Now might be the best time to review the family's digital subscription budgets. A new law has just been enacted that adds a value-added tax (VAT) on foreign digital services, affecting platforms like Netflix, HBO, and Disney, as well as popular e-commerce sites.
The new legislation, known as Republic Act 112023, establishes a 12% VAT on digital services offered by both resident and non-resident digital providers, regardless of their physical presence in the Philippines.
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Value Added Tax on Digital Services Law
The law introduces an amendment to the Tax Code, stipulating that digital services delivered by foreign providers are considered to be performed in the Philippines if consumed within the country. This aims to level the playing field between local and international service providers.
What Digital Services Will Be Taxed?
RA 112023 encompasses all foreign digital services delivered via the internet or electronic networks, focusing on those that are primarily automated. This includes online search engines, e-marketplaces, cloud services, online media, advertising, and digital goods. Platforms like Netflix, Disney+, Shein, Temu, and Amazon will now be liable for VAT on the digital services they provide to Philippine consumers, despite being based overseas.
To enforce the law, the Bureau of Internal Revenue (BIR) will issue regulations that target the platforms themselves, which will then manage their sellers. BIR Commissioner Romeo Lumagui explained that the focus will be on these platforms, as they monitor their providers and will be responsible for compliance.
"What we will do is focus on the platforms. Everything passes through them. They monitor their providers—their sellers. We will issue regulations on how they will report to us," Lumagui said in a press conference after the law's signing.
Thanks to the digital nature of these transactions, the BIR will have the ability to track sales and examine the records of foreign digital service providers to ensure compliance. "We will be able to monitor that, and then we can cross-check with the payments they are making. If we see discrepancies, we will call them out," he added, highlighting that the law gives the BIR the authority to block non-compliant websites or platforms.
Impact on Consumers
When it comes to the potential impact on subscription fees, Lumagui noted that any increases would ultimately depend on the service providers themselves. He emphasized that providers should have already factored VAT into their pricing structures. "It's a business decision by the service providers. They should have been paying from the very beginning, so they should have incorporated that VAT into their pricing from the start," he explained.
Importantly, the government will not impose a price cap on any potential fee increases. Lumagui argued that market dynamics would naturally regulate prices, cautioning that excessive price hikes could lead to customer loss.
"In the end, if they increase their prices too much, they will also lose their customers at the same time. I am sure they will not do that; it's not a wise business decision," he added.
Meanwhile, the Department of Finance estimates that the VAT implementation will generate approximately P83.8 billion from 2024 to 2028, with plans to allocate 5% of this revenue for the development of local creative industries.
It's worth noting that several Southeast Asian nations have adopted similar measures. Countries like Singapore, Indonesia, and Malaysia implemented new regulations for digital taxes in 2020, while Thailand introduced a VAT on foreign digital service providers in 2021.
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