ADB supports VAT on digital transactions

MANILA, Philippines — Imposing a value-added tax (VAT) on digital services can help expedite economic recovery, especially as the government faces fiscal challenges due to the pandemic.

In its recent blog, Manila-based Asian Development Bank (ADB) said extending VAT on e-commerce and digital services has the potential to yield short-term revenue for Asia Pacific economies, including the Philippines.

ADB consultant Richard Highfield and public management specialist Go Nagata said that VAT reform, as a response to the e-commerce boom, has remained below its true potential.

This, even as VAT is the largest source of tax revenue on average, and the region  is the fastest growing e-commerce market in the world.

“Addressing the impacts of the COVID-19 pandemic continues to challenge the fiscal management of just about all governments within the Asia Pacific,” the experts said.

“At the same time, the surge in e-commerce that largely coincided with COVID-19 has greatly boosted the potential for governments to bolster tax revenues by applying VAT more effectively to digital trade,” they said.

In September last year, the House of Representatives approved on final reading House Bill 7425 that aims to impose a 12 percent VAT on digital transactions to generate more revenues.

It targets to impose VAT on electronic or online sale of services, including online advertisement services and provision for digital advertising space, digital services in exchange for a regular subscription fee, as well as supply of other electronic and online services that can be delivered through the internet.

Earlier estimates from the Department of Finance showed that the proposed law could generate P10.7 billion in additional revenues every year.

Further, Highfield and Nagata cited that governments saw their revenues drop and spending skyrocket due to the pandemic, resulting in a growing fiscal deficit.

“While some countries are witnessing signs of economic recovery and growing tax revenues, fiscal deficits remain a prominent feature of most governments’ budgets and are likely to do so for some time,” they said.

“With many governments facing unprecedented fiscal challenges, improving the effectiveness, efficiency, and fairness of existing taxes makes a lot of sense and should be a priority for all,” they said.

The ADB experts said that the strong growth of digital trade has created significant challenges for VAT systems, particularly for Asia, concerning online sales of services and digital products that often are provided by non-resident suppliers to private consumers.

The multilateral lender suggested that governments should create a legal basis for levying VAT on services and intangibles, including sales of digital services and digital products, irrespective of whether or not the supplier is located in that jurisdiction.