Digital transaction tax should mirror international best practices — AIC

Digital transaction tax should mirror international best practices — AIC

By Luisa Maria Jacinta C. Jocson, Reporter

THE proposed value-added tax (VAT) on digital transactions must meet the norms for cross-border trade practices, the Asia Internet Coalition (AIC) said.

In a statement, AIC Managing Director Jeff Paine said that the proposed tax should be aligned with “cross-border trade with internationally agreed standards and global best practices.”

“A VAT taxation policy framework that is consistent with international norms and built around the key principles of neutrality, efficiency, certainty, and simplicity will provide long-term stability and certainty for businesses to continue to innovate and invest for the future,” Mr. Paine said.

In November 2022, the House of Representatives approved a measure seeking to impose 12% VAT on nonresident digital service providers. A similar measure is still pending before a Senate committee.

If passed into law, the measure would result in a 12% VAT on the digital sale of services, which refers to any service that is delivered or subscribed for over the internet or other electronic networks.

These services include online advertising, online licensing of software, and the supply of other services which are delivered through online marketplaces, webcasts and mobile applications, among others.

Digital service providers in the Philippines are taxable under the current law, Eleanor L. Roque, tax principal of P&A Grant Thornton, said.

“As long as the provider of the service is performing the service outside of the Philippines and its servers and equipment are also outside of the Philippines, the service is not taxable in the Philippines,” she said in a Viber message.

“However, tax rules are changing because of the shift in digital transactions… other countries have adopted taxation of the digital economy early on to capture lost revenue on these types of transactions,” she added.

The government has been seeking ways to tax digital platforms, which boomed over the pandemic with many people confined to their homes.

In 2022, the digital economy was estimated at P2.08 trillion, equivalent to 9.4% of gross domestic product.

The Philippine digital economy is expected to grow to between $80 billion and $150 billion in gross merchandise value by 2030, according to a recent report by Google, Temasek Holdings and Bain & Co.

“This means that the traditional mode of taxing cross-border transactions is also changing to properly address the fact that the internet is ubiquitous and income is created without even leaving one’s own home,” Ms. Roque said.

Leonardo A. Lanzona, an economics professor with the Ateneo de Manila, said that any tax must be aligned with international standards and regulations.

“In principle, taxation should be neutral and equitable across all sectors of the economy. This means that asymmetries in taxes can favor or discriminate against certain sectors from evolving,” he said in an e-mail.

Ms. Roque said that the Bureau of Internal Revenue (BIR) will also need to prepare for the implementation of the proposed tax.

“Since the providers of the digital service are nonresident foreign corporations, the BIR will again rely on the nonresident foreign corporations voluntarily complying with the requirements of the law. This will be an administrative challenge for the BIR,” she said.

She also noted the bill’s impact on consumers, who will bear the brunt of the costs passed on by providers.

“It’s high time that digital transactions are taxed. Some Association of Southeast Asian Nation countries adopted the digital transaction tax as soon as the pandemic started, and most transactions shifted to online and digital. However, this would of course impact the consumers here in the Philippines as VAT is a passed-on tax. The burden is always shifted to the consumer,” she said.

“Taxes can potentially cause distortions from what would occur in the absence of the taxes. As such, welfare losses can occur. For one, consumers who are price sensitive can be excluded in the adoption of technology if taxes increase the cost  of digital utilization,” Mr. Lanzona added.

The Department of Finance has said that if the bill is enacted, it is expected to generate P17 billion next year, P18.3 billion in 2025, and P19.5 billion in 2026.