By Kyle Aristophere T. Atienza, Reporter
PHILIPPINE President Ferdinand R. Marcos, Jr. on Wednesday signed into law a bill taxing nonresident digital service providers (DSP) including Netflix and Amazon, from which it expects to collect P100 billion in the next five years.
Republic Act No. 12023, which amended the National Revenue Code of 1997, imposes a 12% value-added tax (VAT) on foreign digital service providers. A 5% VAT will also be slapped on registered foreign players providing services to the government.
The law covers online search engines, online marketplaces, cloud services, online media and advertising, online platforms, and any digital content providers.
However, digital services sold on a subscription basis to educational institutions recognized by the Department of Education, the Commission on Higher Education, and state universities and colleges will be exempted from the VAT policy.
“For the next five years, we estimate to collect P105 billion from this measure,” Mr. Marcos said in a speech during the ceremonial signing event in Malacañang. “This is enough to build 42,000 classrooms, more than 6,000 rural health units, 7,000 kilometers of farm-to-market roads.”
“With this law, we say that if your presence in the Philippine market is as real as your profits, then your tax responsibilities should also be equally tangible.”
The law requires nonresident DSPs to register for VAT payments if their gross sales or receipts for the past year have exceeded P3 million.
Under the law, 5% of VAT collections will be used for the development of the local creatives industry for five years.
Concerned agencies should come up with the law’s implementing rules and regulations (IRR) within 90 days of the law’s effectivity.
The Bureau of Internal Revenue should also establish an implementation system 120 days from the effectivity of the IRR.
Under the law, foreign DSPs should designate a representative office or agent in the Philippines.
At a briefing for Malacañang reporters, Bureau of Internal Revenue Commissioner Romeo Lumagui, Jr. said the government expects to generate more than P100 billion in revenues from VAT collections under the new law, citing revenue data of Google, Netflix, Spotify, and Amazon from website Statista.
“The thing is, since Statista is also limited, the DSPs there are not complete, so the revenues could be bigger,” Department of Finance Director Euvimil Nina Asuncion said at the same briefing.
Senate President Francis Joseph G. Escudero said there are currently no pending revenue-generating bills except the measure imposing an excise tax on single-use plastics.
The government aims to generate P4.27 trillion in revenues, including P3.83 trillion from tax collections, this year.
“The 12% tax though results in significant tax revenues may not still be enough to cover the rising needs of the government given a 10.1% increase in the proposed budget next year,” Leonardo A. Lanzona, who teaches economics at the Ateneo de Manila University, said in an e-mail.
He said the BIR’s P100-billion revenue projection from the digital services VAT may not be met as consumers may adjust or lessen their spending on digital services.
Before the law’s passage, Finance Secretary Ralph G. Recto had said the government had no plans to introduce new taxes apart from the reform measures that were pending in Congress at that time.
BIR’s Mr. Lumagui said the new law should not automatically translate to price increases since the Philippines is actually a laggard when it comes to imposing VAT on digital services.
In Southeast Asia, Singapore, Malaysia and Indonesia have started imposing a VAT on nonresident DSPs since 2020. Thailand followed suit in 2021.
“Note that they already have this in other countries. They have been complying — actually, we are late in the game, in collecting from our nonresident digital service providers,” Ms. Asuncion said, noting that the law would have no significant impact on the digital economy.
The digital economy’s share to the Philippines’ gross domestic product (GDP) went down to 8.4% last year from 8.6% in 2022, according to the Philippine Statistics Authority (PSA). This was the digital economy’s lowest share to GDP since 2018.
In terms of gross value added, the digital sector grew by 7.7% to P2.05 trillion in 2023.
Mr. Lanzona said the new law would have an impact on gig workers, potentially worsening the country’s employment and unemployment figures.
It could also lead to piracy of more digital content, he added.
The new VAT law is “just the latest regressive step in the country’s tax system, which is increasingly skewed towards indirect consumption taxes and away from more progressive direct taxes on income and wealth,” said IBON Foundation Executive Director Jose Enrique “Sonny” A. Africa.
“The impact of consumption taxes like VAT on consumers is cumulative and should not be dismissed so lightly,” he said in a Messenger chat.
He explained the share of consumption taxes like VAT and excise taxes in total BIR tax revenues has increased from 26% in 2008 to 31% in 2023, “corresponding to higher prices paid by consumers.”
“Corporate taxes, however, fell from 37% to 22% over that same period, corresponding to increased corporate profits,” Mr. Africa said.
“The added burden on poor and middle-class consumers whose incomes are stagnant and whose savings are falling amid rising prices is grossly insensitive,” he said.
Consumer group SUKI Network said that even though the 12% VAT will be imposed on digital service providers, companies usually pass the charges on to consumers.
