VAT on Digital Services in the Philippines

​As previously outlined in our Q3/2024 newsletter​, the Philippines has introduced new regulations regarding the imposition of Value Added T​​ax (VAT) on digital services provided to customers in the Philippines. While the legislative framework is primarily driven by domestic tax reform efforts, its underlying logic is largely consistent with international developments, in particular the OECD’s Base Erosion and Profit Shifting (BEPS) project. The BEPS framework promotes equitable taxation of multinational enterprises, especially those engaged in digital services, by advocating for taxation in the jurisdictions where economic activities and value creation actually take place.

       

Under Republic Act No. 12023, effective  since 1 June 2025, all businesses providing digital services that are consumed or utilized in the Philippines are, in principle, subject to VAT at the standard rate of 12 %. The tax liability applies to both legal and natural persons, irrespective of whether they are resident in the Philippines or abroad. VAT liability is triggered for both B2B and B2C transactions.

    

The law was officially enacted with Revenue Memorandum Circular (RMC) No. 078-2025, which was published on 29 July 2025. It provides crucial interpretative guidance on the statutory elements of tax liability. In particular, it specifies concrete deadlines within which the tax liability arises under the law, and tax returns as well as tax payments need to be made. In addition, it establishes operational procedures for compliance, including mandatory online registration of foreign digital service providers (DSPs) through the newly established electronic portal of the Bureau of Internal Revenue’s (BIR). The RMC also outlines monitoring mechanisms and rules concerning VAT refunds. Notably, refunds of excess VAT paid are generally not permitted; however, excess VAT paid may be carried forward to offset VAT liabilities in subsequent quarters, provided that the taxpayer properly declares the excess.

       

The VAT compliance requirements differ depending on the nature of the transaction:

      

It is important to highlight that foreign digital service providers are not eligible for input VAT credits, and therefore the usual input-output VAT mechanism available to resident taxpayers does not apply.

With the launch of the Bureau of Internal Revenue’s (BIR) special online platform, the Philippine tax authorities have taken a notable step towards modernizing and streamlining VAT compliance for foreign digital service providers. While the system marks a progressive move towards aligning with global tax standards, it is still in the early stages of implementation. 

      

Operational challenges and transition issues may be expected as both regulators and foreign entities adapt to the new framework. Nevertheless, the initiative is promising: it strengthens the government’s capacity to generate revenue from the rapidly growing digital economy, promotes fair competition between local and foreign providers, and reaffirms the Philippines’ commitment to an equitable and transparent taxation.