Republic Act no. 12023 (RA no. 120230), which imposes 12% VAT on digital transactions and services performed or rendered in the Philippines by residents or nonresidents, came into effect on 18 October 2024. Digital transactions/services are considered performed or rendered in the Philippines if the services are consumed in the Philippines. (For background, see EY Global Tax Alert, Philippines passes VAT on Digital Services Law affecting nonresident providers, dated 11 October 2024.)

Under the new law, a digital service is defined as a service supplied over the internet or other electronic network with the use of information technology and where the supply is essentially automated. This includes online search engines, online marketplaces or e-marketplaces, cloud services, online media and advertising, online platforms and digital goods.

A nonresident DSP is required to register for VAT in the Philippines if its gross sales for the past 12 months exceed 3,000,000 Philippine pesos (Php3m, equaling approximately US$51,000) or if its gross sales are expected to exceed this threshold in the next 12 months. With VAT registration comes the obligation to issue VAT invoices for billing of digital services.

A nonresident DSP is required to directly report 12% VAT on its sales of digital services to Philippine consumers who are not registered for VAT. For transactions between a nonresident DSP and VAT-registered Philippine consumers, the VAT-registered Philippine consumers must withhold the VAT on their payments to the nonresident DSP and remit the same to the Philippine tax authorities (under the reverse-charge mechanism).

In addition, a nonresident DSP that is considered to be an online marketplace or e-marketplace is required to withhold and remit VAT on the sales of a nonresident seller transacting through its platform, provided that the nonresident DSP is involved in setting the terms and conditions of the supply and in the ordering and delivery of the goods.

In the case of noncompliance by a nonresident DSP, the Philippine tax authorities may suspend its business operations by blocking the digital services performed in the Philippines.