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The Philippines: Legislation to Empower the Digital Economy

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The recent enactment of Republic Act (RA) No. 12023, known as the Value-Added Tax on Digital Services, represents a significant step toward bolstering the Philippines’ digital economy. This law aims to generate additional revenue to fund critical infrastructure projects, such as building schools, constructing farm-to-market roads, establishing modern hospitals, and supporting essential socio-economic programs.

Image credits: Philippine Information Agency

While this legislation does not introduce new taxes, it is projected to yield approximately ₱7.25 billion (US$130 million) in revenue by 2025, assuming a compliance rate of 50%. During the signing ceremony on October 2 at Malacañang, President Ferdinand R. Marcos Jr. emphasised the long-term benefits, stating that over the next five years, the government anticipates collecting ₱105 billion (US$1.9 billion) from this initiative. This revenue could lead to the construction of 42,000 classrooms, over 6,000 rural health units, and 7,000 kilometres (4,350 miles) of farm-to-market roads.

Importantly, the new law levels the playing field for local and foreign digital service providers (DSPs). Currently, only local DSPs are required to pay a 12% value-added tax, creating an imbalance in competition. President Marcos Jr. clarified that the law is not about imposing new taxes but rather strengthening the Bureau of Internal Revenue’s authority to collect existing taxes from digital services, including digital media, music, video, video-on-demand, and digital advertising.

The president highlighted the importance of equitable treatment in the digital economy, stating, “We no longer will 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 also to its growth.” This sentiment reinforces the idea that all businesses – whether small tech startups or multinational corporations – share a collective responsibility to contribute to the community in which they operate.

In alignment with the Marcos administration’s commitment to accessible and affordable education, the law exempts educational services, including digital courses and webinars, from value-added tax. Furthermore, digital services sold on a subscription basis to educational institutions recognised by the Department of Education (DepEd), the Commission on Higher Education (CHED), and State Universities and Colleges (SUCs) are also tax-exempt.

Over the next five years, 5% of the revenues generated from this law will be exclusively allocated to developing the local creative industries, fostering innovation, and empowering the next generation of Filipino creators and entrepreneurs.

Finance Secretary Ralph G. Recto stated, “We are merely correcting the current system that creates an unfair advantage for foreign digital service providers and weakens the country’s tax base.”

He underscored that this legislation fosters fairness, competition, and inclusivity within the tax system and marketplace by addressing existing inequalities and enhancing revenue collection without imposing new taxes. Foreign digital service providers (DSPs) with gross sales exceeding ₱3 million (US$54,000) are now required to register for VAT and designate a local representative to ensure compliance.

Senator Sherwin Gatchalian underscored that the law clarifies the tax obligations of non-resident DSPs, ensuring fair competition, “We are not imposing new taxes. We will only collect the tax that we should be collecting from foreign digital service providers.”

House Ways and Means Committee Chair Joey Salceda noted that the law will significantly benefit the Philippines’ creative sector by correcting the unfair advantage foreign companies had in selling to Filipino consumers without the VAT burden. He projected it could generate ₱8 billion to ₱12 billion (US$144 million to US$216 million) in its first year, with a 5% allocation for the creative industry over the next decade potentially stimulating substantial growth.

As the Philippines continues to evolve its digital economy, RA No. 12023 is poised to strengthen the nation’s infrastructure, enhance competition, and foster a more equitable digital landscape for all stakeholders.

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