By Kenneth Christiane L. Basilio
SENATORS and congressmen in a bicameral conference committee on Thursday approved a bill that seeks to levy a 12% value-added tax (VAT) on digital services provided by companies outside the Philippines.
In a statement, Albay Rep. Jose Ma. Clemente “Joey” S. Salceda said the bicameral conference committee agreed to allow the Department of Finance (DoF) to set withholding tax rates for companies falling under the P3-million VAT threshold under the Tax Reform for Acceleration and Inclusion (TRAIN) Law.
This is to protect small online businesses, he said, adding that laws such as the Barangay Micro Business Enterprise Act and Ease of Paying Taxes Act would protect them from excessive taxes.
The measure is expected to generate P18 billion in its first year of enactment, Mr. Salceda, who heads the House of Representatives ways and means committee, said.
“The [bicameral conference committee] quickly agreed… on withholding taxes for percentage taxpayers… which will allow the secretary of Finance to set withholding tax rates for those who are not VAT-covered,” Mr. Salceda said.
“We obtained assurances that small taxpayers will not be subject to excessive audits or complicated compliance. What the DoF proposal simply does is instead of paying their percentage taxes at the end of the year, the taxes will be withheld,” he added.
Digital services refer to those provided over the internet or other electronic networks using information technology. These include online search engines, online marketplaces, cloud services, online media and advertising, online platforms and digital goods.
The bill covers e-commerce companies such as Amazon, Shein, Rakuten, Taobao, AliExpress and Temu, which are all outside the Philippines.
It will also cover foreign streaming platforms such as Netflix, Disney and HBO, Senator Sherwin T. Gatchalian, who led the Senate delegation in the bicameral conference committee, said in a separate statement.
“Businesses of digital services from abroad were not subject to VAT prior to this law,” Mr. Salceda told BusinessWorld in a Viber message. “So everything from, say, software purchases directly online to independent services delivered from abroad for Philippine companies, they don’t get to charge input VAT for that.”
Failure to tax foreign digital companies also harms their domestic rivals, he added.
“During the pandemic, at the peak of the displacement of traditional goods by digital services, we allowed foreign digital service providers unfettered and untaxed access to the Philippine market,” he said.
“While resident content producers were subject to VAT and income taxes, foreign service providers were not.”
This created an “unfair situation” for domestic digital services providers, he said.
House members of the bicameral committee pushed to earmark 5% of the bill’s revenues — about P900 million — to support the domestic digital creative industry.
The proposed law could affect the revenue of foreign digital service companies, Robert Dan J. Roces, chief economist at Security Bank Corp., told BusinessWorld.
“While it could generate much needed government revenue for social programs or infrastructure, the impact on both businesses and consumers should require careful consideration,” he said in a Viber message.
“Companies may absorb the VAT, hurting profits, or pass it on to Filipino consumers, leading to higher prices for streaming services, online games and more,” he added.
Mr. Roces said Congress might eventually explore alternative tax models or flat fees on specific services to balance revenue generation with fostering a thriving digital landscape.
“The National Government is expected to arrive at an optimal digital tax strategy that ensures the Philippines benefits from the digital age without stifling innovation or consumer choice,” he added.
Collecting the VAT could be a challenge, Leonardo A. Lanzona, an economics professor at the Ateneo De Manila University, said in a Facebook Messenger chat.
“Foreign companies may face challenges in complying with these taxes, including understanding new tax rules, filing requirements and potential double taxation if similar taxes exist in other countries,” he said.
