BY ALVYN SARMIENTO
IN A SIGNIFICANT step toward modernising the country’s tax system, Republic Act (RA) No. 12023 was enacted in October 2024, introducing a 12% value-added tax (VAT) on digital services. To implement this law, the Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) No. 3-2025 in January 2025. While much of the discussion has focused on the compliance requirements for digital service providers (DSPs), it is equally important to understand how these changes will affect regular consumers.
Understanding RA No. 12023 and RR No. 3-2025
RA No. 12023 amends several sections of the Tax Code of 1997 to include digital services within the scope of VAT. RR No. 3-2025 provides guidelines for implementing this VAT on digital services. The Department of Finance states that the purpose of this law is to ensure equal opportunities for local and foreign digital service providers (DSPs) by subjecting all digital services consumed in the Philippines to VAT. While the government views the legislation as a step towards fair taxation and increased revenue, consumers are facing the reality of higher costs for their favorite online services.
Affected services
The VAT will apply to a broad spectrum of digital services, including streaming platforms like Netflix, Disney+, HBO Go, and YouTube Premium; music services such as Spotify and Apple Music; app stores like the Apple App Store and Google Play Store; cloud services including Google Drive and OneDrive; digital marketplaces like Shopee, Lazada, and Amazon; online advertising platforms such as Facebook Ads and Google Ads; gaming platforms like Steam, PlayStation Store, and Xbox Live; and online learning platforms such as Coursera, Skillshare, and Udemy. Essentially, any service delivered over the internet that does not require significant human involvement will now be subject to VAT.
Accessibility and convenience
While the tax may be seen as an additional burden, it aligns the Philippines with other countries in the region, such as Indonesia, Japan, Malaysia, Singapore, and Thailand, which have already implemented similar measures. This move is expected to generate significant revenue for the government, which can be used to fund public services and infrastructure projects, ultimately benefiting citizens. Enhanced public services, such as healthcare, education, and transportation, can improve the quality of life for all Filipinos, making the VAT on digital services a worthwhile investment in the country’s future.
Economic impact
The introduction of VAT on digital services is part of a broader effort to modernize the Philippines’ tax system and increase revenue collection. By taxing digital services, the government aims to capture a growing segment of the economy that has traditionally been undertaxed. This move is expected to boost government revenue significantly, providing much-needed funds for public services.
However, there are concerns about the potential impact on the digital economy. Higher costs for digital services could lead to reduced demand, affecting the sector’s growth. Small businesses and startups that rely on affordable digital services may find it harder to compete, potentially stifling innovation and entrepreneurship. Balancing the need for increased revenue with the goal of fostering a vibrant digital economy will be a key challenge.
From the government’s perspective, the VAT on digital services is a necessary step to ensure that all businesses, whether local or foreign, contribute their fair share to the country’s revenue. The tax aims to address the disparity where foreign DSPs were not subject to the same tax obligations as local DSPs.
Finance Secretary Carlos Dominguez III stated, “The imposition of VAT on digital services is part of our broader effort to modernize our tax system and ensure fairness. It will help us generate additional revenue needed for public services and infrastructure development.”
Consumer impact
Recently, I have seen many posts from concerned netizens claiming that the VAT on digital services will increase their subscription prices, and they are correct. For consumers, the introduction of VAT on digital services means higher costs for various online subscriptions and transactions. DSPs are likely to pass on the VAT to consumers, resulting in price increases across many digital services. For instance, a monthly subscription to a streaming service that previously cost P500 will now cost P560. This price hike may lead consumers to re-evaluate their spending on digital services, potentially reducing their usage or seeking alternatives. While the additional cost might seem small on an individual basis, it can add up significantly over time, especially for households that subscribe to multiple digital services.
For freelancers working from home, the added VAT means paying more for essential services like cloud storage and design software subscriptions. Similarly, students who depend on online learning platforms like Coursera and Udemy to supplement their studies will also likely pay more to continue using these services.
The added VAT on digital services also has social implications, particularly for low-income households. For many Filipinos, digital services are not just a luxury but a necessity. Online education, telemedicine, and remote work have become essential during the COVID-19 pandemic, and the increased cost of these services could disproportionately affect those who can least afford them. Ensuring that all Filipinos have access to affordable digital services will be crucial in promoting digital inclusion and bridging the digital divide.
Consumer Strategies
As consumers adjust to the new tax, there are several strategies they can employ to manage digital service expenses. One approach is to prioritize essential services and cut back on non-essential subscriptions. Consumers can also look for bundled services or discounts offered by providers to reduce costs. Additionally, staying informed about promotions and special offers can help consumers maximize their digital service budgets.
Conclusion
The imposition of VAT on digital services in the Philippines represents a significant shift in the digital economy. While it aims to create a fairer tax environment and boost government revenue, consumers will need to adjust to higher costs for their favorite digital services. As the implementation continues, both providers and consumers must stay informed about the changes and their implications.
In a few days, the true impact of this tax will become clearer as consumers and businesses begin to pay the VAT on digital services. For now, the added VAT on digital services serves as a reminder of the evolving landscape of taxation in the digital age.
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Alvyn Sarmiento is a Manager for the Tax Advisory and 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! Connect with us on LinkedIn and like us on Facebook: P&A Grant Thornton and email your comments to business.development@ph.gt.com. For more information, visit our website: www.grantthornton.com.ph.
