VAT on digital service providers

Since the Covid-19 pandemic began, numerous discussions about the imposition of taxes on digital transactions have been rolling. The government particularly eyes VAT on transactions made online as a great potential source of revenue.

VAT on online transactions is nothing new. Our present tax laws are clear that any sale of goods in the Philippines and supply of services rendered in the country, in the course of trade or business, are subject to VAT. These should include all sales of goods, electronic in nature or not, and all services rendered, whether rendered electronically or not. Offshore transactions done outside the Philippines, although the buyers are located inside the country, are not subject to VAT. The person or entity that is liable to impose and remit the said tax to the tax authority is the seller. However, now, with the way the Internet changed the market, these present taxation rules need to be revisited and upgraded. With the development of so many digital platforms or applications where sellers and buyers located across the globe could exchange their goods and services—who should pay the VAT and where should it be paid?

The President himself, in his first SONA, stressed the importance of adjusting our tax system to catch up with the developments in the digital economy. Particular attention is placed on the role of digital service providers (DSPs) in the collection of VAT from persons engaging in business through their digital platforms. Recently, Senate Bill 250 was filed to clarify the imposition of VAT on DSPs. The bill was based on the measure in House Bill 7425 that was transmitted to the Senate in the 18th Congress and now refiled under a new bill number.

Under the bills, a DSP refers to a service provider of a digital service or good to a buyer, through an online platform for purposes of buying and selling of goods and services or by making transactions for the provision of digital services on behalf of any person. It includes the following: (a) a third party who through information-based technology or the Internet, sells multiple products for its own account, or one who acts as an intermediary between the supplier and buyer; (b) a platform provider for promotion that uses the Internet to deliver marketing messages to attract buyers; (c) a host of online auctions conducted through the Internet; (d) a supplier of digital services to a buyer in exchange for a regular subscription fee over the usage of the said product or service; and (e) a supplier of goods or electronic and online services that can be delivered through an information technology infrastructure.

The term “buyer” refers to any person who resides or consumes taxable digital services in the Philippines from a DSP either for personal consumption or for trade or business purposes.

As we see it, DSPs, resident or not, are liable to pay VAT on sale made electronically to a buyer in the Philippines. For the non-resident foreign sellers using the services of DSPs, the bill also constituted the non-resident DSPs as the withholding agents who will be responsible in the collection and remittance of VAT due on the transactions that go through their platforms.

Based on the proposed rule on electronic transactions, VAT will be paid in the home country of the consumer, regardless of the place where the sale will take place or where the services will be rendered, which is a radical departure from the present rule that VAT is paid in the place where the sale took place and the service was performed. The proposed rule just opened a room to discuss and redefine the situs of taxation in an online setting, not just for the levy of VAT but also for the imposition of other taxes as well, like income tax. We also see challenges in the enforcement of this rule—from the registration of all the various online activities of the participants, the recording, reporting and monitoring of their transactions, payment and remittance of tax, and the assessment and collection of tax.

This is a welcome development though to level the competition between our domestic sellers who pay VAT on their sale to Filipino consumers and the foreign suppliers who do not levy VAT. Also, our government and some industry representatives support the imposition of VAT on DSPs, as this is expected to raise substantial additional amount of revenues.

So, as early as now, it will also be good if we could already thresh out the concerns and challenges raised in the implementation of the proposed measure.

The author is a junior partner of Du-Baladad and Associates Law Offices (BDB Law), a member-firm of WTS Global.

The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at or call 8403-2001 local 160.