By John Alexis S.B. Sumulong
AS THE famous saying by Abraham Lincoln and Peter Drucker goes, “The best way to predict the future is to create it.” True enough, the world never ceases to invent and reinvent itself with hopes for at least a slightly better and more convenient foreseeable future. Humanity’s hunger for innovation led the civilization of sand and stone to develop into one of flame and steel.
Comparatively, businesses evolved from mere trading of valuable goods by traveling miles to find the perfect equivalent to the current day and age where two business parties can interact while being oceans apart. With the development of digital mediums and platforms, businesses have thrived by capitalizing on opportunities outside of physical restrictions. As we move into a more digital era, laws are understandably followed to ensure that businesses do not bypass the implemented rules. In the Philippines, an example of this is the proposed Senate Bill (SB) No. 2528, which aims to impose Value-Added Tax (VAT) on digital services.
In the last week of June 2024, the bicameral conference committee approved the latest and joint version of the bill, which mainly proposes the imposition of VAT on non-resident service providers. As a refresher, the salient features of the bill are highlighted below.
What are digital services?
As VAT is normally imposed on the usual sale of goods and services made in the course of business trade, it is proposed to be imposed on digital services by adding a provision in Section 105 of the Tax Code explicitly stating that persons rendering digital services are included among the persons liable to VAT. The term “digital services” refers to any service that is supplied over the internet or other electronic network with the use of information technology and where the supply of the service is essentially automated. The bill also enumerated a non-exhaustive list inclusion of digital services, as follows:
- Online search engine;
- Online Marketplace or E-Marketplace
- Cloud Service;
- Online Media and Advertising;
- Online Platform; or
- Digital Goods.
What are the liabilities of a non-resident digital service provider (DSP)?
As the proposed bill aims to regulate and monitor the flow of wealth in transactions with non-residents, it proposes two alternatives to ensure that the VAT due on the digital services consumed in the Philippines is paid, depending on the registration of both the provider and consumer of digital goods:
- If the non-resident DSP provides services to VAT-registered consumers, the consumers shall be liable to withhold and remit to the BIR within 10 days following the end of the month in which the withholding was made;
- On the contrary, if a non-resident DSP, required to be VAT-registered, provides services to non-VAT registered consumers, the former shall be liable to remit the VAT on the digital services that are consumed in the Philippines.
Moreover, should a VAT-registered non-resident DSP be classified as an online marketplace or e-marketplace, it shall also be liable to remit the VAT on transactions of non-resident sellers that go through its platform. Provided that it controls key aspects of the supply, and performs any of the following:
- It sets, either directly or indirectly, any of the terms and conditions under which the supply of goods is made; or
- It is involved in the ordering or delivery of goods, whether directly or indirectly.
As the liability to remit the VAT shifts between the service provider and the consumer, should this bill be put into law, both parties will have to seek additional information from one another to ensure that the proper party is liable for the VAT properly reports and remits the taxes.
What are the mandatory invoicing requirements?
Aside from the hardcopy invoice allowed as substantiation, the bill allows the use of digital sales or commercial invoices for digital service transactions made by a VAT-registered non-resident DSP under Section 113 of the Tax Code. Such a digital invoice shall be valid as long as the following information is contained under Section 113:
- Date of the Transaction;
- Transaction Reference Number;
- Identification of the Consumer;
- Brief Description of the Transaction;
- The total amount, with the indication that such an amount includes the value-added tax; and
- If the sale of digital services includes some services that are subject to VAT and some that are VAT-zero-rated or VAT-exempt, the invoice or receipt shall clearly indicate the breakdown of the sale price between the taxable, exempt, zero-rated, and components subject to VAT. Provided, that the calculation of the VAT on each portion of the sale shall be shown on the invoice.
What are the consequences of non-compliance?
The bill expands the BIR Commissioner’s power to suspend businesses by including the blocking of digital services provided to the Philippines by a DSP. The blocking of services shall be done by the Department of Information and Communications Technology (DICT) through the National Telecommunications Commission (NTC). This ensures full compliance of DSPs with the tax rules on digital service transactions.
What to expect?
While the bill awaits approval, the constant collaboration between the Senate and Congress regarding the taxation of digital services is a testament to their commitment to ensuring proper rules and regulations for these new forms of transactions. Businesses are already contemplating the potential impact of these taxes on future dealings, with some arguing that the additional financial burden may deter investors from engaging with Philippine companies.
Conversely, lawmakers are taking decisive action to level the playing field. Local service providers currently face income tax and VAT, while foreign digital service providers have enjoyed untaxed access to the Philippine market. This disparity is being addressed to ensure fair competition. Notably, our lawmakers, in conjunction with the BIR, have shown a greater willingness to engage with the business sector, valuing professional insights and opinions.
As we anticipate the final version of the bill, it is crucial to ensure that the BIR provides clear, actionable rules and regulations for its implementation. These guidelines should align with the initiatives of Ease of Doing Business and Ease of Paying Taxes, ultimately creating a more equitable and thriving business landscape in the Philippines.
John Alexis S.B. Sumulong is a Manager from the Tax Advisory & Compliance Practice Area at P&A Grant Thornton. One of the leading audit, tax, advisory, and outsourcing firms in the Philippines, P&A Grant Thornton is composed of 29 Partners and 1,500 staff members. We’d like to hear from you! Tweet us: @GrantThorntonPH, like us on Facebook: P&A Grant Thornton, and email your comments to pagrantthornton@ph.gt.com. For more information, visit our website: www.grantthornton.com.ph.
