Simplicity key to VAT law’s success

The measure imposing a 12-percent value-added tax (VAT) on foreign digital service providers (DSPs) of video and music streaming such as Netflix and Spotify and online marketplaces such as Lazada, Shopee, and Amazon was signed last week by President Marcos. Republic Act No. 12023 amended the 1997 National Internal Revenue Code to include non-resident DSPs in the coverage of VAT to remove their undue advantage over their local counterparts that pay the tax. The government is hoping to raise about P105 billion in revenues over the next five years from this law.

The newly signed law is not a new tax. It just aligns the Philippines with other countries that have implemented similar tax measures to capture revenue from global tech giants and digital platforms. Commissioner Romeo Lumagui Jr. of the Bureau of Internal Revenue (BIR) said the government expects around 100 foreign DSPs to register for the payment of digital VAT with the passage of RA 12023. Nina Asuncion, director of the Department of Finance’s revenue operations group, added that the BIR is already working on a simplified registration system for non-resident DSPs and the filing and payment system for digital VAT.

The BIR will begin implementing the digital VAT on foreign DSPs at least 120 days after the publication of RA 12023’s implementing rules and regulations (IRR), which are to be finalized within 90 days from the law’s signing. The crafting of the IRR is the more difficult task as there are a number of issues that need to be addressed or avoided to ensure compliance.

Incredibly expensive

The Washington DC-based non-partisan organization Tax Foundation, in a research paper titled “Digital Taxation Around the World” published last April, provides key points that the BIR can use as a guide in coming up with the IRR.

First and foremost is the need to standardize the compliance requirements with those of other countries. “Not having a physical presence in the country poses a great challenge to the seller as it needs to deal with disparate and changing requirements in each of the countries where it has sales,” it noted, adding that “this presents unique bookkeeping requirements” and tedious paperwork.

The IRR must prevent making compliance difficult. As more than 175 countries have already implemented requirements for companies to use e-invoicing for reporting taxes on business transactions, it pointed out that foreign companies face serious challenges in following different and changing requirements in each of the countries where they sell. “Complying with the reporting requirements can be incredibly expensive, and potentially prohibitive,” it warned.

Trade secrets

The paper also cited a risk when the tax scheme sets a threshold for compliance, which the BIR puts at P3 million in annual revenues. Some foreign DSPs, it said, may try to shift their activities to avoid reaching this threshold and therefore avoid the tedious work associated with the new VAT law.

The report pointed out that an in-depth cost-benefit analysis should have been conducted before implementing VAT on foreign digital sales, noting that the amount of information that foreign DSPs have to collect in some countries regarding the transactions and their customers are burdensome and, in some cases, could violate privacy laws governing trade secrets. “Policymakers need to balance the compliance costs of information requirements against the need to verify compliance with VAT rules,” the paper said.

While Lumagui sounded confident in the ability of the BIR to monitor foreign DSPs doing business in the Philippines, does the BIR really have the resources to deal with the volume of transactions to be verified? It is likewise hard to imagine that foreign DSPs will be absorbing the added cost of the tax. Thus, consumers can expect price increases for some of the video streaming or online selling services that they tap.

Cross-border deals

In crafting the IRR, the BIR should adhere to what the Tax Foundation calls the globally accepted principles for digital taxation: simplicity, transparency, neutrality, and stability.

For the Philippines, simplicity is most crucial. The tax regulation must be easy for taxpayers to comply with and for the government to administer and enforce. As the report noted, “digital tax policies fail the simplicity test when they leave important definitions unclear or add unnecessary compliance challenges for businesses that are trying to understand how much tax they owe.”

The United Nations Conference on Trade and Development estimated that 1.48 billion people, or a quarter of the world’s population aged 15 and older, made purchases online in 2019, and that one in four of their transactions were cross-border deals. The Philippines had long been losing out on this significant tax revenue source. Many countries such as Singapore, Thailand, and Japan have years ago successfully implemented tax measures on these foreign DSPs. The passage of RA 12023 will hopefully allow the Philippines to catch up.