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Philippines: Cruxes of the proposed VAT on digital transactions
When the COVID-19 pandemic began, we all relied heavily on the use of electronic platforms to acquire our necessities, be present in virtual classes, report to work while we are at the comfort of our homes, communicate and reconnect with our loved ones, and entertain ourselves to veer away from problems or deal with anxiety during lockdowns and community quarantines.
The increase in digital activities and online transactions stimulated the Congress’ creation of various revenue measures aimed at imposing taxes on digital transactions, the seeming intentions being to level the playing field between traditional and digital businesses as the economy shifts from brick-and-mortar to virtual, and to generate revenues to fund the nation’s effort in recuperating from the ongoing adverse impact of the pandemic.
After more than a year of required readings and interpellations, House Bill (HB) 7425 entitled “An act imposing value-added tax (VAT) on digital transactions in the Philippines, amending for the purpose Sections 105, 108,109, 110, 113, 114, and 236 and adding a new Section 105-A of the National Internal Revenue Code (NIRC) of 1997, as amended” was approved by the House of Representatives on Sept. 21 and is pending before the Senate’s Committee on Ways and Means.
One of the key features of the bill is the amendment of Sections 105 and 108 of the NIRC to include in the definition of VATable transactions the supply (sale or exchange) by any person, whether resident or non-resident, of goods and services which are digital or electronic in nature, including those subscribed online or delivered through information technology infrastructures such as the internet or other electronic network.
Further, Subsection (A) was added to Section 105 providing for ‘digital service providers (DSPs)’ as the ‘persons liable’ to the VAT being imposed, and defining them as the suppliers of the aforementioned digital transactions to a buyer (any person who resides or consumes taxable digital services in the Philippines from a DSP either for personal consumption or for trade or business purposes) or third parties who sell for its own account or on account of others or those who act as an intermediary between a supplier and buyer of goods and services, such as those who collect payment for goods and services from a buyer on behalf of a supplier and receives commission therefor.
Another salient point of HB 7425 is the amendment of Sections 113, 114, and 236 of the NIRC providing that non-resident DSPs shall be liable for assessing, collecting, and remitting the 12 percent VAT on the transactions that go through its platform, and it shall also be liable to register for VAT if its gross sales or receipts for the past 12 months have exceeded P3 million or there are reasonable grounds to believe that its gross sales or receipts for the next 12 months will exceed this threshold. Further, no creditable input tax shall be claimed by non-resident DSPs.
Lastly, HB 7425 also intends to modify Section 109 of the NIRC to provide for VAT-exemption of the following transactions: online courses and webinars under educational services rendered by private educational institutions, duly accredited by the Department of Education (DepEd), the Commission on Higher Education (CHED), the Technical Education and Skills Development Authority (TESDA), and those rendered by the government educational institutions; and books and other printed materials, such as newspapers and magazines, that are sold electronically or online.
While the intention is clear, the cruxes in imposing VAT on digital transactions are incoherence between its purpose and effect, the situs of taxation, and non-resident DSPs’ VAT administrative requirements.
Incoherence between the HB’s purpose and effect
Since VAT is an indirect tax and may be shifted or passed on to the buyer, the additional burden that will be imposed on digital goods and services will actually be shouldered by the end-users, who are mainly commoners who patronize the goods and services for personal consumption only. While it is true that HB 7425 is a potential source of additional revenue for the government, we cannot discount the fact that it will ultimately be generated at the expense of the individuals in the middle or lower economic classes. This effect will somehow defeat the purpose of the bill to help the Filipinos recover from the pandemic.
Situs of taxation
In various International Tax Affairs Division (ITAD) rulings and existing tax treaties, cloud-based services or those rendered through the internet, provided that the servers used in rendering the services are located outside the Philippines, are not considered as Philippine-sourced income even if the same are for buyers located inside the country; hence, not subject to 12 percent withholding VAT. This matter may cause confusion and contention in the future, especially to non-resident DSPs, as the bill does not seem to take into account the situs of taxation. Under the said bill, it seems that as long as the digital transaction is subscribed online or delivered through any electronic platform and the buyer resides or consumes it in the Philippines, the same is already considered as subject to Philippine VAT unless another provision explicitly exempts it.
Non-resident DSPs’ administrative requirements
While the bill clarifies the VAT liability of non-resident DSPs, it does not provide how they will pay the same and whether they are required to file monthly and quarterly VAT returns if they qualify to be VAT-registered taxpayers. For easier compliance on the part of non-resident DSPs, clear and concise guidelines must be set out, and simplified VAT payment schemes, invoicing, and registration requirements should be put in place.
As this HB imposing VAT on digital transactions is still at its early stage, it is worthwhile for the Philippine Senate and the Congress’ Bicameral Conference Committee to further evaluate the complexities of taxing digital transactions before it is endorsed for approval of the President. Cliché as it may sound, one of the keys to effective enforcement and collection of taxes is to ensure that the administrative requirements are simple and easy to comply with. Having simple rules may lead to a higher level of taxpayers’ compliance and additional revenues to fund the country’s efforts in recovering from this COVID-19 pandemic.
Source: https://www.philstar.com/business/2021/11/16/2141494/cruxes-proposed-vat-digital-transactions