The rise of the digital economy has prompted the Philippine government to modernize its tax framework, ensuring fair and equitable taxation across all business platforms. A significant development in this area is the implementation of Value-Added Tax (VAT) on digital services consumed in the Philippines, regardless of the service provider's location. This blog post will explore the key aspects of these new regulations.

The Legal Mandate: Republic Act No. 12023

The foundation for these new regulations is Republic Act No. 12023 - “the Digital Service Act”, signed into law on October 2, 2024. This Act amended several sections of the National Internal Revenue Code of 1997, as amended, and introduced new sections (108-A and 108-B) specifically imposing VAT on digital services consumed in the Philippines. The primary goal is to level the playing field between local and foreign digital service providers (DSPs) and to capture revenue from the burgeoning digital marketplace.

Implementing Rules and Regulations: Revenue Regulations No. 3-2025

To provide the specific guidelines and procedures for implementing RA No. 12023, the BIR issued Revenue Regulations (RR) No. 3-2025 on January 16, 2025. This comprehensive regulation outlines the scope, coverage, registration requirements, and tax obligations for DSPs, both resident and non-resident.

Key Provisions of RR No. 3-2025 (with Coverage Examples):

• Coverage: The regulations cover any service supplied over the internet or other electronic network with the use of information technology, where the supply 1 is essentially automated and involves minimal human intervention. Here are some examples:

  • Online Search Engines: Services like Google Search and Bing.

  • Online Marketplaces or E-marketplaces: Platforms such as Lazada, Shopee, Amazon, and AirBnB (for booking accommodations).

  • Cloud Services: Including Google Drive, Dropbox, Amazon Web Services (AWS), and Microsoft Azure.

  • Online Media and Advertising: Services like Facebook Ads, Google Ads, and sponsored content on digital platforms.

  • Online Platforms: This includes streaming services like Netflix, Spotify, YouTube Premium, online gaming platforms, and social media platforms offering paid features.

  • Digital Goods: Such as downloadable e-books from Amazon Kindle, digital music from Spotify or Apple Music (purchases), software licenses, mobile applications purchased from app stores, and digital art.

  • VAT Rate: A 12% VAT is imposed on the gross sales derived by DSPs from the supply of digital services consumed in the Philippines. This means that the price consumers across the Philippines pay for these services will likely include VAT.

• Consumption Rule: Digital services are considered consumed in the Philippines if the buyer is located in the Philippines, determined based on payment information (e.g., credit card billing address), residence information, access details (IP address), or other relevant factors. For instance, if someone in Makati pays for a Netflix subscription using a Philippine credit card, the service is deemed consumed in the Philippines.

  • Registration Requirements:

    • Resident DSPs: Follow existing BIR registration procedures under Section 236 of the Tax Code. This includes local Filipino companies providing digital services.

    • Non-Resident DSPs: Must register with the BIR through the VAT on Digital Services (VDS) Portal. They may appoint a local third-party service provider for administrative matters. The deadline for registration for non-resident DSPs was initially April 2, 2025, but Revenue Regulations No. 14-2025, issued on April 25, 2025, extended this to June 1, 2025. This affects companies like Netflix or Spotify that have Filipino subscribers but no physical office in the Philippines.

  • VAT Liability and Remittance:

    • B2C Transactions (Business-to-Consumer): Non-resident VAT-registered DSPs are directly liable for filing VAT returns and paying the VAT due through the VDS Portal. So, when a Filipino consumer subscribes to a foreign streaming service, that service provider is responsible for collecting and remitting the VAT.

    • B2B Transactions (Business-to-Business): Philippine-based businesses purchasing digital services from non-resident VAT-registered DSPs are liable for withholding the 12% VAT and remitting it to the BIR (reverse charge mechanism). For example, if a marketing agency in Quezon City uses a foreign cloud-based software, the agency is responsible for withholding and remitting the VAT on that subscription.

  • Invoicing Requirements:

    • Resident DSPs must issue VAT-compliant sales invoices, as they would for any other VATable transaction.

    • Non-resident DSPs must issue digital sales or commercial invoices containing specific details (date, transaction reference, buyer ID if applicable, description, total amount including VAT), which do not need to be registered with the BIR.

  • Input Tax: Resident VAT-registered DSPs can claim input VAT on their related business expenses. Non-resident DSPs are not allowed to claim input VAT.

  • VAT-Exempt Digital Services: Certain digital services, such as online courses offered by accredited Philippine educational institutions and subscription-based services to government educational bodies (DepEd, CHED, TESDA), are exempt from VAT.

  As mentioned, Revenue Regulations No. 14-2025 introduced amendments to RR No. 3-2025, primarily focusing on extending the deadlines for non-resident DSPs to register and comply with the VAT obligations. The collection and payment of VAT by non-resident DSPs now commence on June 2, 2025.

  Implications for Businesses and Consumers in the Philippines:

  These new regulations have significant implications for businesses and consumers in Metro Manila and across the Philippines:

  Clarifications and Updates: Revenue Regulations No. 14-2025

  • Digital Service Providers (Local and Foreign): Must understand their registration and tax obligations to ensure compliance and avoid penalties, which can include closure or blocking of digital services.

  • Businesses Consuming Digital Services: Need to be aware of the VAT implications on their purchases, particularly from non-resident DSPs where the reverse charge mechanism applies. This can affect everything from software subscriptions to online advertising costs.

  • Consumers: Will likely see the 12% VAT reflected in the pricing of many digital services they use regularly.

  Staying Updated:

  The BIR has also been actively disseminating information through its official website and other channels. It's crucial for businesses and consumers involved in digital services or online transactions to stay updated on any further memoranda, circulars, or clarifications issued by the BIR regarding these regulations.