Philippines Introduces New VAT Obligations for Foreign Digital Service Providers
On October 2, 2024, the Philippine Congress passed the Republic Act (R.A.) No. 12023, extending VAT obligations to foreign digital service providers. This legislation expands the scope of VAT responsibilities to non-resident service providers, impacting both B2B and B2C transactions.
Key Provisions of the New Law
Foreign digital service providers will be subject to VAT if they meet the following criteria:
- The service is offered through the Internet or another electronic network using information technology, with a significant portion of the service being automated.
- The service is consumed within the Philippines.
- The digital service provider's gross sales liable to VAT exceed 3 million Philippine pesos (approximately EUR 47,900) over the last 12 months, or are expected to exceed this threshold in the coming 12 months.
The VAT rate on these services will be 12%, with certain exemptions for educational and financial service providers.
VAT Obligations for Different Transaction Types
The VAT obligations vary depending on the nature of the transaction:
- B2B Transactions: For VAT-registered taxpayers, the reverse charge mechanism applies. This means the buyer must withhold and remit the VAT on the transaction.
- B2C Transactions: For non-VAT-registered taxpayers, the non-resident digital service provider is responsible for remitting the VAT.
In addition, non-resident online marketplaces through which digital service providers offer services will also be held liable for VAT, particularly if they control critical aspects of the service supply.
Next Steps for Affected Businesses
Foreign digital service providers must register for VAT either physically or electronically and issue invoices for all sales. The law will be enforced 15 days after its publication in the Official Gazette or another widely circulated newspaper, and detailed implementing regulations will be announced within 90 days of the law’s effect.
Starting 120 days after these regulations are released, non-resident digital service providers will be required to comply with the VAT obligations.
Penalties for Non-Compliance
Failure to register for VAT and comply with the new regulations could result in the suspension of operations in the Philippines for non-compliant service providers.
This new VAT framework underscores the Philippine government's effort to ensure fair taxation in the digital economy, ensuring that foreign digital service providers contribute to the local tax system. Businesses impacted by the changes should take immediate steps to understand their obligations and prepare for VAT registration and compliance.
There’s more you should know about e-invoicing in the Philippines – learn more about the new and upcoming regulations.
