in the bill but may be subject to compromise penalties
• Late filing of VAT returns: No penalty mentioned in the bill but under existing rules, a 25% surcharge and 12% interest per annum may be imposed
• Late payment of VAT: No penalty mentioned in the bill but under existing rules, a 25% surcharge and 12% interest per annum may be imposed
• Under declaration of tax: No penalty mentioned in the bill but under existing rules, a 25% surcharge and 12% interest per annum may be imposed, including compromise penalties
• Errors resulting in an incorrect return being filed: No penalty mentioned in the bill but under existing rules, a 25% surcharge and 12% interest per annum may be imposed, including compromise penalties
• Criminal penalties for failure to register: Fine of no less than PHP 5,000 but no more than PHP 20,000 and imprisonment of not less than six months but not more than two years. In lieu of criminal prosecution, a compromise penalty ranging from PHP 2,000 to PHP 20,000 may be paid

Contact us

For more information, contact a KPMG tax professional:

Philippe Stephanny | philippestephanny@kpmg.com

Chinedu Nwachukwu | chinedunwachukwu@kpmg.com

Julius Patrick Acosta | jcacosta@kpmg.com