Finance Secretary Ralph G. Recto lauds the enactment of a new law that will ensure equitable tax treatment on all digital businesses providing services in the Philippines and boost much-needed revenue collections to aid national development.
Republic Act (RA) No. 12023 or the Value-Added Tax on Digital Services was signed into law by President Ferdinand R. Marcos, Jr. on October 2, 2024.
It levels the playing field between local and foreign digital service providers (DSPs) by mandating a 12% value-added tax on all digital services consumed in the Philippines. At present, only local DSPs are subject to paying the 12% value-added tax.
Digital services include online search engines, marketplaces, cloud services, online media, online advertising, and digital goods.
“With this law, we say that if your presence in the Philippine market is as real as your profits, then your tax responsibility should also be equally tangible. But make no mistake. We are not imposing new taxes. We are simply strengthening the authority and streamlining the process of the BIR to collect value-added tax on digital services,” the President said during the ceremonial signing of the law.
“This is not a new tax mechanism. We are just merely correcting the current system that creates an unfair advantage to foreign digital service providers and weakens the country’s tax base, forgoing much-needed revenues that could have been used to fund crucial public services, infrastructure, and other socio-economic programs,” the Finance Chief said.
“By doing this, we foster fairness, competition, and inclusion in our tax system and marketplace. Whether you are a local entrepreneur or a global giant, everyone will play by the same rules,” he added.
The new law strengthens the Bureau of Internal Revenue’s (BIR) authority to collect the value-added tax on digital services by providing measures on how foreign DSPs can comply with the value-added tax requirements under the Philippine Tax Code.
Foreign DSPs whose gross sales or receipts for the past year have exceeded PHP 3 million are required to register for value-added tax.
Furthermore, foreign DSPs are required to designate a representative office or agent––a resident corporation registered under Philippine law to assist in compliance with the provisions of the Tax Code. Non-compliant businesses will be temporarily suspended.
In the interest of public service delivery, a 5% value-added tax is imposed on registered foreign DSPs providing services to the government.
To support the Marcos, Jr. administration’s priority to keep education accessible and affordable for all, the law exempts educational services, including courses, webinars, and other digital educational offerings, from value-added tax.
Moreover, digital services sold on a subscription basis to educational institutions recognized by the Department of Education (DepEd), the Commission on Higher Education (CHED), and state universities and colleges (SUCs) are also not subject to value-added tax.
With the new law in place, the Department of Finance (DOF) expects an estimated revenue collection of PHP 7.25 billion in 2025, at 50% compliance.
From 2025 to 2029, the estimated revenues to be collected from the measure amounts to around PHP 102.12 billion, which will be channeled into projects that directly benefit the Filipino people, such as building more schools, roads, and hospitals as well as supporting vital socio-economic programs.
For the next five years from the law’s effectivity, 5% of the collected revenues will be used exclusively for the local creative industries’ development to foster innovation and empower the next generation of Filipino creators and entrepreneurs.
There will be a transition period of 120 days from the effectivity of the law’s implementing rules and regulations (IRR) to enable the BIR to establish implementation systems before value-added tax is imposed on foreign DSPs.
The IRR will be promulgated 90 days from the effectivity of the Act.
Present during the event were Special Assistant to the President for Investment and Economic Affairs Frederick Go, Department of Information and Communications Technology (DICT) Secretary Ivan John Uy, Senate President Francis Escudero, House Speaker Martin Romualdez, Senator Sherwin Gatchalian, Albay Representative Joey Salceda, and other members of both Houses of Congress.
DOF Chief of Staff and Undersecretary Maria Luwalhati Dorotan Tiuseco, DOF Revenue Operations Group (ROG) Undersecretary Charlie Mendoza, Tax Research and Expenditure Monitoring (TREM) Undersecretary Renato Reside, BIR Commissioner Romeo Lumagui, Jr., Fiscal Policy and Monitoring Group (FPMG) Assistant Secretary Karlo Adriano, National Tax Research Center (NTRC) OIC-Deputy Executive Director Monica Rempillo, and ROG Director Nina Asuncion were also present.