Following news that Netflix and Steam will be implementing a 12% VAT on all of their products and services, Filipinos are outraged at the price hikes that are a direct effect of the Digital Services Law.
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We understand that you hate paying more taxes for digital services, but we all need to understand what the law is about and why there’s a need to implement it.
What is the Digital Services Law?
Signed by President Bongbong Marcos on October 2, 2024, Republic Act (RA) 12023 (also known as the Value-Added Tax on Digital Services) aims to level the playing field between local and foreign digital service providers (DSPs) by mandating a 12% value-added tax on all digital services consumed in the Philippines. Prior to the enactment of the law, only local digital service providers were subject to paying the 12% value-added tax.
What platforms are affected?
It affects all digital services offered by both local and foreign companies. Those included are:
- Streaming Services (Netflix, Spotify, YouTube Premium, Apple Music, Amazon Prime Video, Disney+)
- App Stores and Software Providers (Apple App Store, Google Play Store, Microsoft 365, Adobe Creative Cloud)
- Freelancing and Gig Platforms (Upwork, Fiverr, Toptal)
- Cloud and Hosting Services (Amazon Web Services (AWS), Google Cloud, Dropbox, Microsoft OneDrive)
- E-Commerce and Online Marketplaces (Shopify (for subscription fees), Etsy (if they charge subscription or listing fees))
- Online Learning Platforms (Udemy, Coursera, Skillshare, LinkedIn Learning)
- Gaming Platforms (Steam, Epic Games Store, PlayStation Store, Xbox Game Pass)
While the law covers all digital services, it exempts services sold on a subscription basis to educational institutions recognized by DepEd, CHED, and state universities and colleges. Also exempted from the Digital VAT are financial services from registered banks (BPI, BDO, Security Bank), non-bank financial institutions (Sun Life, Pru Life UK, Manulife), and BSP-regulated Virtual Asset Service Providers (Maya, Coins.ph, GoTyme Bank).
Why is the Digital Services Law necessary?
Finance Secretary Ralph Recto explained during the signing of the law that it is not a new tax mechanism. Instead, the Digital Services Law aims to correct the current system “that creates an unfair advantage for foreign digital service providers and weakens the country’s tax base”. In short, Recto positions the Digital Services Law as a means of fostering “fairness, competition, and inclusion in our tax system”.
What benefits do we get from the Digital Services Law?
The government promises that for the next 5 years from the law’s effectivity, 5% of the collected VAT will be used to help the local creative industry to “foster innovation and empower the next generation of Filipino creators and entrepreneurs.” On paper, that sounds similar to what South Korea is doing to help its local creative industry in producing KDramas, Webtoons, and Korean Movies on different platforms instead of selling rights to overseas platforms.
What are the requirements for compliance?
Aside from needing to register with the BIR and adding 12% VAT on their digital services, digital service providers are also required to issue invoices that show the VAT separately, file VAT returns, and pay the collected VAT to the BIR on a regular basis. For Filipino users of these platforms, the additional VAT may be reflected in their subscription fees, purchase costs, or other charges.
Foreign digital service providers are required to register with the BIR through the Virtual Digital Service (VDS) Portal and need to collect the 12% VAT and pay it to the Philippine government on a regular basis.
When is the formal implementation of the 12% Digital VAT?
The BIR expects all digital services to comply by June 1 and start collecting the 12% Digital VAT by June 2. With Steam and Netflix announcing their compliance, expect other digital services to follow through in the coming weeks.
