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DigiTax: Government Response to Increased Demand
Benjamin Franklin once said, “In this world, nothing can be said as insurance except death and taxes.” I came across this quote in high school, but it was only now, while still appreciating the tax law, that I really understand what Mr. Franklin meant.
In fact, the government has the inherent power to tax. As the government’s tax reform efforts continue, the Philippine Congress continues to actively investigate how our tax system can be updated to keep up with current business practices and innovations. Online transactions and services are no exception, especially with the rise in electronic transactions during the COVID-19 pandemic.
In fact, online services offer convenience, making it easy for us to stay at home according to the recommendations of health authorities and still accomplish things we used to do personally before COVID-19 suddenly changed the way we do things. .
As such, it is not surprising that there are several bills and resolutions on the taxation of digital transactions introduced in the lower house, namely House Bill (HB) Nos. 4531, 6765, 6944 and Resolution (HR) 685. However, on August 18, the Ways and Means Committee submitted HB 7425 to the House of Representatives that would serve as a substitute for all the aforementioned bills on the digital transaction tax. .
Definition of digital services
Unlike the current provisions of the Tax Code, as amended, on Value Added Tax (VAT) that do not specifically mention online or electronic transactions, HB 7425 seeks to introduce amendments that impose a 12 percent VAT on digital service providers (DSPs), whether resident or non-resident, in their sales of goods or properties that are digital or electronic in nature and services provided electronically in the Philippines.
Digital services are more specifically defined as services provided or subscribed over the Internet or other electronic network that cannot be obtained without the use of information technology. It includes the online licensing of software, webinars, search engine services, social networks, and the provision of digital content and information, among others.
In fact, HB 7425 includes in the definition of the sale of services, among others, the following: 1) Provision of advertising space and other services for online advertising purposes. 2) Provision of digital services in exchange for a regular subscription fee. And, 3) Provision of electronic or online services that can be delivered through an IT infrastructure such as the Internet.
Please note, however, that the imposition of 12 percent VAT on digital transactions will not include the electronic or online sale, import, printing or publication of books and any newspaper, magazine, magazine or newsletter that appears at regular intervals with fixed prices or subscription and sale and that is not mainly dedicated to the publication of paid advertisements as provided in Section 109 (R) of the Tax Code.
DSP subject to 12% VAT
HB 7425 defines a DSP as a service provider of digital goods or services, whether residents or non-residents of the Philippines, through the operation of an online platform or through transactions for the provision of digital services to a specific buyer (ie that is, anyone who resides in the Philippines and purchases digital services subject to tax in the Philippines, whether for personal consumption or for business purposes). DSPs may include: 1) A third party selling products on its own account or for others as an intermediary through information-based technology or the Internet: 2) A platform provider for promotional / marketing messages through the Internet: 3 ) A series of online auctions conducted over the Internet: 4) A digital service provider to a buyer in exchange for a regular subscription fee on the use of said product or service: AND, 5) A provider of goods or services online that can be delivered through an information technology infrastructure, such as the Internet.
The requirement that non-resident DSPs register as VAT payers
Under HB 7425, a non-resident DSP must register as a VAT payer if its gross sales for digital services during the last 12 months prior to the VAT filing date have exceeded P3 million, or if there are reasonable grounds to believe that the gross sales of its digital services during the next 12 months from the date of filing of the VAT return will exceed P3 million. The Internal Revenue Office (BIR) will present a simplified registration system for non-resident DSPs. In addition, such nonresident VAT registered DSPs may issue an electronic invoice or receipt subject to the rules prescribed by the Secretary of Finance on the recommendation of the Internal Revenue Commissioner.
Treatment of VAT borne by non-resident DSP registered in VAT
It is worth noting that one of the unique features of HB 7425 is that non-resident DSPs are prohibited from claiming input tax as credits against output VAT liability. This is different from other VAT registered taxpayers who can claim input tax as credits against input tax to determine VAT payable for a specified period.
VAT withholding for non-resident DSPs that are not registered for VAT purposes
Non-resident DSPs registered with VAT are the ones who are required to collect and remit VAT for electronic transactions. On the other hand, non-registration in the BIR does not exclude these non-resident DSPs from paying VAT, since it can be inferred from HB 7425 that non-resident DSPs that are not registered in VAT will be subject to a withholding of 12%. percent of VAT on services rendered in the Philippines.
Effectiveness
HB 7425 establishes a transition period of 180 days from the effective date of the law before VAT can be imposed on non-resident DSPs.
The government’s efforts to keep our tax laws up to date with technology and globalization are certainly commendable. Imposing a digital tax on large DSPs can certainly help the government raise more revenue to fund its COVID-19 response efforts and Build Build projects. However, since VAT is an indirect tax, the burden of assuming such VAT on digital transactions may ultimately fall on consumers. There should also be clearer guidelines on how VAT will be collected from non-resident PSDs and whether an entity must be established in the Philippines solely for the purpose of meeting VAT compliance requirements. Another interesting question would be how the change in the definition of sale of services would affect the situation rules on sales of services for income tax purposes. Hopefully, these elements can be cleared up before Congress finalizes the proposed law on digital transaction taxes.
Jalen Nicole V. Balalio is an associate in the tax group of KPMG RG Manabat & Co. (KPMG RGM & Co.), the Philippine member firm of KPMG International.
This article is for general information purposes only and should not be considered as professional advice for a specific topic or entity.
Points of view and opinions expressed in this document are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM & Co. For comments or inquiries, please email ph-inquiry @ kpmg. com.
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