Additional P100 billion revenue seen from digital transaction tax

MANILA, Philippines — The Department of Finance (DOF)  expects to generate close to P100 billion in revenues from the proposed value-added tax (VAT) on digital transactions in a bid to boost state coffers and even the playing field.

During the Senate committee on ways and means hearing yesterday, Finance Undersecretary Dakila Napao said the imposition of a 12 percent VAT on digital service providers could generate an additional P96.72 billion over the next five years.

“We are not proposing a new tax imposition. We are merely strengthening the BIR  (Bureau of Internal Revenue)’s authority to collect VAT on digital transactions,” Napao said.

“Our aim is to level the playing field between traditional and digital businesses by clarifying the VAT treatment of digital service providers,” he said.

Included in the plan are digital advertising, subscription-based services, and other services using information and communication technology-enabled infrastructure.

VAT is the largest source of tax revenue on average, and the Philippines is in the Asia-Pacific, which is the fastest growing e-commerce region in the world.

The Senate is currently deliberating on the VAT proposal. In November last year, a similar measure was approved on third and final reading by the House of Representatives.

The DOF’s estimate assumes a 50 percent collection efficiency in the first year of implementation by 2024, and an improved collection at 70 percent by 2025 until 2028.

A more conservative projection is revenues reaching P72.69 billion at 50 percent collection efficiency over the course of the five-year period.

On the other hand, a maximum of P145.37 billion is seen to be collected from 2024 to 2028 if the government will have a 100 percent collection efficiency.

The assumption covers VAT on digital media, such as digital music, video games and video-on-demand.

It likewise covers digital advertising, including audio, banner, classifieds, influencer, search and videos.

Currently, the tax system in the country only covers the traditional business landscape, which means that substantial revenues have been missed in the digital economy, especially since the pandemic started.

Under the Tax Code, any sale of goods in the Philippines and supply of services rendered in the country, whether electronically or not, are subject to VAT. Offshore transactions, however, are VAt-exempt.

“With the growth of the digital economy, there is a pressing need to revisit the Tax Code,” Napao said.

“The gray area in the treatment of non-resident digital service providers leads to inequitable tax treatment, unfair competition, and erosion of the VAT base,” he said.

The DOF maintains that not taxing non-resident digital service providers from VAT goes against the principles of fairness and equal treatment in taxation, creating a disparity between local providers and their foreign counterparts.

Local businesses providing similar digital services are subject to VAT while their foreign competitors enjoy a tax advantage, hindering fair competition and disadvantages local businesses.

“The government is unable to fully collect taxes from the growing digital economy, which could have been used to fund public services, infrastructure, and other socioeconomic programs,” Napao said.

Neighbouring Asian countries have also updated their tax frameworks to capture revenue from digital transactions and services. VAT rates on digital transactions range from a low of five percent in Taiwan to as high as 11 percent in Indonesia.