Philippines to impose 12% VAT on foreign digital services

Philippine President Ferdinand Marcos Jr. has officially signed Republic Act 112023, mandating a 12% value-added tax (VAT) on digital services provided by local and foreign digital service providers (DSPs). This new tax impacts popular platforms like Netflix, HBO, Disney+, and e-commerce giants like Amazon (NASDAQ: AMZN) and Shopee, ensuring that foreign companies contribute taxes when offering services to the Philippine market.

“The rapid change in our digital landscape has created a gap in our tax system,” Marcos stated during the ceremonial signing. “Today, we signed the Value-Added Tax on Digital Services Law and we are now bridging that gap. With this law, we say that if your presence in the Philippine market is as real as your profits, then your tax responsibilities should also be equally tangible.”

Marcos also clarified that no new taxes were being imposed, but the Bureau of Internal Revenue (BIR) is now empowered to collect VAT on these services effectively. The move addresses loopholes in the existing tax framework, ensuring foreign DSPs are now subject to the same obligations as their local counterparts.

Leveling the playing field for local businesses

One of the key objectives of RA 112023 is to ensure fair competition between local and foreign service providers. During the pandemic, many foreign companies accessed the Philippine market without paying taxes, creating an unfair advantage that overtaxed local businesses.

Rep. Joey Salceda, chair of the House Ways and Means panel emphasized that the law addresses this imbalance. Salceda said foreign service providers enjoyed untaxed access, while resident content producers paid VAT and income taxes. He added that this “unfairness” persisted for years. With the law in place, all DSPs, regardless of origin, are now required to adhere to the same tax regulations.

Scope of RA 112023: What services are covered?

RA 112023 applies to a wide range of digital services offered through online platforms, including streaming services, e-commerce, search engines, and cloud computing. Platforms like Netflix, Disney+, Shein, and Temu will be subject to the 12% VAT.

Even without a physical presence in the Philippines, foreign companies must register with the BIR if their gross sales or receipts exceed PHP3 million ($53,396) annually.

BIR Commissioner Romeo Lumagui explained that the agency will monitor compliance and hold platforms accountable for managing sellers in their marketplaces.

Exemptions to promote education and innovation

Marcos stressed that the law is designed to support innovation while protecting vital sectors. Educational and public interest services are exempt from the VAT, including online courses and webinars recognized by the Department of Education (DepEd) or the Commission on Higher Education (CHED). This ensures that essential services remain affordable and accessible, especially in the education sector.

“This law is more than ensuring tax compliance, it is also in support of nation-building,” Marcos emphasized, highlighting its broader impact on public welfare.

Impact on consumers and subscription fees

A concern raised by critics is the potential increase in subscription fees for consumers. BIR Commissioner Lumagui clarified that while DSPs may adjust their pricing due to the VAT, any price increase is at their discretion.

Former Bayan Muna representative Carlos Zarate criticized the law as “anti-consumer,” suggesting that middle-class Filipinos may bear the brunt of increased costs rather than large international corporations.

Revenue allocation: Boosting the creative industries

“For the next five years, we estimate to collect PHP105 billion ($1.86 billion) from this measure. This is enough to build 42,000 classrooms, more than 6,000 rural health units, 7,000 kilometers of farm-to-market roads,” the President said. 

“Additionally, five percent of the revenues generated by this law will be allocated to our creative industries. This means our artists, filmmakers, musicians— the very people who fill our platforms with stories and with content—will directly benefit. This ensures that our creative talents are not just surviving in a competitive digital market but will be allowed to prosper,” he added.

Learning from other Southeast Asian nations

The Philippines is following the lead of neighboring countries such as Singapore, Indonesia, Malaysia, and Thailand, all of which have recently implemented similar digital tax measures. The success of these countries in enforcing VAT on foreign DSPs serves as a model for the Philippines as it embarks on this new regulatory approach.

A step towards a fairer digital economy

Marcos highlighted the law as a crucial step toward a more equitable digital economy. “To our people, who deserve nothing less than a system that works for them, this law shall bring in much-needed revenue to help build a better future for us all. I call for the support of all the companies and entrepreneurs who will be covered by this law,” he said. “I also urge the concerned government agencies to promulgate the necessary rules and implement the needed steps to operationalize this law within the period that is prescribed within the Act.”

With RA 112023, the Philippines is ensuring that both local and foreign companies contribute equally to the country’s development, marking a shift in how digital services are taxed and regulated.

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