On 2 October 2024, Philippine President Ferdinand Marcos Jr. signed into law Republic Act No. 12023, which amended the National Internal Revenue Code (“Tax Code”) to impose Value-Added Tax (“VAT”) on nonresident digital service providers (“DSPs”) for digital services consumed within the Philippines.
The Philippine Secretary of Finance then issued the Implementing Rules and Regulations (“IRR”) through Revenue Regulations No. 3-2025 (“RR 3-25”), published on the Bureau of Internal Revenue’s (“BIR”) official website on 17 January 2025. RR 3-25 provides the policies and guidelines related to implementing the VAT on Digital Services Law. Nonresident DSPs shall be immediately subject to VAT after 120 days from the effective date of the IRR. As per Revenue Regulations No. 14-2025, nonresident DSPs are given until 1 June 2025 within which to register, and shall be subject to VAT starting 2 June 2025.
1. Inclusion of Digital Services as a VAT Taxable Transaction
Digital services that are rendered in the course of trade or business by a DSP are now expressly covered by the enumeration of transactions subject to VAT in the Tax Code.
The term “digital service” refers to any services that are supplied over the internet or other electronic network with the use of information technology and where the supply of the service is essentially automated. Digital services include:
(i) online search engines;
(ii) online marketplaces or e-marketplaces;
(iii) cloud services;
(iv) online media and advertising;
(v) online platforms; and
(vi) digital goods.
Digital services that are delivered by nonresident DSPs are considered performed or rendered in the Philippines if the digital service is consumed in the Philippines. While the term “consume” is not defined in the law or the IRR, the wording of the law would also encompass the terms “used”, “utilized”, and “availed of” when referring to the gamut of digital services covered
2. Requirement of the DSP to Register and Pay VAT, and issue Invoices
Nonresident DSPs rendering digital services are required to register for VAT:
(i) if their gross sales for the past 12 months, other than VAT-exempts sales, have exceeded the VAT threshold (currently PHP 3 million1); or
(ii) if there are reasonable grounds to believe that their gross sales, other than VAT-exempt sales, will exceed the VAT threshold. The BIR will establish a simplified automated VAT registration system for nonresident DSPs.
If the nonresident DSP is an online marketplace or e-marketplace, it shall be liable to remit to the BIR the VAT on the transactions of the nonresident sellers that utilize its platform, provided that the said DSP controls key aspects of the supply and it, namely:
(a) sets, either directly or indirectly, any of the terms and conditions under which the supply of goods is made;
or
(b) is involved in the ordering or delivery of goods, whether directly or indirectly
For a business-to-consumer transaction (i.e., the end-user is a Philippine customer who is not VAT-registered), the nonresident DSPs are liable for assessing, collecting, and remitting VAT on the digital services consumed in the Philippines.
However, in a business-to-business transaction with a VAT-registered Philippine customer, nonresident DSPs will be subject to the “reverse charge mechanism,” where the VAT-registered taxpayer in the Philippines is required to withhold and remit VAT on its purchases of digital services consumed in the Philippines from the nonresident DSP.
This is the utilization of the withholding tax mechanism. Further, there is also the requirement of the nonresident DSP to issue digital sales or commercial invoices for every
sale, barter, or exchange of digital services. The digital sales or commercial invoice must contain the:
(i) date of the transaction;
(ii) transaction reference number;
(iii) identification of the consumer;
(iv) brief description of the transaction; and
(v) total amount, with the indication that such amount is inclusive of VAT.
If applicable, the breakdown of the sale price for the digital service by its taxable, VAT-exempt, and VAT zero-rated components, and the calculation of VAT on each portion of the sale shall also be included.
However, nonresident DSPs are not allowed to claim creditable input tax. Further, these DSPs are not covered by the requirement of maintaining subsidiary sales and purchases journals under the Philippine Tax Code
3. VAT-Exempt Digital Services
There are digital services that are VAT-Exempt, namely:
(a) online courses, online seminars and online trainings rendered by duly accredited private educational
institutions and by government educational institutions, as well as the sale of online subscription-based
services to the DepEd, CHED, TESDA and educational institutions recognized by these government
agencies; and
(b) services of banks, non-bank financial intermediaries performing quasi-banking functions, and other nonbank financial intermediaries, including those rendered through different digital platforms.
- Approximately USD 54,500 at exchange rate of USD 1 = PHP 55