Marcos signs VAT on foreign digital services law

MANILA – President Ferdinand R. Marcos Jr. signed into law on Wednesday a measure imposing a value-added tax (VAT) on foreign digital services providers (DSPs).

A priority measure of the administration, Republic Act (RA) 12023 imposes a 12 percent VAT on foreign DSPs, such as Netflix, Disney, and HBO, to generate additional revenue for the government.

In his message, Marcos said the new law would level the playing field for local providers.

"If you are reaping the rewards of a fruitful digital economy here, it is only right that you contribute also to its growth. After all, whether you are a small tech startup or a global tech giant based halfway around the world, if you are making money here in the Philippines, you're a part of our community, and with that comes a shared responsibility," Marcos said.

According to the President, about P105 billion in revenue is expected to be collected in the next five years due to RA 12023.

The amount is enough to build 42,000 classrooms, more than 6,000 rural health units, and 7,000 km of farm-to-market roads, the Chief Executive noted.

Additionally, 5 percent of the revenues generated by the law will be allocated to the local creative industry.

"This means our artists, filmmakers, musicians, the very people who fill our platforms with storage and the content, will directly benefit. It ensures that our creative talents are not just surviving in a competitive digital market, but will be allowed by fairness and progress," Marcos said.

The President thanked the legislators for passing the measure even as he called on companies covered by the law to support and heed the rules of the Act.

Senator Sherwin Gatchalian, meanwhile, said the new law is expected to address revenue losses by clarifying the taxability of non-resident digital service providers and addressing the ambiguity in the previous law.

"We believe in the importance of creating an environment where our digital services providers, whether they are nonresident or local, operate under fair and square tax policies," Gatchalian said in a statement.

He said the new measure does not mean a new tax imposition.

"Hindi tayo nagpapataw ng bagong buwis. Kokolektahin lang natin ang buwis na dapat naman talaga nating nakokolekta mula sa mga dayuhang (We are not imposing new taxes. We will only collect the tax that we should be collecting from foreign) digital service providers," he said.

Finance Secretary Ralph Recto, for his part, said the enactment of the VAT on digital services will ensure equitable tax treatment on all digital businesses and will boost revenue collections.

"This is not a new tax mechanism. We are just merely correcting the current system that creates an unfair advantage to foreign digital service providers and weakens the country's tax base, forgoing much-needed revenues that could have been used to fund crucial public services, infrastructure, and other socio-economic programs," Recto said in a statement on Wednesday.

"By doing this, we foster fairness, competition, and inclusion in our tax system and marketplace. Whether you are a local entrepreneur or a global giant, everyone will play by the same rules," he added.

The new law strengthens the Bureau of Internal Revenue's (BIR) authority to collect the value-added tax on digital services by providing measures on how foreign DSPs can comply with the value-added tax requirements under the Philippine Tax Code.

Foreign DSPs whose gross sales or receipts for the past year have exceeded P3 million are required to register for value-added tax.

Foreign DSPs are required to designate a representative office or agent – a resident corporation registered under Philippine law to assist in compliance with the provisions of the Tax Code.

Non-compliant businesses will be temporarily suspended.

House Ways and Means Committee Chair Joey Salceda said the Philippine creatives sector, including artists, artisans, and producers, stands to gain the most from the newly enacted law.

Salceda commended President Marcos for signing the law, which addresses the disparity between domestic and foreign creatives.

"The Philippine creatives sector, artists, artisans, producers, are the biggest winners in this law," he said.

Salceda added that prior to the law, foreign companies in the digital space were able to sell products to Filipino consumers without the 12-percent VAT burden, creating an uneven playing field for local artists and producers.

"For the longest time, our VAT system has taxed domestic creatives while allowing foreign companies to sell to Filipinos without any tax. This meant that our local creatives sector was competing with their hands tied behind their backs while foreigners had full access to our market," he said.

Salceda said the law ends this unfair treatment and will generate between P8 billion to P12 billion in its first year, with the executive branch projecting even higher revenues.

He said the 5-percent earmark for the Philippine creatives industry over the next decade could be a potent source of growth for the country.

Salceda drew comparisons to South Korea's investment in its cultural sector following the 1997 Asian financial crisis and the 2008 global recession, suggesting that the Philippines can similarly boost its creatives industry with targeted support.

"The Philippines is ASEAN's largest creatives sector exporter, and we have an absolute advantage in this field due to our culture, predisposition, and multilingual society. It is time we invest heavily here," he said. (PNA)