Foreign digital service providers operating in the country cannot leverage international double tax agreements to avoid the nation’s 12 percent value-added tax (VAT), according to the Bureau of Internal Revenue (BIR).

The tax authority clarified that bilateral tax treaties strictly apply to income taxes, meaning cross-border digital transactions remain fully subject to consumption taxes.

“Tax benefits, either a preferential tax rate or tax exemption under a tax treaty, cover only income tax,” BIR Commissioner Charlito Martin R. Mendoza stated in Revenue Memorandum Circular (RMC) No. 59-2026, issued last Tuesday, June 2.

However, the BIR noted that a digital service may still be exempt from VAT or qualify for a zero rating. These designations are granted pursuant to Sections 108, 109, and 295 of the National Internal Revenue Code (NIRC) of 1997, or the Tax Code, as amended, rather than through international tax treaties.

The bureau also emphasized that even if a provider’s services qualify for these exemptions, they are not exempt from administrative compliance.

If a non-resident digital service provider (NRDSP) sells digital services to consumers in the Philippines that qualify for a VAT exemption, it must still register with the BIR and file VAT returns. However, it should report these sales as VAT-exempt transactions in its tax filings.

In business-to-business (B2B) arrangements, such as cross-border cost-sharing where a foreign affiliate pays for services consumed by a local branch, the responsibility for tax remittance shifts. Under this reverse charge system, the Philippine subsidiary is responsible for filing the VAT return, as well as withholding and paying the 12 percent VAT due based on the billing or invoice issued by its foreign affiliate.

For the online travel and hospitality sector, the tax is not applied to the gross booking value. The RMC stated that NRDSP online booking platforms are only required to pay the 12 percent VAT on the portion of income earned from subscription, commission, or service fees, rather than on the total gross amount received. This means VAT applies strictly to the segment of the payment that qualifies as a digital service fee.

On digital advertising, the BIR clarified that the location of the target audience is irrelevant if the payor is local. If a Philippine entity procures an online advertisement, the transaction is subject to VAT regardless of where the audience views it. Conversely, a service may be subject to a zero-rated VAT if the services are consumed by clients located abroad, provided they are paid for in an acceptable foreign currency.

For subscriptions that began before the law’s implementation in June last year, companies must compute and remit the 12 percent VAT applicable to the remaining months of the subscription period. This rule applies even if the full subscription was paid for in advance before the new VAT guidelines took effect.