Revisiting VAT on digital services: When digital convenience meets tax complexity

For many taxpayers, the end of the first quarter of 2026 marks the filing of several tax returns, notably the filing of the Value-Added Tax (VAT) on Digital Services (VDS). Starting June 2, 2025, Republic Act (RA) No. 12023 took full effect. The law imposes a 12% VAT on “digital services.” Frankly, this imposition startled, and to some degree, upset business owners and consumers who rely heavily on digital platforms and media.

Early this year, reports emerged that certain members of the House of Representatives initiated House Bill No. 7844, which aims to repeal the VAT on digital services. The House bill explained that the signing of the law  raised the cost of essential services, such as Netflix and Shopee. They also explained that the imposition burdened digital media consumers, which is seen as regressive and burdensome.

In a world where daily life has become increasingly digitized, and in a country continuously being plagued by corruption scandals, the move to abolish an additional tax burden is seen as a light of hope for ordinary citizens.  However, the debate surrounding VAT on digital services warrants close examination, not only of its impact but also of its purpose and implementation.

To properly inform the taxpayers of this imposition, the Bureau of Internal Revenue (BIR) issued implementing rules and regulations to clarify how VAT on digital services would be applied. Yet, RA No. 12023 and its subsequent implementing rules raised additional questions and practical concerns and issues among taxpayers.

RA NO. 12023 AND ITS ORIGINS
RA No. 12023 expanded the Philippine Value-Added Tax system by imposing a 12% VAT on digital services consumed in the Philippines. Significantly, it requires not only resident but also nonresident digital service providers to register, collect, and remit VAT. The law further introduced rules on invoicing, withholding, compliance, and enforcement, effectively placing digital transactions on similar footing with traditional goods and services.

Under the law, “digital service” refers to any service supplied over the internet or other electronic network with the use of information technology and where the supply of the service is “essentially automated.” The law provides examples, such as online marketplaces, cloud platforms, streaming services, and other automated digital tools.

The accelerated growth of digital activity during the COVID-19 pandemic underscored the rationale for the law. With movement restricted, consumers and businesses alike shifted rapidly to digital platforms, embracing video conferencing, online games, streaming platforms, online marketplaces and e-commerce as daily necessities rather than conveniences.

The growth of the so-called “digital economy,” coupled with government need to generate income in a changing environment, pushed several countries to impose taxes on digital services. In Southeast Asia, Singapore, Malaysia, Thailand, Indonesia, and Vietnam have imposed taxes on digital services, with the Philippines following suit.

CHALLENGES IN IMPLEMENTING VAT ON DIGITAL SERVICES
Despite its policy rationale, the implementation of RA 12023 presents notable challenges. One recurring issue is the statutory use of the phrase “essentially automated,” which the law did not clearly define. While Revenue Regulations No. 003-2025 enumerated what constitutes digital services, the same regulation contained the phrase “includes, but are not limited to,” which means that the list of examples is not an exclusive list, leaving room for uncertainty. This lack of precision creates compliance concerns, particularly for digital service providers and consumers.

In a country where there are students who use online platforms for easy access to learning materials to a country where an ordinary citizen finds solace and amusement in consuming television series online, the sudden imposition of an additional tax could be burdensome as prices of certain services have significantly increased. Clearly, this burden is frowned upon by the ordinary consumer.

Thankfully, the BIR issued Revenue Memorandum Circular (RMC) No. 047‑2025, which clarified the registration, filing, and compliance requirements for non-resident digital service providers (NRDSPs), including mandatory registration through the VDS Portal or ORUS, even for purely B2B transactions. The circular also identified specific VAT-exempt transactions, including but not limited to services of educational institutions and IPA-registered enterprises for attributable services.

Overall, the RMC guides both NRDSPs and Philippine consumers on compliance requirements for the VAT on digital services. However, this RMC still leaves out grey areas that need to be addressed by the BIR, or the government in general.

To cite an example, a law student preparing for the bar examinations enrolled in a review center, which conducts most of its lectures online. The review center would then conduct its lecture live via a video conferencing platform. Given that the current laws on VDS do not clearly define what “essentially automated” means, the BIR could impose VAT on videoconferencing, as it could be within the “view” of what is “essentially automated.” This, among others, is an example of how broad the law is and how it imposes an additional burden on ordinary citizens.

Beyond definitional issues, compliance has also proven challenging. The requirement for NRDSPs to register and file returns through the BIR’s VDS portal introduced technical and operational difficulties. Multi-factor authentication, system downtime, and portal congestion have, at times, undermined the convenience expected of a digital system. To cite an example, every login made at the portal requires multi-factor authentication, with a One-Time Pin (OTP) sent via the taxpayer’s e-mail address needing to be entered. Likewise, BIR’s system suffers technical errors every time a number of taxpayers log in simultaneously.

An additional burden for non-resident digital service provider (NRDSP) corporations that have not registered with the BIR involves business-to-business (B2B) transactions. These NRDSPs find themselves suddenly required to register with the BIR to file nil returns. While they generally do not have to pay anything, this sudden move created a surprise obligation.

ANOTHER PERSPECTIVE
VAT on digital services, or taxes in general, are imposed by a government exercising its inherent powers. The government cannot function properly without any income, which is why it imposes taxes on individuals, corporations, and entities to generate income. This is what we call the “lifeblood theory,” where taxes keep a country alive.

While the digital economy is booming, governments see taxes on digital services as another way of generating revenue. In fact, digital services are taxed not only in the Philippines but also in several other countries. As early as 2019, France enacted a digital services tax. After the pandemic, the global population saw a dramatic increase in online use, which gave governments cover to tax digital services. Our Southeast Asian neighbors have followed suit: Singapore included digital services in its goods and services tax; Malaysia imposes a service tax on digital services; Indonesia imposes VAT on digital services; Thailand imposes VAT on foreign digital service providers; and Vietnam imposes VAT on cross-border digital service providers. In sum, a number of countries have imposed taxes on digital services.

Understandably, the Philippine government imposed a 12% VAT on digital services, as other jurisdictions already have. The VAT rate of 12% had been fixed as early as 2006. While there have been calls by private citizens and legislators to decrease the VAT rate, the BIR cannot act unilaterally to lower it, as this power lies with the legislative branch.

FINDING THE BALANCE
As digital services become further embedded in everyday life and while the government must continue generating revenue through taxes to sustain essential services, it must also weigh the burden these measures place on ordinary citizens. Striking a balance between fiscal responsibility and public welfare is crucial. Whether VAT on digital services ultimately promotes shared progress or is perceived merely as an added cost will depend on how thoughtfully the law and regulations are refined and implemented in the years ahead.

Marc Aaron G. Magbuhat is an associate from the Tax Advisory & Compliance Practice Area at P&A Grant Thornton.

pagrantthornton@ph.gt.com

www.grantthornton.com.ph