Leveling the playing field

Finally, senators will soon tackle the long-overdue proposal to subject foreign digital service providers, among them popular movie streaming platforms Netflix and Amazon as well as the Filipinos’ favorite online marketplaces Shopee and Lazada, to a 12-percent value-added tax (VAT).

Sen. Sherwin Gatchalian, chair of the Senate committee on ways and means, sponsored during plenary session last week Committee Report 189 under Senate Bill No. 2528, which seeks to amend and add sections to the National Internal Revenue Code of 1997 to cover these firms. The House of Representatives had already approved its version of the proposed bill.

The Department of Finance (DOF) has estimated that the measure can easily generate additional tax revenues of about P18 billion a year, or about P90 billion in the first five years, even at a compliance rate of only 70 percent.

Finance Assistant Secretary Dakila Elteen M. Napao has told a Senate hearing that the proposed bill will not impose new taxes, but merely strengthen the Bureau of Internal Revenue’s (BIR) authority to collect VAT on digital transactions by providing measures on how resident and nonresident digital service providers can comply with the existing VAT requirements imposed by the tax code.

“Assuming that there will only be 70 percent compliance among those digital service providers, we note that in 2024 alone, there will be a P17.64 billion additional collection on the part of the government,” he said, adding that this may grow to P18.96 billion in 2025 and further to P23.28 billion in 2028 on a 70 percent compliance.

Reputational risksAt that time, Gatchalian said the Senate would try to pass its version of the bill within the year since foreign digital service providers did not oppose the measure during the committee hearing. “They are cooperative because they want to follow our laws and they have reputational risks,” he pointed out, adding that foreign companies such as Netflix “just wanted a legal basis” to pay the VAT.

The Senate, however, failed to pass the measure in 2023, which could have raised nearly P18 billion in additional tax collection estimated for 2024.

This tax regime for international web-based service providers is nothing new since similar domestic businesses are mandated to pay that VAT. As Gatchalian noted, all local corporations offering digital goods and services are already paying 12 percent VAT. “The problem with our tax code is that it did not cover nonresidents or foreign-owned [digital services]. So it created a gap. We’re crafting this law to plug that gap,” he explained.

Leveling the playing fieldThe proposed bill should have been easy for the Senate to consider due to the fact that the companies to be affected by it are not complaining. “When I was talking to Netflix [executives], they were puzzled why we don’t [impose VAT] because they’re paying it in other countries,” Gatchalian had said in one media briefing last year. Also, consider that the Philippines is among the four remaining countries in Southeast Asia that still do not impose VAT on digital transactions of foreign providers, and about 120 countries are already collecting taxes on online goods and services.

The Philippines is losing out on much-needed revenues that can finance socioeconomic programs for the poor. Digital service providers are not limited to popular video streaming firms such as Netflix.

They also include providers of video games, webcasts, and webinars; online licensing of software, website filters and firewalls, and mobile applications; digital music content providers such as Spotify; online marketplaces such as Lazada and Shopee; social networks such as Facebook, X (formerly Twitter) and YouTube; online newspapers, and payment processing services, among others. Making them cough up what their local counterparts already pay is simply leveling the playing field.

Poverty alleviationThe bill simply removes the ambiguity in the current tax code by instituting the payment of VAT for both “resident or nonresident” digital service providers doing business in the Philippines. Plugging the loophole will allow the government to generate billions in additional revenues without imposing the burden on those who are already heavily taxed. There will also be a provision in the bill giving the head of the BIR the authority to block or suspend the digital services of providers that will be found in violation of the VAT provisions to ensure compliance given the complexity of tracking digital companies. The BIR will be assisted by the Department of Information and Communications Technology and the National Telecommunications Commission in exercising this power.

The Senate needs to work double time and expedite approval of its version of the bill taxing foreign digital service providers. Each day that passes simply means the government is missing out on millions of pesos in tax revenues that can go to the government’s poverty alleviation programs to uplift the lives of the poor and marginalized.