VAT on Digital Services Law elevates playing field for MSMEs—DTI

The Department of Trade and Industry has expressed full support for the newly signed Value-Added Tax (VAT) on Digital Services Law, deemed to create a more level playing field for micro, small, and medium enterprises (MSMEs).

Signed by President Ferdinand Marcos Jr. on Wednesday, Republic Act 12023 is expected to generate an additional P105 billion of revenue over the first five years of implementation, as it strengthens the Bureau of Internal Revenue’s (BIR) authority to collect VAT on digital transactions and clarifies how the DSPs (digital service providers) can comply with the VAT requirement imposed under the National Internal Revenue Code (NIRC).

Trade Secretary Cristina Roque expressed her support for the law, stating that it aligns with the DTI's commitment to fostering a level playing field for businesses, empowering MSMEs in the digital age, and protecting consumers.

“This landmark legislation is a significant step towards creating a more equitable and inclusive digital economy in the Philippines. By ensuring that all digital service providers, regardless of origin, contribute their fair share to the country’s tax system, we are promoting healthy competition and supporting the growth of our local MSMEs,” said Roque.

“The law levels the playing field for our local MSMEs by removing the unfair advantage previously enjoyed by foreign digital service providers. With a more competitive landscape, our MSMEs can better leverage digital technologies to innovate, expand their reach, and thrive in the global marketplace," she added.

Not a new law

In a press briefing at the Palace hours after President Marcos Jr. signed the law, BIR Commissioner Romeo Lumagui Jr. expressed that the law will lead to more equitable tax compliance among local and foreign businesses in the Philippines.

Lumagui explained that under the previous tax system, only those who purchased digital services locally were subject to a 12 percent value-added tax, while those provided remotely by foreign businesses were not.

“This is not a new tax, just to clarify, but a crucial step in ensuring fairness in competition in our rapidly evolving digital economy. For too long, local digital service providers have carried on and carried the tax burden of VAT while foreign DSPs or digital services providers, though profiting from our consumers, have not,” he said.

“This new law corrects that imbalance by subjecting all digital service providers, both local and foreign, to the same 12 percent value-added tax,” he added.

Lumagui further noted that the VAT on Digital Services Law provides welcome support for the BIR’s efforts to collect due taxes.

“This law promotes for competition and trade that both local and foreign DSPs compete on equal footing and in doing so we create a more competitive marketplace, where consumers will ultimately benefit from improved services and fairer pricing,” he said.