RA 12023: Digital Service Act

Republic Act No. 12023: Digital Service Act (12% VAT on Digital Service Providers)

Date of Publication: 3 October 2024 (Official Gazette)

Effectivity Date: 18 October 2024

2 October 2024 – President Ferdinand Marcos, Jr. signed Republic Act No. 12023, imposing Value-Added Tax (VAT) on Digital Services Providers (DSP) by amending l certain sections of the National Internal Revenue Code of 1997 (the “Tax Code”).

The salient provisions of the DSP Law are as follows:

1. Section 1 of the DSP Law amends Section 105 of the Tax Code (Person Liable) by including digital services within the coverage of VAT. In addition, the digital services delivered by nonresident digital service provider shall be considered performed or rendered in the Philippines IF the digital services are consumed in the Philippines.
2. Section 3 of the DSP Law adds new section designated as Section 108-A of the Tax Code providing “Liability of Persons Providing Digital Services”. DSPs, whether resident or nonresident, shall be liable for assessing, collecting, and remitting the VAT on the digital services consumed in the Philippines, subject to the provisions of withholding tax in digital services under Section 114 (D) of the Tax Code.
3. Further, Section 3 of the DSP Law defines “digital services” as referring to any service that is supplied over the internet or other electronic network with the use of information technology and where the supply of service is essentially automated. Digital services shall include:
   1. Online search engine;
   2. Online marketplace or e-marketplace;
   3. Cloud service
   4. Online media and advertising;
   5. Online platform; OR
   6. Digital goods
4. “Digital service provider” refers to a resident or nonresident supplier of digital service to a consumer who uses digital service subject to VAT in the Philippines.
5. “Nonresident digital service provider” means a digital service provider that has no physical presence in the Philippines.
6. Section 4 of the DSP Law adds a new section designated as Section 108-B of the Tax Code indicating the liability of a Nonresident DSP to VAT, requiring registration for VAT under Section 236 (F) of the Tax Code (Persons Required to Register for VAT).
   1. A Nonresident DSP required to be registered for VAT shall be liable for the remittance of VAT on the digital services that are consumed in the Philippines IF the consumers are non-VAT registered;
   2. On the other hand, if the consumers are VAT-registered, the provision of Section 114 of the Tax Code (Reverse Charge Mechanism in Digital Service) shall apply.
   3. If a VAT-registered nonresident DSP is classified as an online marketplace or e-marketplace, it shall also be liable to remit the VAT on the transactions of the nonresident sellers that go through its platform. Provided, it controls key aspects of the supply and performs any of the following:
      1. It sets, either directly or indirectly, any of the terms and conditions under which the supply of goods is made; or
      2. It is involved in the ordering or delivery of goods, whether directly or indirectly.
7. Section 5 of the DSP Law amends Section 109 of the Tax Code on VAT-Exempt Transactions, to wit:
   1. Educational services, including online courses, online seminars, and online trainings, rendered by private educational institutions, duly accredited by the Department of Education (DepEd), the Commission on Higher Education (CHED), the Technical Education and Skills Development Authority (TESDA) and those rendered by government educational institutions; and sale of online subscription-based services to DepEd, CHED, TESDA, and educational institutions recognized by said government agencies; and
   2. Services of bank, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries, including those rendered through different digital platforms
8. Nonresident DSP are not allowed to claim creditable input tax as expressly provided in Section 6 of the DSP Law, amending Section 110 of the Tax Code.
9. As to Invoicing Requirements for VAT-registered person under Section 113 of the Tax Code, the digital sales or commercial invoice issued by a VAT-registered nonresidential DSP shall indicate the following information in lieu of the “Information contained in the VAT Invoice, to wit:
   1. Date of transaction;
   2. Transaction reference number;
   3. Identification of the consumer
   4. Brief Description of the transaction; and
   5. The total amount with the indication that such amount includes the VAT.
10. For mixed transactions (i.e. VATable, VAT zero-rated or VAT Exempt), the invoice shall clearly indicate the breakdown of the sale price, and the calculation of the VAT shall be shown on the invoice.
11. Section 113 (C) of the Tax Code, as amended by Section 7 of the DSP Law, provides that Accounting Records (i.e. books of accounts) shall not apply to VAT-registered nonresident DSPs.
12. Payments for services to nonresident suppliers who are not registered under Section 236 (Registration Requirements) shall be subject to 12% withholding VAT at the time of payment
13. Section 8 of the DSP Law, amending Section 114 of the Tax Code, introduces “Reverse Charge Mechanism in Digital Services” whereby a VAT-registered taxpayer shall be liable to withhold and remit the VAT due on its purchase of digital services consumed in the Philippines from nonresident DSPs to the BIR, within ten (10) days following the end of the month the withholding was made.
14. The Commission of the Internal Revenue have the power to suspend and block the digital services performed or rendered in the Philippines by the DSP for its failure to register for VAT. This shall be implemented by the Department of Information and Communication Technology (DICT), through the National Telecommunications Commission (NTC).
15. For those DSPs required to register for VAT under Section 236 (F) of the Tax Code, as amended by DSP Law, [i.e. (a) gross sales for the past 12 months, other than those VAT-exempt transactions, have exceeded the VAT threshold of Php3M, and (b) reasonable ground to believe that the gross sales for the next 12 months, other than those VAT-exempt transactions, will exceed the VAT threshold of Php3M], the BIR shall establish a simplified automated registration system which shall be prescribed by the Secretary of Finance, upon the recommendation of the Commissioner.
16. Any communication, notice, or summons to a nonresident DSP can be made via electronic mail messaging (Section 13. Mode of Correspondence, DSP Law).
17. DSPs shall immediately be subject to VAT under this law after one hundred twenty (120) days from the effectivity of the implementing rules and regulations (Section 14. Transitory Clause, DSP Law)
18. Not later than ninety (90) days from the effectivity of this Act, the Department of Finance (DOF), upon the recommendation of the BIR, and in coordination with the DICT and the NTC, and upon consultation with the stakeholders, shall issue rules and regulations for the effective implementation of this act (Section 15. Implementing Rules and Regulations, DSP Law).

A copy of the DSP Law can be accessed through the link below.