The Government Wants to Impose 12% VAT on 'Digital Transactions.' But Will It Work?

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Don’t check out that cart just yet.

The House committee on ways and means has approved a bill that will impose value-added tax (VAT) on digital transactions, thereby amending the National Internal Revenue Code of 1997.

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According to the bill, “Any person who, in the course of trade or business, sells, barters exchanges, leases goods or properties—including those in digital or electronic in nature—renders services, including those rendered electronically, and any person who imports goods shall be subject to the VAT.”

Now that seems pretty broad, but small businesses need not fret. The bill is aimed at taxing “digital service providers,” foreign and local, by 12 percent VAT.

What does this mean? It means online shopping will be more expensive if the bill is signed into law.

What Exactly Will be Taxed?

The bill defines “digital service provider” as the following:

  • A platform provider for promotion that uses the internet to deliver marketing messages to attract buyers;
  • A host of online auctions conducted through the internet, where the seller sells the product or service to the person who bids the highest price;
  • A supplier of digital services to a buyer in exchange for a regular subscription fee over the usage of the said product or service;
  • A supplier of electronic and online services that can be delivered through information technology structure such as the internet, or
  • A third party that acts as a conduit for goods or services offered by a supplier to a buyer and receives commission.

When it comes to foreign services, like Netflix and Spotify, the bill clarifies that only services that have gross sales exceeding P3 million or likely to exceed P3 million will be taxed.


Now, if small businesses don’t fit this description, what does?

Which 'Digital Transactions' Could Be Affected?

  • Netflix
  • HBO Go
  • Amazon
  • Lazada
  • Shopee
  • Zalora
  • Spotify

Those are the obvious services. But the bill can also include the following types of digital transactions:

Mobile applications, video games, online games, firewalls, advertising platforms, social media, website hosting, Cloud storage, online courses, publication subscriptions, and even payment processing services.

That means your New York Times subscription could get more expensive, and even your Google payments might get taxed. Even the diamonds you purchase on Mobile Legends could be affected.

Is it Feasible? 

The Philippines now joins a number of other countries that are trying to tax the internet. A number of states in the U.S.A. have already started taxing digital services like Netflix by 6 percent. Meanwhile, closer to home, Indonesia has also imposed its own 10 percent tax on services like Google. 

The Philippines' 12 percent VAT hopes to raise funds for the government, which is still reeling from the pandemic and struggling to find ways to jumpstart the economy and repay our debts. According to the Department of Finance, the tax on digital transactions could raise over P9 billion in government funds.

However, there are a number of loopholes in the internet for platforms and users to hide behind, like virtual private networks (VPNs) that can (theoretically) change your location and IP address so you can avail of a subscription plan in a country that doesn't impose digital taxes. There are also plugins that let you bypass subscription plans on websites like the New York Times. And tracking netizens who are tech-savvy enough to practice this strange breed of "tax evasion" is another question altogether. 

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Taxing the internet is still relatively uncharted territory. Only a handful of countries around the world have digital taxes, and if this pushes through, the Philippines will be one of the few to see how easy or difficult it will be to impose digital taxes.

The bill is still months away from becoming law, so for now, you might as well get your fill on Lazada and Netflix while the tax is still being discussed. Or you might find that online shopping won't be so fun with a 12 percent VAT added to the mix.

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Anri Ichimura
Section Editor, Esquire Philippines
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