The ELA is proud to welcome our newest member firm: LOGOS  in Iceland!
The ELA is proud to welcome our newest member firm: LOGOS  in Iceland!


New bill seeks to impose VAT on digital transactions


Ronald Mark C. Lleno, Patrice Jane L. Romero

Submitted by Firm:
SyCip Salazar Hernandez & Gatmaitan
Firm Contacts:
Rodelle B. Bolante
Article Type:
Legal Update

The Philippine government is seeking to take advantage of the extensive use of digital service providers by Philippine consumers to generate more revenue. In November 2022, the House of Representatives approved House Bill (HB) No. 4122, which amends the National Internal Revenue Code (the Tax Code) by imposing a 12% value added tax (VAT) on digital transactions. As most, if not all, Association of Southeast Asian Nations (ASEAN) countries have already introduced a tax on digital services, the Philippines is seeking to keep in step with its ASEAN neighbors.

HB No. 4122 is currently pending before the Senate. To become law, HB No. 4122 must also be passed on three readings by the Senate and approved by the president.

Proposed amendments to Tax Code

The salient amendments to the Tax Code under HB No. 4122 are as follows:

  • Persons who, during trade or business, engage in the sale, barter, exchange, or lease of digital or electronic goods, or those who render services electronically, are now expressly subject to VAT. This includes non-resident digital service providers.
  • A "digital service provider" refers to a service provider of digital services or goods to a buyer, through operating an online platform for the purposes of buying and selling of goods or services or by making transactions for the provision of digital services on behalf of any person. A digital service provider may be:
    • a third party that sells multiple products, through information-based technology or the internet, for its own account or as an intermediary;
    • a platform provider that uses the internet for marketing purposes;
    • a host of online auctions conducted through the internet;
    • a supplier of digital services in exchange for a regular subscription fee; or
    • a supplier of goods or services that can be delivered through an information technology infrastructure.
  • A "digital service" refers to any service that is delivered or subscribed to over the internet or other electronic network, which cannot be obtained without the use of information technology and which may be automated. This includes, among others:
    • the online licensing of software;
    • mobile apps;
    • video games;
    • online games;
    • webcasts;
    • the provision of digital content;
    • advertisement platforms;
    • online platforms; and
    • social networks.
  • A "buyer" refers to any person who resides in the Philippines or consumes taxable digital services in the Philippines from a digital service provider either for their personal consumption, or for trade or business purposes.
  • The definition of "sale or exchange of services" is broadened to expressly include those services which are rendered electronically or otherwise. It is also specified that the term "sale or exchange of services" includes:
  • the supply by any resident or non-resident person of digital services for the purposes of online advertisement or in exchange for a regular subscription fee; and
  • the supply of electronic and online services that can be delivered through an information technology infrastructure.
  • The list of the transactions exempt from VAT has also been broadened to include an exemption of educational services that are rendered online and the sale of online subscription-based services to duly recognised educational institutions.
  • Payments to non-resident digital service providers are subject to 12% withholding VAT at the time of payment, unless the providers are duly registered with the Bureau of Internal Revenue (BIR).
  • A non-resident digital service provider is not entitled to creditable input taxes, even if it is subject to VAT.
  • Non-resident digital service providers are subject to the same registration requirements as other VAT taxpayers.
  • The power of the Commissioner of Internal Revenue to temporarily close or suspend a business also applies to digital service providers.
  • A non-resident digital service provider must designate a representative office or agent, which must be a resident corporation under Philippine law, to assist it in complying with the provisions of the Tax Code.

Differences between house bills

Around one year ago, the House of Representatives also approved a separate bill, HB No. 7425, which also sought to amend the Tax Code to impose VAT on digital transactions. However, HB No. 7425 was not approved by the Senate. Some of the differences between HB No. 4122 and HB No. 7425 are as follows:

  • HB No. 7425 provides that books, newspapers, magazines, reviews, and bulletins that are sold electronically or online are exempt from VAT. HB No. 4122 limited the VAT exemption on the sale of online subscription-based services to educational institutions recognised by the Department of Education, the Commission on Higher Education, and state universities and colleges.
  • HB No. 4122 provided that the 5% incremental revenue from the imposition of VAT on digital service providers would be allocated to and used exclusively for the Creative Industries Development Fund established under the Philippine Creative Industries Development Act.(1)
  • HB No. 4122 added the National Telecommunications Commission (together with the BIR and the Department of Information and Technology) to the agencies that would aid the Department of Finance in the issuance of the implementing rules and regulations for the effective implementation of the law.


Under the proposed amendments to the Tax Code, only the place of consumption is considered when determining the place where the digital service is rendered, which may not be fully consistent with the territorial nature of VAT. Also, the current bill does not address potential problems that could arise in connection with the requirement to register as VAT-registered entities if certain thresholds are met.

Requiring non-resident digital service providers to register for VAT purposes may result in issues to do with doing business in the Philippines. The non-resident digital service provider may be considered to have a business presence in the Philippines, which could bring about the imposition of income tax and the imposition of fines or criminal liabilities and other consequences for failure to comply with the necessary registration and regulatory requirements not only under the Tax Code but also under other applicable laws (eg, the Revised Corporation Code). Also, given that VAT is an indirect tax, Philippine consumers will have to bear the burden of the VAT imposition as it will lead to higher costs for online service providers' goods and services.

Finally, the enforcement of the Philippines' tax jurisdiction over non-resident digital service providers will likely result in additional implementation costs to monitor the online activities covered by HB No. 4122. Thus, the advantage of gaining additional revenue from the imposition of VAT on non-resident digital service providers must be balanced with its possible effects on Philippine consumers, and any implementation and monitoring requirements that the Philippine government may have to put in place to effectively enforce the amendments.

Originally published on Lexology.