MANILA, Philippines — Foreign digital service providers (DSP) operating in the Philippines only have four months to comply with the mandatory requirements following a landmark law imposing a 12% value-added tax (VAT) on overseas digital services.
These offshore digital services include all streaming platforms (Netflix, Disney+, Amazon, Viu, MAX), all online search engines (Google), all electronic marketplaces (Shopee, Shein, Temu), all cloud services, all online advertising and all digital goods consumed in the Philippines.
In a 10-page draft implementing revenue regulation (IRR) obtained, the proposed rules state all foreign DSPs should register and update the country’s Bureau of Internal Revenue (BIR) through the agency’s portal within 60 days from the effectivity of the revenue regulation. Offshore DSPs shall immediately be subject to VAT after 120 days from the effectivity of the IRR.
The BIR shall submit the draft IRR to the Finance department and has until Jan. 16, 2025 to issue the IRR of the Republic Act (RA) 12023 or the VAT on digital services law.
BIR Assistant Commissioner Larry Barcelo said assuming the agency will release the IRR in mid-January 2025, foreign DSPs only have four months or until May 16, 2025 to comply through the agency’s VAT on Digital Services (VDS) portal, a webpage where foreign DSPs can register, submit and transact all the Philippine government’s requisites.
“The period given is for them to comply to any of the administrative requirements the non-resident DSPs need to comply with this law,” Barcelo said during the BIR’s public consultation last month.
Power to block sites
The draft IRR also outlines the power of the BIR to issue take-down or closure orders against foreign DSPs that fail to register and comply with the law.
According to the draft IRR, the Department of Information and Communications Technology (DICT) and the National Telecommunications Commission (NTC) will suspend and block the platforms of non-compliant overseas DSPs.
“The closure of business operations under a duly approved Closure/Take Down Order shall not preclude the BIR from filing the appropriate administrative and criminal sanctions against the persons concerned if evidence so warrants, or in the case of juridical entities, against its responsible officers, under the Run After Tax Evaders (RATE) program of the BIR,” it said.
The draft regulation also defined VAT will apply to both business-to-business (B2B) and business-to-consumer (2C) transactions. For B2B transactions, Filipino companies must withhold 12% VAT on services and remit it to the BIR. Under B2C transactions, foreign DSPs must directly file and pay the VAT based on their gross sales, either quarterly or monthly.
The IRR also outlines the simplified registration system, invoicing for foreign firms, and mode of correspondence. It also directs all payments and remittances are electronic and shall be in Philippine peso (P).
Appointing a local provider
The draft regulation also states a foreign DSP will not be required to appoint a Philippine representative when registering under the law.
“However, [the foreign firm] may appoint a resident third-party service provider (an individual entity, e.g. law firm, accounting firm, consultancy firm) for purposes of receiving notices, record keeping, filing of tax returns and other reporting obligations,” the draft IRR stated.
It adds the foreign DSP may open bank accounts in the Philippines through its appointed third-party service provider.
Foreign firms decline to comment
Netflix and Google have yet to issue statements on the law. Disney, iQIYI, MAX and BiliBili did not respond to requests for comment.
Meanwhile, foreign-owned streaming platform Viu declined to answer questions regarding the VAT on overseas digital services law.
In an email, Viu Philippines Senior Lead for Channel Partnerships Cy Langkay said: “we’d like to kindly and politely decline to responding to this topic as of the moment, as there is yet to have full clarity on the law until the IRR guidelines are released.”
Complying on the landmark law
Meanwhile, the BIR was asked how the agency would know if all foreign DSPs would comply with the new law.
BIR Commissioner Romeo Lumagui Jr. said the agency already coordinated with the big foreign digital service players even before the law's implementation.
“We talked to them and asked them what they needed to comply. Secondly, we are doing a massive information dissemination. We are also monitoring which companies will be covered by this law. We are trying to reach out to them,” Lumagui said in a Philippine state television interview last December 1.
Public consultation
On Nov. 12, 2024, BIR conducted a public consultation to solicit inputs on the IRR to the Republic Act 12023.
During the public consultation, questions arose on the different tax scenarios and the difference between the draft IRR and the law.
In the IRR, all foreign digital firms are now required to register, but, in the law, only foreign DSPs whose gross annual sales are expected to exceed 3 million are required to register VAT.
Foreign firms shall await the final IRR for clarity.
