27 January 2025 Philippines issues implementing rules for VAT on Digital Services Law - Nonresident digital service providers (DSP) who meet the value-added tax (VAT) threshold are required to register within 60 days from the effective date of the Regulations and shall immediately be subject to VAT after 120 days from the effective date.
- For business-to-business (B2B) transactions, purchasers of digital services that are engaged in business and located in the Philippines shall be liable for withholding the VAT and remitting it to tax authorities.
- Penalties imposed on nonresident DSPs that fail to register for VAT or comply with the Regulations include the suspension of business operations (including the blocking of digital services performed in the Philippines).
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On 17 January 2025, the Bureau of Internal Revenue (BIR) issued Revenue Regulations No. 3-2025, the implementing regulations for Republic Act (RA) No. 12023, which imposes a 12% VAT on digital services, including those provided by nonresident digital service providers (DSPs). The VAT shall be imposed on services supplied over the internet or other electronic network and used for information technology. Specifically, this includes: - Digital goods, which refers to intangible goods delivered or transferred in digital form, including sounds, images, data, facts, or combinations thereof, such as:
- Digital content purchases (e.g., downloads of e-books, music, videos, software, applications, digital media, e-games, online courses)
- Subscription-based supplies of content (e.g., news, music, streaming media, online gaming, online courses)
- Digital art
- Supplies of software services and maintenance (e.g., anti-virus software, digital data storage)
- Licensing of content (e.g., access to specialized online content, such as publications and journals, software, cloud-based systems)
- Telecommunication and broadcasting services
- Virtual assets
- Digital services, such as:
- Cloud and IT infrastructure, such as data storage and web hosting
- E-commerce platforms and payment processing
- Targeted digital marketing and analytics
- Communication tools and collaborative software
- E-learning platforms and professional networking
- Data analytics and artificial intelligence for business insights
- Cybersecurity and regulatory compliance
- Masking and encryption services (e.g., virtual private network services)
- System maintenance and optimization for digital services
- Online consultations through a digital platform (i.e., website, applications, e-marketplace) and interactive media, like online gaming and augmented and/or virtual reality (AR/VR) experiences
Highlights for nonresident DSPs Digital services provided by a nonresident DSP shall be considered performed, rendered, supplied or delivered in the Philippines in the course of trade or business if such digital services are consumed in the Philippines (i.e., the buyer is located in the Philippines based on payment information, residence information, access information, etc.). All nonresident DSPs that are required to register (i.e., meet the VAT threshold) shall register or file an update with the BIR within 60 days from the Regulations' effective date through the VAT on Digital Services (VDS) Portal and shall immediately be subject to VAT after 120 days from the effective date. In registering with the BIR, a nonresident DSP may appoint a resident third-party service provider for purposes of receiving notices, record keeping, filing tax returns and other reporting obligations. The appointment of a third-party service provider shall not classify the nonresident DSP as a nonresident foreign corporation doing business in the Philippines. For B2B transactions, the purchaser of digital services engaged in business and located in the Philippines, shall be liable for both: - Electronically filing the required remittance return
- Withholding and remitting the 12% VAT due on its purchase of digital services
The withheld VAT shall be considered as input VAT or part of the cost or expense, as the case may be, on the part of the withholding buyer. For business-to-consumer (B2C) transactions, the nonresident VAT-registered DSP shall be directly liable for both: - Electronically filing the VAT return
- Paying the VAT due thereon through a simplified pay-only regime in the VDS Portal based on its gross sales relating to the sale of digital services consumed or used in the Philippines
Nonresident DSPs are required to issue an invoice containing the following information: - Date of the transaction
- Transaction reference number
- Identification of the buyer (including the taxpayer identification number (TIN), if any)
- Brief description of the transaction
- Total amount with the indication that such amount includes the VAT
Additional rules apply if the nonresident DSP is classified as an e-marketplace. The suspension of business operations (including the blocking of digital services performed in the Philippines) and other penalties shall be imposed upon nonresident DSPs that fail to register for VAT or comply with the provisions of the Regulations. The Regulations shall take effect within 15 days after their publication (i.e., by 1 February 2025). While reporting obligation for B2B transactions belong to local purchasers of digital services, who are liable for withholding the VAT and remitting the payment to tax authorities, affected nonresident DSPs should (1) assess whether they will breach the registration threshold, (2) revisit pricing arrangements with local customers, (3) ensure compliance with mandatory invoicing requirements and (4) note that penalties on nonresident DSPs that fail to register for VAT or comply with the Regulations include the suspension of business operations in the Philippines. * * * * * * * * * * | Contact Information | For additional information concerning this Alert, please contact: Ernst & Young LLP (United States), Philippines Tax Desk, New York Ernst & Young LLP (United States), ASEAN Tax Desk, New York Ernst & Young LLP (United States), Asia Pacific Business Group, New York Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago Ernst & Young Philippines (SGV & Co.), Manila | Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor |
Document ID: 2025-0331 |