EXPLAINER: What are the digital services affected by VAT on non-resident DSPs?

The newly signed Republic Act (RA) 12023 aims to impose a 12% Value Added Tax (VAT) on non-resident digital service providers (DSPs) in order to generate additional revenue for the government.

The 12% VAT will be imposed on electronic or online sale of services, such as online advertisement services and provision for digital advertising space; digital services in exchange for a regular subscription fee; and supply of other electronic and online services that can be delivered through the internet.

Cloud services or those platforms providing downloadable digital content are also affected by the new law.

These include Netflix, Disney Plus, HBO Go, Google, and other online marketplaces such as Lazada, Shopee, and Amazon.

Meanwhile, RA 12023 will spare educational and public interest services from its coverage, including online courses, webinars, and other digital educational offerings to keep education affordable and accessible to all Filipinos.

Qualified educational offerings should be recognized by the Department of Education, Commission on Higher Education, and state universities and colleges. Those duly accredited by the Technical Education and Skills Development Authority are also exempted from the value added tax.

Services from bank, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries, including those rendered through different digital platforms are also not included.

Under the new law, digital service is defined as any service that is delivered or subscribed over the internet or other electronic network with the use of information technology and where the delivery of the service may be automated.

The term non-resident digital service provider means a digital service provider that has no physical presence in the Philippines.

Not a new tax

President Ferdinand "Bongbong" Marcos Jr. said RA 12023 would level the playing field for local providers.

In his speech during the signing of the law, Marcos said the landmark legislation does not seek the imposition of new taxes.

It strengthens and streamlines the Bureau of Internal Revenue's authority to collect VAT on digital services by providing measures on how digital service providers can comply with the VAT requirements.

The law states that 5% of the incremental revenue from the value added tax on digital service providers shall be allocated to and used exclusively for the development of creative industries.

Further, foreign digital service providers whose gross sales or receipts for the past year have exceeded P3 million are required to register for VAT.

A temporary blocking of non-resident DSPs will be imposed once found that they are non-compliant with VAT regulations. — VDV/RSJ, GMA Integrated News