The Senate is targeting the passage of a measure imposing a value-added tax (VAT) on digital services like Netflix and Disney Plus, among others, so that the government can collect up to P145 billion in VAT from 2024 to 2028, according to Sen. Sherwin Gatchalian.

During the Kapihan sa Senado on July 11, Gatchalian, who chairs the Senate committee on ways and means, said his panel is finalizing the VAT on digital services, which he clarified as 'not a new tax measure.'

'Yes, the target (to pass it) is within the year,' Gatchalian confirmed.

'At present, when we buy things or goods in the Philippines, there is a 12-percent VAT when you look at the receipt. When you subscribe to Vivamax, as long as you subscribe to local digital services, there is (a) 12-percent (VAT), so all local corporations, goods and services, digital goods and digital services, we will pay 12-percent (VAT),' he explained.

A local version of Netflix, Vivamax is a subscription-based, video-on-demand app that features a blockbuster Pinoy and foreign movies, television series, documentaries, concerts, stand-up comedies, fitness and workout shows, sports and genre-bending exclusives that are all Filipino-made.

The senator, however, said the problem is that under the country's tax code, non-residents and foreigners are not included or covered, which became 'a gap.'

'So we are making a law to plug that gap. So it's not new; it's still 12 percent, but these non-residents, foreign digital service providers, those foreign companies must pay,' he added.

Other alternatives to Netflix include Pluto TV, Crackle, Vudu, Tubi, Vimeo, YouTube, Amazon Freevee, Hoopla and Kanopy, among others.

Gatchalian said he was scheduled to meet with officials of the Bureau of Internal Revenue (BIR), which is tasked to implement the measure on VAT on digital services.

While he presided over a public hearing on VAT on digital services last July 6, the senator said he has additional questions for the BIR, as he noted that while the law is good, the issue would be its implementation.

He added that the Philippines is lagging behind in the region, with seven in the 10-member Association of Southeast Asian Nations already imposing VAT on foreign digital service providers and about 120 other countries in the world have the same measure.

The House of Representatives approved a similar measure last year.

Better competition

Gatchalian assured the public that the proposal to tax foreign digital services will result in lower charges due to better competition, amid concerns that the tax will be passed on to consumers.

He added that foreign digital services should also be taxed to level the playing field with local digital companies.

Gaps in the law

During the hearing last July 6, BIR officials told the Senate that the tax bureau could not collect VAT from digital services in the absence of physical presence in the country.

Gatchalian said he wanted to know what provisions in the law the bill intends to clarify and what the gaps are to allow the BIR to collect VAT on digital transactions.

'So I want to pinpoint what is missing in the law. What are the gaps in the law that we want to plug in order for the BIR to impose VAT on this type of transaction. I want to pinpoint exactly the law because people will ask if we have the law and we're not implementing the law,' he added.

BIR Assistant Commissioner Larry Barcelo said there are no clear provisions in the law on imposing VAT on digital services.

'Services are VAT-able because the services are performed in the Philippines. You mentioned earlier, services are being used here in the country, so services rendered or used in the Philippines, but under the enumeration of Section 128, digital services are not there. There are services that are taxable in the Philippines because these are being used by residents of the Philippines, for instance, royalties. The privilege to use royalty under formula process, if the user is in the Philippines, that royalty will be subject to VAT,' Barcelo explained.

'If the user is in the Philippines, they are subject to VAT… There is nothing mentioned on online services … that provides uncertainty or weakness on whether or not they will be subject to VAT. So it is not really clear whether these digital services, especially if they have no physical presence in the Philippines, will be really subject to VAT,' he added.

Finance Undersecretary Dakila Napao clarified that the Department of Finance (DOF) is not imposing new taxes, but capturing the uncaptured taxes.

'We are in effect creating a level playing field in these businesses. We also note that if we continue to not impose VAT on these non-resident service providers, we are eroding the tax base, so we think it is high time to capture and not lose out on potential revenues,' Napao said.

'We cannot really impose because they are not here in the Philippines. They are not registered. We cannot even audit them. They are not here. That's the legal constraint,' Barcelo added.

The government can earn up to P145 billion from 2024 to 2028 if non-resident digital service providers will be taxed, or P77 billion even if only 50 percent of them will comply, according to the DOF.

'Representatives from Netflix are surprised that the Philippines does not have this type of regime, as they viewed the Philippines as a fast-growing economy. But the beauty of being late is we can copy and learn from the mistakes of others,' Gatchalian said.


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