Philippines VAT on foreign digital services proposed in new bill

A House Bill has been designed to tax the digital economy in the Philippines. The standard 12% VAT rate is to apply to affected digital services.

May 20, 2020

A prominent Philippines lawmaker has designed a bill aimed at taxing foreign-supplied digital services (e.g. streaming apps, social media ads and sales via online platforms) due to the substantial loss of revenue caused by the COVID-19 crisis. The bill proposes for the Philippine standard 12% VAT rate to apply to affected digital services.

According to an interview that Joey Salceda, the chairperson of the Philippines House Ways and Means committee, gave to the Inquirer website it is estimated that the Philippines will lose PHP120 billion (circa USD2.36 billion) due to tax changes introduced by the government to “soothe the pain inflicted by COVID-19 on businesses”.

VAT collection – according to Salceda’s House Bill 6765 (the digital economy taxation bill) – could amount to an estimated PHP30 billion (circa USD590 million) per annum. Salceda refers specifically to a ‘Netflix tax’ (streaming)’, a ‘Facebook ads tax’ (social media ads), and a ‘Lazada tax’ (sales via platforms). Lazada is a very popular e-commerce platform in Southeast Asia, owned by the Alibaba Group.

Salceda justified the introduction of the House Bill saying: “They have been raking in millions, if not billions, on behalf of the Filipinos, but not a single cent from the VAT. Zero. Simply put, these are not new taxes. These are tax administration measures that we hope will capture the value more fairly.”

The catalyst for the introduction of this House Bill - the impact of COVID-19 on government revenue streams - is one that has tax authorities around the world looking for different sources of revenue.

For this reason, digital services are becoming more of a target as sales (in general) have risen due to lockdown measures forcing customers to remain at home. As the popularity of such digital services increases, so too does the chance that they will become a target for tax authorities in need of additional revenue in this time of crisis.

Potential obligation for both digital and physical goods mirrors a global trend

The proposed House Bill not only focuses on digital services but also on the sale of goods through marketplaces. Marketplaces are suggested as the collectors of VAT on behalf of sellers. This proposed approach mirrors those in other jurisdictions as the rules around the taxation of low value goods change.

This trend started back in 2018 in Australia and has since been replicated in New Zealand (2019), Norway (2020) and, from 2021, in the European Union. If the proposed Philippines Bill becomes law it will become the first jurisdiction to introduce an obligation for both digital and physical goods at the same time.

Philippines VAT on foreign digital services: some background information 

Major tax reform has been hovering below the waterline in the Philippines for some time. The specific taxation of foreign-supplied digital services has been firmly in the sights of the tax authority there. As of October 2019, however, the Bureau of Internal Revenue (BIR) was still "studying the taxation of the digital economy."

The BIR's deputy commissioner Arnel Guballa said: “We also have to tax the digital economy. We have to capture them, pay the taxes. Because what is happening now is, we will go online, we will order, and anything we can order, we can get. There’s no receipt, we don’t pay taxes to the BIR.”

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