The government may be in dire need of revenue source as the pandemic goes on and billions of borrowing have been or are being spent to recover. While the government commits to pass a tax reform that will help the country and the economy recover, through the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), various administrative and legislative measures are proposed to exact more taxes from the people are being explored.
Last May 2020, Albay Rep. José María Clemente “Joey” Salceda filed House Bill 6765, or the “Digital Economy Act of 2020” – a bill which seeks to amend certain provisions in our National Internal Revenue Code (Tax Code), specifically, it seeks to subject to the 12-percent VAT on digital advertising services.
Today, the House Committee on Ways and Means has approved a bill looking to impose a 12% value-added tax (VAT) on some foreign companies providing goods and services through digital and electronic platforms. What exactly does this mean to us?
The bill and its definition of digital services provider
The bill seeks to amend Section 105-A of the National Internal Revenue with a provision making a non-resident digital service provider such as Facebook, Apple, Netflix, Spotify, Lazada, among others, liable for assessing, collecting, and remitting the VAT on the transactions that go through its platform.
Who exactly is considered as a Digital Service Provider according to the bill? A Digital Service Provider is “an entity that provides digital service or goods to a buyer through an online platform for purposes of buying and selling of goods or services or by making transactions for the provision of digital services on behalf of any person.”
Digital service providers may also be:
- a third party that acts as a conduit for goods or services offered by a supplier to a buyer and receives commission therefor;
- a platform provider for a promotion that uses the internet to deliver marketing messages to attract buyers;
- a host of online auctions conducted through the internet, where the seller sells the product or service to the person who bids the highest price;
- a supplier of digital services to a buyer in exchange for a regular subscription fee over the usage of the said product or service; and
- a supplier of electronic and online services that can be delivered through an information technology infrastructure, such as the internet.
In particular, the following are the digital services proposed to be charged with 12% VAT, whose “providers” will be liable to assess, collect, and remit Value Added Tax:
- online licensing of software, updates, and add-ons
- website filters and firewalls
- mobile applications, video games, and online games
- webcast and webinars
- provision of digital content such as music, files, images, text, and information
- advertisement platform such as the provision of online advertising space on an intangible media platform
- online platforms such as electronic marketplaces or networks for the sale, display, and comparison of prices of trade products for services
- search engine services
- social networks
- database and hosting such as website hosting
- online data warehousing
- file sharing and Cloud storage services
- Internet-based telecommunication
- online training such as the provision of distance teaching, e-learning, online courses and webinars, online newspapers, and journal subscription
- payment processing services
The said proposal was sought to be as an alternative means for the government to make up for the budget deficit due to lower tax collections in the past few months in effect to the closure of some businesses due to the pandemic.
According to Finance Assistant Secretary Dakila Napao, the government will earn as much as ₱10 billion from this measure.
What is VAT and who will actually be taxed?
The bill provides that any nonresident digital service provider who, in the course of trade or business, engages in the sale or exchange of digital services shall be liable to register for Value-Added Tax if:
- his gross sales or receipts for the last past 12 months, other than those that are exempt under Section 109 (A) to (BB), have exceeded P3 million; or
- there are reasonable grounds to believe that his gross sales or receipts for the next 12 months, other than those that are exempt under Section 109 (A) to (BB), will exceed P3 million.
Rep. Sharon Garin, Vice-Chairperson of the House panel and one of the main proponents of the measure, clarified that the bill is not targeting the micro, small, and medium enterprises (MSMEs) and small-time online sellers, but the “service providers from outside” which include Netflix, Spotify, Facebook, Google, and other global internet companies that conduct business in the country. These companies likely leverage cutting-edge technology to enable global online transactions (go to this site to find out more) and so will likely have to tweak their transactional processes to accommodate the new taxes being implemented.
In the accounting parlance, however, Value-Added Tax (VAT) is a form of sales tax. It is a tax on consumption levied on the sale, barter, exchange or lease of goods or properties and services in the Philippines and on importation of goods into the Philippines. It is an indirect tax, which may be shifted or passed on to the buyer, transferee or lessee of goods, properties or services.
Considering the definition of VAT, while it is true that the bill is not targeting the micro, small, and medium enterprises, and small-time online sellers, it will most likely be that the final consumers (the Filipino people) are the ones at a disadvantage if this bill is passed, contrary to the statement of Rep. Garin. This is in the form of the increased price (by 12% or possibly even more), of services and subscriptions which are considered digital.
Will this regulation help us get through in these trying times? Let us know in the comments section below!