Albay 2nd District Rep. Joey Salceda. INQUIRER FILE PHOTO
The bicameral conference committee on Thursday approved the joint version of a bill imposing a 12-percent value-added tax (VAT) on foreign digital service providers (DSPs), such as Amazon, Google, Netflix, and Spotify, according to Albay Rep. Joey Salceda.
Salceda, who chairs the House committee on ways and means, said the bill would level the playing field since nonresident DSPs are currently allowed to have unfettered and untaxed access to the Philippine market, particularly at the peak of the pandemic when digital services displaced traditional brick-and-mortar stores.
During the COVID-19 health crisis, digital activities and online transactions surged sharply as people were stuck in their homes and had to rely on internet platforms to buy goods and even entertainment services such as video streaming.
Digital services include the provision of content such as movies, music, images and information; electronic marketplaces such as Amazon; online licensing of software, mobile applications, video and games; online advertising spaces offered by video hosting services such as YouTube and TikTok; search engine services such as Google; social networks such as Facebook, and webcasts and webinars.
READ: Proposed VAT on Netflix, digital services gains Senate traction
Aside from Amazon, the tax measure would cover e-commerce platforms such as Shein, Rakuten, Taobao, AliExpress, and Temu, all of which do not have a physical presence in the Philippines.
The Bureau of Internal Revenue can order the blocking or suspension of the DSPs’ services should they fail to withhold and remit the 12 percent VAT on transactions with clients in the Philippines.
Salient provisions
A key feature of the bill is the amendment to Sections 105 and 108 of the National Internal Revenue Code (NIRC) to include in the definition of VAT-covered transactions the sale by any person, whether resident or nonresident, of goods and services that are digital or electronic in nature, including those subscribed online or delivered through the internet.
It also makes the DSPs liable for VAT on digital transactions from buyers in the Philippines, either for personal consumption or for business purposes, or from third parties acting as intermediaries between a supplier and buyer of goods and services based in the country.
The bill amends Sections 113, 114, and 236 of the NIRC and requires nonresident DSPs to assess, collect, and remit the 12-percent VAT on transactions that pass through their platforms.
READ: Taxman coming for Netflix, et al.
However, the measure provides VAT exemption for online courses and webinars under educational services rendered by private schools that are duly accredited by the Department of Education, the Commission on Higher Education, and the Technical Education and Skills Development Authority, as well as those rendered by state colleges and universities. Books and other printed materials, such as newspapers and magazines, that are sold electronically or online are also exempt from the VAT.
Aid to local creators
Salceda said the proposed measure could generate as much as P18 billion in its first year of implementation, while the Department of Finance (DOF) earlier estimated that the proposal could bring in P83.8 billion in government revenues from 2024 to 2028.
Salceda, chair of the House ways and means panel, said the committee approved the reconciled bill after agreeing on two things: allowing the DOF to set the withholding tax rates for those who are not VAT-covered, particularly companies with annual sales of less than P3 million, and earmarking around P900 million of funds collected under the bill for the local creatives sector.
“While resident content producers were subject to VAT and income taxes, foreign service providers were not. This created an unfair situation where local creators are taxed while imported content is not,” Salceda noted in a statement. “This unfairness to the domestic sector for at least four years is why the House contingent believes that we owe the resident creative sector some measure of compensation and support.”
Salceda filed the first version of the bill (House Bill No. 7425) at the height of the pandemic. The House of Representatives approved the measure in November 2022, while the Senate approved its version last month.
Small businesses protected
Salceda said the measure’s enactment into law would not affect the protection provided to small businesses under the Barangay Micro Business Enterprise Act and the Ease of Paying Taxes Act.
“What the DOF proposal (in the reconciled bill) simply does is, instead of paying their percentage taxes at the end of the year, the taxes will be withheld by the e-commerce site [after every transaction],” Salceda said.
Under the bill, taxpayers subject to the percentage tax are limited to those who fall below the VAT threshold of P3 million in annual sales set under the Tax Reform for Acceleration and Inclusion Act.
Groups opposing the move to tax digital services earlier argued that doing so would raise the prices of goods and services bought online, and consumers would ultimately end up shouldering the increase in cost.
“New taxes for digital services is another burden on the people,” said Bayan president Renato Reyes.