DICT coordination and leveling the playing field
Lumagui also said the agency has been closely coordinating with DICT to monitor digital firms that will not comply.
The BIR commissioner said this is not a new tax but a scheme to level the playing field for local and international players.
He sees a slight price increase in these digital services, noting that firms will also consider the possibility of losing clients and subscribers.
Difficulty in tax administration
For Filomeno Sta. Ana III, executive director of Action for Economic Reforms (AER), a policy research and advocacy group on macroeconomic issues, government will have difficulty monitoring and administering this new law.
“You are still aware that there is a significant percentage of tax leakage in our system that the government must address. Tax administration needs to be strengthened…The challenge goes to those firms that will not comply,” Sta. Ana said in a phone interview. “And organization like Netflix will comply, there is reputational risk, why will they take that risk?”
Meanwhile, think tank and advocacy group IBON foundation has been sounding the alarm with Philippines having the highest VAT in the Southeast Asian region. The research group has long been calling to lower the VAT and impose a wealth tax on rich Filipino families.
Losing revenues
But Sta. Ana, co-founder of AER, said the Philippines cannot reduce the VAT from 12% to the Southeast Asian regional average of 10% because the Philippine government will lose a lot of revenues.
“If you reduce VAT to 10% we’ll be losing a lot from our revenues. We’ll be having a fiscal crisis. Just now, you have a fiscal problem with what government is doing: spending a lot but very inefficient spending. At the same time, [government] is not imposing new taxes, we have a fragile fiscal situation and that can turn into a fiscal crisis,” the AER executive director said.
Sta. Ana said one way to reduce the Philippine VAT rate from 12% to 10% is to remove all the exemptions on the VAT law. The current exemptions include agricultural and marine food products in their original state, educational materials, renewable energy systems and services rendered by medical professionals, educational institutions, among others.
Neighboring countries
Meanwhile, countries like Singapore, Malaysia and Indonesia have been imposing VAT on digital players since 2020 and Thailand joining the list in 2021.
Filipinos living in these Southeast Asian countries consuming foreign digital services were subject to VAT taxation four years ago.
54-year-old Victoria Go, a Filipino domestic helper living in Malaysia, said she has been a subscriber of Netflix since last year.
She utilizes the video-on-demand platform as a form of entertainment while being away from her family for more than 16 years.
She pays 29.90 Malaysian ringgit (roughly P399) for the monthly basic plan. With Malaysia having 6% VAT for digital services, Go has been paying 1.794 Malaysian ringgit for the VAT.
But when asked regarding the new 12% VAT law in her home country, she said she is not in favor, saying foreign firms should make it more affordable. She added the tax collected from this new taxation will only be corrupted by Filipino politicians.
Meanwhile, neighboring country Japan has been imposing a consumption tax or VAT at 10%.
51-year-old Rosette Ohtsuka, a Filipino living in Japan for 25 years, said she subscribed to streaming platforms like Netflix, Disney+ and Amazon Prime.
“We subscribe because my husband and my children love to watch movies and documentaries,” the Filipino working as a translator in Japan said.
She admits subscription fees in Japan are much higher compared to the Philippines. “It is not advisable to subscribe monthly. So what we are doing is to rent the specific movie we need.”
Japan aims to remain a high-tax country. Japan’s tax effort or the measure of a country's own effort to raise taxes is at 34.4% in 2022, according to the Organization for Economic Cooperation and Development (OECD).
Philippine tax effort
Meanwhile, in the Philippines, according to the treasury bureau, the Philippine tax effort is at 14.6% in 2022 and 14.1% in 2023. This is below the Asia and Pacific average of 19.3%.
“We need to increase our tax effort for us to become a prosperous country. The tax effort should be 20 to 25 percent that means tax revenues as a percentage of gross domestic product, we are not yet there,” the AER executive director said.
Generating revenue
Last October 2, Philippine President Ferdinand Marcos Jr. signed into law RA 12023 or the VAT on digital service law and it is expected to generate 105 billion in revenue between 2025 and 2025.
It also plans to allocate 5% of this revenue for the creative industry.
Although the law exempts the following: digital services sold to educational institutions an online banking or financial intermediaries functioning as quasi-banking services.
The Action for Economic Reforms said government’s P105 billion revenue estimate is an “erosive projection and somehow exaggerated.”
Jerome Villanueva, an MA in Journalism student, wrote this story as part of his requirements in an International Reporting class at the University of Santo Tomas.