VAT Law on Digital Services Levels Playing Field, Boosts Revenues – DOF

Finance Secretary Ralph G. Recto praised the recent enactment of a law that ensures equitable tax treatment for all digital businesses providing services in the Philippines, aiming to increase revenue collections for national development.

Republic Act No. 12023, or the Value-Added Tax (VAT) on Digital Services, was signed into law by President Ferdinand R. Marcos Jr. on October 2, 2024.

The law mandates a 12% VAT on all digital services consumed in the Philippines, putting local and foreign digital service providers (DSPs) on equal footing. Previously, only local DSPs were subject to the 12% VAT.

Digital services covered by the law include online search engines, marketplaces, cloud services, online media, online advertising, and digital goods.

“With this law, we are affirming that if your presence in the Philippine market is as real as your profits, your tax responsibility should be equally tangible. However, this is not a new tax; it simply strengthens the authority and streamlines the process for the Bureau of Internal Revenue (BIR) to collect VAT on digital services,” President Marcos said during the ceremonial signing.

“This is not a new tax mechanism. It corrects the current system, which creates an unfair advantage for foreign DSPs and weakens the country’s tax base, losing much-needed revenues that could fund critical public services, infrastructure, and socio-economic programs,” Recto said.

The law empowers the BIR to enhance VAT collection on digital services by outlining how foreign DSPs must comply with the Philippine Tax Code.

Foreign DSPs with gross sales or receipts exceeding PHP 3 million in the previous year are required to register for VAT. They must also appoint a representative office or agent, a resident corporation registered under Philippine law, to assist with compliance.

Non-compliant businesses may face temporary suspension.

In a move to support public services, the law imposes a 5% VAT on registered foreign DSPs providing services to the government.

To maintain accessible education, the law exempts educational services, such as courses, webinars, and other digital educational offerings, from VAT.

Additionally, digital services sold on a subscription basis to educational institutions recognized by the Department of Education (DepEd), the Commission on Higher Education (CHED), and state universities and colleges (SUCs) are also VAT-exempt.

The Department of Finance (DOF) anticipates revenue collections of PHP 7.25 billion in 2025, assuming 50% compliance. From 2025 to 2029, the projected revenue is approximately PHP 102.12 billion. These funds will be allocated to infrastructure projects like building schools, roads, and hospitals, as well as other socio-economic programs.

For the first five years after the law takes effect, 5% of the collected revenues will be dedicated to developing the local creative industries to foster innovation and empower Filipino creators and entrepreneurs.

A 120-day transition period is set after the law’s implementing rules and regulations (IRR) are finalized to allow the BIR to establish the necessary systems before VAT is imposed on foreign DSPs. The IRR will be issued 90 days after the law’s effectivity.

Special Assistant to the President for Investment and Economic Affairs Frederick Go, Department of Information and Communications Technology (DICT) Secretary Ivan John Uy, Senate President Francis Escudero, House Speaker Martin Romualdez, Senator Sherwin Gatchalian, Albay Representative Joey Salceda, and other legislators attended the signing ceremony.

Also present were DOF Chief of Staff and Undersecretary Maria Luwalhati Dorotan Tiuseco, DOF Revenue Operations Group Undersecretary Charlie Mendoza, Tax Research and Expenditure Monitoring Undersecretary Renato Reside, BIR Commissioner Romeo Lumagui Jr., and other key officials.