New tax law on foreign digital services to level the playing field
“Fairness, inclusivity, and progress—these are the goals of this law,” President Ferdinand “Bongbong” Marcos Jr. declared as he signed into law on Oct 2, 2024 a measure imposing a 12% value-added tax (VAT) on foreign digital service providers (DSPs). In a speech after its signing in Malacañang, the President said that with both local and foreign DSPs subject to a 12% VAT, they now “compete on equal terms” and will “no longer be playing by different sets of rules.”
“If your presence in the Philippine market is as real as your profits, then your tax responsibilities should also be equally tangible … If you are reaping the rewards of a fruitful digital economy here, it is only right that you contribute also to its growth. After all, whether you are a small tech start-up or a global tech giant based halfway around the world, if you are making money here in the Philippines, you are part of our community. And with that comes a shared responsibility,” Mr. Marcos added.
The law known as Republic Act No. 12023 amended the 1997 National Internal Revenue Code to include nonresident DSPs in the coverage of VAT, thus removing their undue advantage over their local counterparts that pay the tax. The law defines DSPs as entities whose services are delivered or subscribed over the internet or other electronic networks such as online search engines and marketplaces, cloud services, online media and advertising, and downloadable digital content consumed in the Philippines.
These include cloud services or platforms providing digital content such as Netflix, Amazon Prime, Disney Plus and HBO as well as online marketplaces such as Lazada, Shopee, Shein and Amazon. Exempted from the digital VAT are educational services such as online courses and webinars of private institutions and online subscription-based services such as Zoom or Google Classroom to educational institutions recognized by the Department of Education, the Commission on Higher Education and state universities and colleges.
Now to the burning question on everyone’s minds: Will this result in a price hike?
Although the law doesn’t directly impose a new tax on consumers, the 12% VAT that these companies are now required to pay will likely be passed on to you. BIR Commissioner Romeo Lumagui clarified in a press briefing: “It’s a business decision by the service providers. Nagbabayad naman dapat sila from the very beginning, so they should have incorporated ‘yung VAT into their pricing sa simula pa lang.Puwede naman magkaroon ng price increase but I think it would be minimal. Hindi naman 12% automatic mag-iincrease sila.”
Finance Secretary Ralph Recto said: “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.”
In addition, the government foresees this law will bring in approximately P105 billion over the next five years. That money, according to the President, will be used for building classrooms, health centers, and other public infrastructure. Plus, 5% of the revenues will go to supporting the local creative industry—think Filipino filmmakers, musicians, and other creatives getting more funding.