Marcos signs law imposing 12% VAT on foreign digital services

MANILA, Philippines — President Ferdinand Marcos Jr. has signed into law a measure that taxes foreign digital services, which includes overseas-based e-commerce firms and popular streaming platforms such as Netflix, HBO and Disney.

Republic Act 112023 imposes a 12% value-added tax (VAT) on digital services provided by resident and non-resident digital service providers, regardless of whether they have a physical presence in the Philippines.

The bicameral conference committee of members of the Senate and the House of Representatives passed the reconciled version of the measure in June. It was also tagged as a priority legislation of the Marcos administration. 

What the law changes. The law adds a provision in the Tax Code which states that digital services delivered by foreign digital service providers are considered performed or rendered in the Philippines if the digital services are consumed in the Philippines.

Proponents of the House and Senate versions said the measure aims to level the playing field between local and foreign digital service providers. 

Rep. Joey Salceda (Albay, 2nd District), chair of the House ways and means panel, said in June that the measure addresses the unfair advantage that foreign companies have over local firms due to their "unfettered and untaxed access" to the Philippine market. 

Salceda said this was particularly evident during the COVID-19 pandemic, when he first filed the House version of the proposed law.

"While resident content producers were subject to VAT and income taxes, foreign service providers were not... This unfairness to the domestic sector for at least four years is why the House contingent believes that we owe the resident creatives sector some measure of compensation and support," he added.

The Department of Finance expects the imposition of the VAT to generate around P83.8 billion from 2024 to 2028. Lawmakers plan to allocate 5% of this amount for the development of local creative industries.

What will be taxed? RA 112023 covers all foreign digital services, which refer to those delivered via the internet or electronic networks using information technology, where the process is largely automated.

Examples include online search engines, e-marketplaces, cloud services, online media, advertising, digital platforms, and digital goods.

This means popular platforms like Netflix, Disney+, Shein, Temu and Amazon will now be required to pay VAT on the digital services they provide to consumers in the Philippines even if they are based overseas.

To enforce the law, the Bureau of Internal Revenue (BIR) will issue regulations that focus on regulating the platforms, which will, in turn, be responsible for managing the sellers in their marketplaces, Commissioner Romeo Lumagui said in a press conference after the signing of the law.

"What we will do is focus on the platforms. Everything passes through them. They monitor their providers—their sellers. We will issue regulations on how they will report to us," Lumagui said in mixed Filipino and English.

Because the sales and transactions on digital platforms are recorded, the BIR can review these records to understand how much business is being conducted by foreign digital service providers, Lumagui added. 

"We will be able to monitor that, and then we can cross-check with the payments they are making. If we see discrepancies, we will call them out," he added. "This law also gives us the power to block their website or platform to compel them to comply."

Senate President Chiz Escudero said in September that the Bureau of Internal Revenue will have to ensure that the public becomes well-informed about the imposition of the VAT.

"The challenge now is on the law's implementation. BIR must see to it that the process will be easy and that there is no confusion on the part of the affected taxpayers in order to ensure full compliance," the Senate president added.

Impact on subscription fees. Lumagui said any increase in subscription fees would be up to the digital service providers themselves.

He noted that while service providers are free to adjust their pricing in light of the new 12% VAT, they should have already considered the VAT when they made their pricing structure.

"It's a business decision by the service providers. They should have been paying from the very beginning, so they should have incorporated that VAT into their pricing from the start. There can be a price increase, but it is not automatic," Lumagui added.

The government will also not be setting any price cap on possible fee increases, with Lumagui explaining that natural market dynamics would end up regulating prices.

"As for the protection of pricing, I think the natural principles of economics in the market will balance that," the BIR official said.

"In the end, if they increase their prices too much, they will also lose their customers at the same time. I am sure they will not do that; it's not a wise business decision... That's why they will also control their price increases because they will lose subscribers," he added.

Former Bayan Muna partylist representative Carlos Zarate previously said that imposing VAT on foreign digital goods is "anti-consumer" and will hurt middle-class consumers more than the large international companies it aims to target.

Zarate said the proposed law would only raise subscription fees and lead to a surcharge in service fees.

Other Southeast Asian nations have also introduced similar legislation. Specifically, Singapore, Indonesia, and Malaysia created new regulations to impose digital tax in 2020, while Thailand introduced a VAT on foreign digital service providers in 2021, according to trade news outlet ASEAN Briefing.