By Alyssa Nicole O. Tan
GOVERNMENT AGENCIES and industry representatives told a Senate committee that they support a bill seeking to impose a 12% value-added tax (VAT) on digital transactions, in order to ensure equal tax treatment for traditional and digital businesses.
The measure clarifies the VAT status of digital service providers, according to Senator Pilar Juliana S. Cayetano, who chairs her chamber’s Ways and Means committee, during a hearing on House Bill 7425.
“This measure will also generate revenue from new sources to fund the country’s efforts to recover from COVID and other expenses. Digital transactions soared during the pandemic. Lockdowns and the quarantine restrictions pushed cost-conscious consumers and suppliers into the digital economy,” she added.
Citing data from the 2020 World Bank Digital Report, the Department of Finance reported that the number of internet users in the Philippines increased to 73 million during the most restrictive phases of the quarantine. Average hours spent by Filipinos on the internet exceeded five hours from four previously due to mobility restrictions.
“We fully support the passage of this bill. It is a timely legislation,” Bureau of Internal Revenue Assistant Commissioner Larry M. Barcelo said at the hearing.
“It is high time to put businesses, especially those conducted by foreign non-resident entities, on equal footing with the traditional brick and mortar businesses in order to even the playing field,” he added.
Trade and Industry Assistant Director Marie Sherylyn D. Aquia of the Bureau of International Trade Relations said the Trade department welcome a feature of the bill defining the tax treatment of facilitated goods and services, in light of the explosion in the delivery of goods ordered online.
“The government should continue to seek ways to address the gaps in the tax system that allow some companies to shift profits away from where the economic activity and value creation are taking place,” she said.
The measure would impose a 12% VAT on the digital sale of services such as online advertising, subscription services, and the supply of other electronic and online services that can be delivered through the internet such as mobile applications, online marketplaces, online licensing of software, and webcasts, among others.
It would also add a new section in the National Internal Revenue Code of 1997 that would require foreign digital service providers to collect and remit VAT for all transactions that go through their platforms.
Bangko Sentral ng Pilipinas (BSP) Payment System Oversight Department Deputy Director Bridget Rose M. Mesina-Romero said the measure is necessary to update the VAT regime in a manner that helps it keep up with the rapid transformation of the digital economy.
However, the additional tax burden may hinder the recovery of smaller enterprises, including gig workers who rely on digital channels to continue their livelihood, as it may lead to lower income, she said.
As such, the BSP proposed VAT exemptions for low-value digital transactions of up to P500, as well as for service fees charged by payment service providers for the use of digital payments.
“This is consistent with the intent of the TRAIN (Tax Reform for Acceleration and Inclusion Law) to exempt from personal income tax the individuals whose annual taxable income does not exceed a certain threshold,” she said, adding that by exempting small digital payments from VAT, minimum wage income earners will not be unduly burdened. The potential negative impacts on the poor and marginalized sectors that shift to digital services will be minimized, she added.
Ms. Cayetano said she was interested in exploring the BSP’s proposals and defined her intended approach to taxation as “reverse discrimination,” which she hopes will encourage digital transactions via the effective 12% discount for those eligible for the exemption.
Ms. Mesina-Romero said the proposed service fee exemption will help encourage the use of digital services by individuals, business and government institutions.
Chairman of the FinTech Alliance.ph, Angelito M. Villanueva supported the BSP position.
Netflix APAC Indirect Tax Manager Davy Chen said the company’s input was solicited in drafting the bill at the House. Netflix supports the legislation.
“Under the proposed rules of the VAT bill, non-resident suppliers like Netflix will be able to register remotely for VAT only in the Philippines, then collect and remit the tax to the Philippines via simplified compliance mechanisms,” he said.
The simplified supplier VAT registration regime benefits both non-resident companies and the Philippine government, he added, as it would limit the compliance burden to non-resident VAT suppliers, while maximizing government revenue and limit costs.
However, there were calls to clarify the process for overseas suppliers transacting through intermediaries. The bill should specify the entity responsible for remitting and collecting VAT in that situation to avoid confusion and double taxation, the committee was told.
Asia Cloud Computing Association Secretariat Bensen Koh, who also represented the Asia Internet Coalition, also expressed support for the bill, saying it was in line with international best practices put forward by the Organisation for Economic Cooperation and Development and the International Monetary Fund.
On payments to government agencies, which are subject to 5% withholding tax and where non-resident service providers cannot claim input VAT, Mr. Koh sought clarification on the tax treatment for such transactions.
“In terms of providing a grace period for this transition, we propose that 9 to 12 months be provided after the promulgation of the details, implementing rules and regulations so that companies have the time to ensure compliance,” he said.
Ms. Cayetano said although she was unsure how far the bill will go before Congress adjourns on June 3, the goal was to get the discussions rolling on the scope of the proposed law.
