President Marcos has signed into law Republic Act (RA) No. 12023 or the Value Added Tax (VAT) on Digital Services Law which imposes a 12-percent VAT on digital service providers (DSPs) to level the playing field for local providers and generate additional revenue that will be used to build more classrooms, health centers, and farm-to-market roads in the next five years.

**LEVELING THE PLAYING FIELD** — President Ferdinand 'Bongbong' Marcos Jr. signs into law Republic Act (RA) No. 12023 or the Value Added Tax (VAT) on Digital Services Law, which imposes a 12-percent VAT on digital service providers, in Malacañan on Oct. 2, 2024. (RTVM Screenshot)

In his speech during the signing ceremony in Malacañan on Wednesday, Oct. 2, the President said the measure bridges the gap that the fast-changing digital landscape has created in the country's tax system.

The Law encompasses various services such as online search engines, online marketplaces, cloud services, online media and advertising, online platforms, and digital goods.

"We are not imposing new taxes, we are simply strengthening the authority and streamlining the process of the BIR to collect value-added tax on digital services. This includes digital media, digital music, digital video on demand, and digital advertising," Marcos said.

Despite this, the President assured the public that the government has taken a "deliberate and measured approach" to ensure that this tax will not crush innovation or hinder growth.

He particularly mentioned that the VAT does not cover education-related digital services.

"We have been precise about where this tax applies, sparing educational and public interest services from its coverages," he said.

"Online courses, webinars, and other digital educational offerings are not subject to VAT in order to keep education affordable and accessible to all Filipinos," he added.

Benefits

Marcos said the new law ensures tax compliance and supports nation-building as the government expects to collect P105 billion from this measure in the next five years.

"This is enough to build 42,000 classrooms, more than 6,000 rural health units, [and] 7,000 kilometers of farm-to-market roads," he said.

In addition, the President said five percent of the revenues generated by RA 12023 will be allocated to the creative industries.

"This means our artists, filmmakers, musicians—the very people who fill our platforms with stories and with content—will directly benefit," he said.

"It ensures that our creative talents are not just surviving in a competitive digital market but will be allowed to prosper," he added.

Leveling the playing field

According to President Marcos, the new law, a priority legislation of the administration, levels the playing field for local providers, saying both local businesses and international digital platforms now compete on equal terms.

"We will no longer be playing by different sets of rules. If you are reaping the rewards of a fruitful digital economy here, it is only right that you contribute to its growth," he said.

"Whether you are a small tech startup or a global tech giant based halfway around the world, if you are making money here in the Philippines, you are part of our community—and with that comes a shared responsibility," he added.

With this, he asked the companies and entrepreneurs covered by the measure to support the government's endeavor.

"Fairness, inclusivity, and progress—these are the goals of this law," Marcos said.

"It is the beginning of a more equitable journey forward," he added.

According to Malacañang, RA 12023 aims to address revenue losses due to ambiguities in existing legislation regarding the taxation of e-commerce transactions.

It specifically targets foreign companies that are not based in the country and continue to provide services to Filipino consumers.

Allaying fears

Meanwhile, Bureau of Internal Revenue (BIR) Commissioner Romeo Lumagui Jr. dispelled concerns over the recently signed measure.

During a Palace media briefing, also on Wednesday, Oct. 2, the commissioner said that the public should actually treat the signing of the law as a “welcome development” because it will level the playing field and bring income for economic development.

“Unang-una, mas magiging level playing field gaya ng nauna na nating napaliwanag dahil magkakaroon ng patas na treatment sa mga local and foreign (First and foremost, it will level the playing field as we originally explained because there will now be an equal treatment to local and foreign),” Lumagui said.

He explained that for so long, local providers have been at a disadvantage because they have to comply with paying the VAT, which made them unable to compete with foreign service providers.

The official also noted that the law will support local businesses that employ Filipinos.

The commissioner assured, as well, that the income generated from the foreign DSPs will be used to fund government projects, social welfare services, and infrastructure projects.

“But ang dapat naman nating maisip, lahat nang makokolekta na ito ay babalik din naman sa atin (What we should think is that all that we will be able to collect will return to us) in terms of government services and social welfares services,” Lumagui said.

However, the official admitted that the BIR was not yet sure if there will be a price increase on the monthly fees of subscribers, only stressing that the VAT should have been incorporated into the fees from the start since foreign DSPs should have been paying the BIR anyway.

“Hindi naman natin ini-expect na magiging malaki ang pagtaas ng presyo nito kung magkakaroon man and ang tinitingnan natin baka naman posible rin malaki rin naman ang chance na hindi rin naman magtaas ang presyo ng mga produktong ito (We don’t expect the increase in prices to be significant but if there will be an increase and we’re also looking at the chance that there won’t be an increase in the prices of these products),” the BIR commissioner stressed.

“So, puwedeng magkaroon ng (there could be a) price increase but again I think it would be minimal hindi naman iyan (it’s not going to be) 12 percent automatically mag-i-increase sila (they will increase) also commensurate the same rate,” he added.

Lumagui likewise expressed confidence that the foreign DSPs, especially the more popular ones, will comply with the new law.

He said that the Department of Finance (DOF) and BIR have already coordinated with the companies and they have “committed” to comply.

“So, we’re hoping na magiging mataas ang compliance nito as far as iyong mga popular digital service providers are concerned na mga nakalista diyan – we’re expecting na maganda iyong magiging compliance nila (that they will comply to this as far as the popular digital service providers are concerned that are listed there — we’re expecting their good compliance),” the official stated.

In signing the law, President Marcos said that about P105 billion in revenue is expected to be generated in the next five years.

This amount, he added, will be enough to build 42,000 classrooms, more than 6,000 rural health units, and 7,000 kilometers of farm-to-market roads.

Argyll Cyrus B. Geducos & Raymund Antonio

Law imposing 12% VAT on digital services signed