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Philippines bill proposing VAT on foreign digital service supplies moves a step closer to becoming law

A Philippines House Bill designed to tax digital services supplied by non-residents has gained Congressional approval. The standard 12% VAT rate is to apply.

The Philippines has moved a step closer to becoming the latest Asian nation to extend its VAT system to foreign-supplied digital services.

On September 21, the country’s House of Representatives passed the third reading of House Bill 7425. House Bill 7425 (previously HB 6765) received approval by the Philippines House Ways and Means Committee in late July 2020. It proposes that a standard 12% VAT rate will apply to affected digital services (e.g. streaming apps, social media ads and sales via online platforms).

There is a threshold level of PHP3,000,000 (circa USD62,000 at time of publication). This threshold is based on gross sales for the previous 12 months and if "there are reasonable grounds to believe that gross sales for the next 12 months" will exceed PHP3,000,000. 

The Bill also provides for a 180-day transition period for the Philippines tax authority to "establish implementation systems before VAT is imposed".

Last year, Representative Joey Salceda, the chairperson of the Philippines House Ways and Means committee, told the the Inquirer website it is estimated that the Philippines will lose PHP120 billion (circa USD2.36 billion) due to tax changes introduced by the government to “soothe the pain inflicted by COVID-19 on businesses”. 

Another of the bill’s co-sponsors, Representative Sharon S. Garin. Garin, recently stated that the passage of the bill would raise P10 billion (circa USD205 million) for the Philippines Government. 

Salceda, previously justified its introduction saying: “They [foreign businesses] have been raking in millions, if not billions, on behalf of the Filipinos, but not a single cent from the VAT. Zero. Simply put, these are not new taxes. These are tax administration measures that we hope will capture the value more fairly.”

The rapid growth of B2C e-commerce in East Asia

The reference to the monetary boost is all the more relevant given a recent World Bank report that revealed East Asian countries are "losing a substantial volume of tax revenue by failing to apply current VAT rules to digital services". The report states: “Evidence from East Asia indicates that the rapid growth of B2C e-commerce has resulted in equally significant growth in the tax potential of the sector, with the indirect tax potential growing some eightfold, rising from US$0.46 billion in 2015 to US$3.7 billion in 2019.”

It is this growth that the Philippines bill aims to harness for tax revenue purposes. Digital services are becoming more of a target as sales (in general) have risen due to lockdown measures forcing customers to remain at home. As the popularity of such digital services increases, so too does the chance that they will become a target for tax authorities in need of additional revenue in this time of crisis.

Potential obligation for both digital and physical goods mirrors a global trend

The proposed bill not only focuses on digital services but also on the sale of goods through marketplaces. Marketplaces are suggested as the collectors of VAT on behalf of sellers. This proposed approach mirrors those in other jurisdictions as the rules around the taxation of low value goods change.

This trend started back in 2018 in Australia and has since been replicated in New Zealand (2019), Norway (2020), the UK (from January 2021) and, since July 2021, in the European Union. If the proposed Philippines Bill becomes law, it will become the first jurisdiction to introduce an obligation for both digital and physical goods at the same time.

Philippines VAT on foreign digital services: some background information 

Major tax reform has been hovering below the waterline in the Philippines for some time. The specific taxation of foreign-supplied digital services has been firmly in the sights of the tax authority there. As of October 2019, however, the Bureau of Internal Revenue (BIR) was still "studying the taxation of the digital economy."

The BIR's deputy commissioner Arnel Guballa said: “We also have to tax the digital economy. We have to capture them, pay the taxes. Because what is happening now is, we will go online, we will order, and anything we can order, we can get. There’s no receipt, we don’t pay taxes to the BIR.”

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