DTI: Digital VAT levels field

The Department of Trade and Industry (DTI) has thrown its weight behind the newly signed Value-Added Tax (VAT) on Digital Services Law, a measure seen to level the playing field for micro, small and medium enterprises (MSMEs) in the Philippines’ growing digital economy.

Signed by President Ferdinand Marcos Jr. on Wednesday, Republic Act 12023 is projected to generate an additional P105 billion in revenue over the first five years.

The law enhances the Bureau of Internal Revenue’s (BIR) authority to collect a VAT on digital transactions and establishes clearer compliance guidelines for digital service providers (DSPs) under the National Internal Revenue Code (NIRC).

Trade Secretary Cristina Roque hailed the law as a “landmark piece of legislation” that promotes fairness in the digital marketplace.

“By ensuring that all DSPs contribute their fair share to the country’s tax system, we’re not just fostering healthy competition, we’re also empowering our local MSMEs to innovate and expand,” Roque said.

Historically, foreign DSPs have operated in the Philippines without facing the same tax obligations as their local counterparts.

This disparity has raised concerns about the sustainability of local businesses, particularly at a time when digital transformation is accelerating across all sectors.

Roque’s statement underscores a commitment to creating an equitable environment for all players.

“The law removes the unfair advantage previously enjoyed by foreign DSPs, allowing our local MSMEs to leverage digital technologies more effectively,” she said. “This is essential for their survival in an increasingly global marketplace.”

Tax compliance

At a press briefing in Malacañang, BIR Commissioner Romeo Lumagui Jr. emphasized that the new law aims to rectify longstanding inequities in tax compliance.

Under the old tax framework, only local consumers of digital services were charged a 12-percent VAT, while foreign providers profiting from Filipino customers were exempt.

“This is not a new tax but a critical step in ensuring fairness in competition within our rapidly evolving digital economy,” Lumagui explained.

“For too long, local DSPs have carried the burden of the VAT while foreign providers reaped the benefits without contributing,” he said.

Lumagui said the BIR is optimistic the law will enhance tax collection and create a more competitive landscape for digital services.

“By subjecting all DSPs to the same tax obligation, we level the playing field, leading to improved services and fairer pricing for consumers,” he added.

Industry pushback

However, not all stakeholders are on board with the changes.

Jack Madrid, president and CEO of the IT & Business Process Association of the Philippines, acknowledged that while the VAT on Digital Services Law is unlikely to directly impact his members, concerns loom over another recent BIR circular.

Celeste Ilagan, IBPAP’s COO, pointed to Revenue Memorandum Circular (RMC) 5-2024 issued in January 2024.

The circular introduces a Philippine withholding tax on payments for services rendered by non-resident foreign corporations (NRFCs), even when these services are provided entirely outside the country. The key factor is that utilization occurs within Philippine territory.

“We are deeply concerned about this,” Ilagan said during an online press conference. “RMC 05-2024 imposes additional costs that local BPOs had not accounted for in their budgets. This could jeopardize their competitiveness and operational viability.”

Ilagan confirmed that the association, along with other business groups, has submitted a position paper opposing the circular and has engaged with government officials, including Secretary Frederick Go and Senator Sherwin Gatchalian, to discuss their concerns.

“We are hopeful that they will reconsider the implementation of this policy,” she added.

Some industry observers said the VAT on Digital Services reflects broader efforts to adapt the regulatory environment to the realities of a rapidly evolving marketplace.

Others underscored the delicate balance between fostering local business growth and addressing the concerns of established industries that may feel threatened by new tax regulations.

The DTI’s support for the VAT law may boost local MSMEs, a businessman who requested anonymity told DAILY TRIBUNE. He explained that the ongoing debate surrounding the RMC highlights the complexities of taxation in a globalized economy, where local players are increasingly competing against foreign entities.

The coming months will be crucial as stakeholders assess the law’s impact and look at the shifting landscape of digital services in the Philippines, he explained.