New 12% VAT Law on Digital Services: What It Means for You and Your Favorite Platforms

The recent enactment of Republic Act No. 12023 marks a significant shift in the taxation landscape for digital services in the Philippines. This law mandates a 12% Value-Added Tax (VAT) on nonresident digital service providers, aligning the country’s tax policies with global standards and ensuring a level playing field for local and international service providers.

Who Will Be Affected?

This extends the 12% VAT to all digital services consumed within the Philippines, even if provided by companies without a physical presence in the country. If your business relies on foreign digital services, expect price changes. Some of these services include:

Online advertising platforms
Popular Electronic Marketplaces like Amazon, Shein, and Temu
Streaming services like Netflix and Disney+
Software and apps available for download
Other digital services offered by foreign-based providers

The law specifically targets “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.”

For consumers, this law means that the cost of these services may rise as companies pass the tax on to users.

What’s in it for us?

Is the Law Good or Bad for the Country and Foreign Platform Operators? The imposition of a 12% VAT on nonresident digital service providers has both positive and negative implications:

For the Country:

Revenue Generation: The law is expected to generate significant revenue for the government, with projections of PHP 105 billion over the next five years. This additional revenue can be used to fund various public services and infrastructure projects.
Level Playing Field: By taxing foreign digital service providers, the law aims to level the playing field for local businesses, which are already subject to VAT. This could encourage fair competition and potentially stimulate the local digital economy.

For Foreign Platform Operators:

Compliance Costs: Nonresident digital service providers will incur additional costs related to compliance, including registration, tax assessment, and remittance. These costs could be passed on to consumers, potentially making digital services more expensive.
Market Accessibility: The requirement to designate a representative office or agent in the Philippines may pose a barrier to entry for smaller digital service providers, potentially limiting the variety of services available to Filipino consumers.

Validity

The law requires nonresident digital service providers to register with the Bureau of Internal Revenue (BIR) if their gross sales or receipts for the past year exceed PHP 3 million. These providers will be responsible for the assessment, collection, and remittance of VAT. The law also mandates the designation of a representative office or agent in the Philippines for compliance purposes. Non-compliant businesses face temporary suspension.

The implementing rules and regulations (IRR) will be promulgated 90 days from the effectivity of the act. Following the IRR’s effectiveness, there will be a transition period of 120 days to allow the BIR to establish implementation systems.

Conclusion

While the law aims to enhance government revenue and ensure fair competition, it also introduces new compliance challenges for foreign digital service providers. The overall impact will depend on how effectively the law is implemented and how both businesses and consumers adapt to the new tax landscape.

Let us Guide you Through these Changes!

Babylon2k helps these businesses adapt to the new VAT law on foreign digital services, making them compliant with accounting services to handle the complications of VAT reporting, tax filing, and adapting to new regulations. Utilizing our expertise in accounting and tax ensures that your business remains compliant while minimizing disruption to your operations.

Whether you’re a small business, a growing startup, or a company reliant on digital platforms, Babylon2k provides tailored solutions to meet your business’s needs. Each service is designed to simplify the tax process for you. Each service has a corresponding code (e.g., 110010, 110040), and the following services under tax and accounting are:

AA0020 – RETAINER – ACCTG OF TAX ACCOUNTS PLUS FILING (BIR, SSS, PHIC, HDMF) W/O BOOKKEEPING
AA0030 – RETAINER – ACCTG OF FINANCIAL & TAX ACCOUNTS W/ BOOKKEEPING (QBO/XERO)
AA0040 – REVIEW OF TAX ACCOUNTS + FILING (BIR) W/ BOOKKEEPING
GG0060 – 3-DAY ITR PREPARATION PACKAGE (ONLINE MERCHANTS, INTERMEDIARIES, SERVICE PROVIDERS, ETC)
GG0140 – TAX COMPLIANCE REVIEW
GG0150 – TAX ADVISORY SERVICES
GG0160 – TAX PLANNING

Additionally, Babylon2k’s B.E.T.H. can help you when you need more information and clarification on how this law affects your business. Avail of the early bird discount—until October 31, 2024, only!

TRY B.E.T.H. FOR FREE

Let us guide you through these changes! When you’re ready to start, simply sign in or request a quote and enter the relevant service code(s) to ensure we can connect you with the perfect Babylon2k specialist.