VAT on Digital Services: Understanding the tax maze created by R.A. 12023
The President has signed into law, Republic Act No. 12023 which governs the imposition of Value-Added Tax (VAT) on digital services provided by Digital Service Providers. The law defines “Digital Service” as 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 while Digital Service Provider on the other hand, refers to a resident or nonresident supplier of digital services to a consumer who uses digital services subject to value-added tax in the Philippines. This means that purchases from streaming services such as Netflix, Spotify and subscription services such as Google among many others shall now be subject to twelve percent (12%) VAT. This Article discusses the salient changes brought by this new legislation:
- Resident or Nonresident Digital Service Provider shall now be liable for assessing, collecting, and remitting the value-added tax on services consumed within the Philippines (Section 108-A, NIRC as amended by R.A. 12023) subject to the following:
- Digital services provided by either resident or nonresident digital service provider shall be exempt from VAT if:
- Rendered by private educational institutions, duly accredited by DepEd, CHED, TESDA
- Rendered by government educational institutions.
- Sales of online subscription-based services to DepEd, CHED, TESDA and educational institutions recognized by said government agencies. (Section 109[H], NIRC, as amended by R.A. 12023).
- Digital service providers who are also an online marketplace or e-marketplace shall have the obligation to remit the value-added tax of transactions of its nonresident sellers that go through them 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. (Section 108-B, NIRC, as amended by R.A. 12023).
- Services of banks done using different digital platforms are considered exempt from value-added tax (Section 109[V], NIRC, as amended by R.A. 12023).
- Nonresident digital services providers are not allowed to claim creditable input VAT. (Section 110, NIRC, as amended by R.A. 12023).
- A VAT nonresident digital service provider shall issue digital sales or commercial invoices for every sale, barter or exchange of digital services. (Section 113[A], NIRC, as amended by R.A. 12023).
- VAT-registered nonresident digital service providers shall issue invoice with the following details in lieu of the invoicing requirements under Section 113 of the National Internal Revenue Code, to wit:
- Date of transaction;
- Transaction reference number;
- Identification of the consumer
- Brief description of the transaction; and
- The total amount with the indication that such amount includes the value-added tax (Section 113[B][5], NIRC as amended by R.A. 12023)
- Payment of services to nonresident digital service providers shall be subject to 12% withholding tax at the time of payment subject to Reverse Charge Mechanism. (Sections 108-B, 112 [C],[D], NIRC, as amended by R.A. 12023)
- Reverse Charge Mechanism – A VAT registered taxpayer (buyer) shall withhold the VAT and remit the same to the Bureau of Internal Revenue for all digital services consumed in the Philippines by a nonresident digital service provider within ten (10) days after the close of the month when the withholding was made. (Section 114[D], NIRC as amended by R.A. 12023)
- The Commissioner of Internal Revenue, with assistance from the Department of Information and Communications Technology (DICT) through the National Telecommunications Commission (NTC) is empowered to suspend operations of digital services provider for ground provided under Section 115 of the Tax Code such as failure to issue invoices, failure to file a VAT return, among others. (Section 115, NIRC as amended by R.A. 12023).
- Digital service providers who are not required to be VAT-registered shall be subject to percentage tax. The percentage tax may, by recommendation of the Commissioner of Internal Revenue, withhold the percentage taxes imposed under the NIRC. (Section 128, NIRC as amended by R.A. 12023)
- Digital service providers, both resident and nonresident are now required to register with the Bureau of Internal Revenue if the sales excluding those that are exempt from VAT, breaches the threshold amount of Php3,000,000.00. The registration may be done manually or electronically. (Section 236, NIRC as amended by R.A. 12023)
Consumer is a VAT registered taxpayer:
VAT-registered taxpayer (buyer) shall be liable for the withholding and remittance of value-added tax due on digital services consumed in the Philippines from nonresident digital services provider (NDSP) to the Bureau of Internal Revenue (BIR) within ten (10) days following the month of transaction.(Section 114[D], NIRC as amended by R.A. 12023)
Consumer is not a VAT Registered Taxpayer:
The nonresident digital service provider (seller) shall be responsible for the remittance of value-added tax for digital services consumed in the Philippines, to the Bureau of Internal Revenue (BIR) (Section 108-B, NIRC as amended by R.A. 12023).
Resident Digital Service Provider
The resident seller shall impose the VAT to its customers and shall remit the same following the established rules on remittance.
This article is for general information only and does not constitute professional advice. Therefore, the reader holds Morfe, Ceneta & Co., CPAs, including its partners, officers and employees free and harmless from any liability arising from one’s reliance on this article.