FRESH VIEWPOINTS: A NEW PERSPECTIVE
By Brian James Lu
I had the opportunity to participate in a forum discussion on the newly enacted Digital Service Tax (DST), organized by the Negosyo Advocates – an association of concerned businesses –aimed at clarifying the law’s key provisions and implications. As a new and unfamiliar concept in the Philippine tax system, the DST’s implementation this year has raised significant questions among businesses, particularly in terms of compliance and scope. Recognizing the potential for confusion and misinterpretation, the initiative to hold an open and informative dialogue was both timely and commendable.
The forum featured insights from Allen Roi Cledera, a lawyer, a certified public accountant, and a licensed financial and estate planner. With a client base of over 100 individuals and extensive experience assisting freelancers, professionals, and micro- and small enterprises (MSEs) with tax concerns, Cledera provided participants with a grounded understanding of the DST and its practical impact on various sectors.
To recall, President Ferdinand R. Marcos Jr. signed the Digital Services Act, or Republic Act No. 12023, on Oct. 2, 2024. The law imposes a 12-percent value-added tax (VAT) on foreign digital service providers, with the objective of generating additional revenue and promoting fairness for local providers. In the Philippines, VAT is an indirect tax applied to the sale of goods and services. It is added to the price paid by consumers, and businesses are responsible for collecting and remitting this tax to the Bureau of Internal Revenue (BIR).
The DST will take effect on June 1, 2025, applying a 12 percent VAT to nonresident digital service providers (DSPs). This date is 120 days after the Implementing Rules and Regulations (IRR) become effective. DSPs are defined as resident or nonresident suppliers of digital services to consumers in the Philippines. “Digital services” refer to services delivered over the Internet or electronic networks using information technology, where the process is essentially automated. These include online search engines, e-marketplaces, cloud services, online media and advertising, digital platforms, and digital goods.
The DST will cover two types of transactions: (1) business-to-business (B2B) transactions, or the supply of digital services to businesses and government entities in the Philippines, including government-owned and controlled corporations (GOCCs); and (2) business-to-consumer (B2C) transactions, or the supply of digital services to individuals not engaged in business within the country.
The speaker emphasized that the new law and its revenue regulation do not introduce a new tax for everyone. The key point is that it’s not something new, especially for resident digital service providers. However, it does create a new obligation for nonresident digital service providers. A nonresident digital service provider (NDSP) in the Philippines refers to a digital service provider without a physical presence in the country.
The implementation of a DST has been a growing trend across Southeast Asia as governments respond to the rapid growth of the digital economy and the need to ensure a fair taxation system. The rise of multinational digital platforms offering services without a physical presence in a country has challenged traditional tax frameworks.
At first glance, it would seem that the DST would add more tax obligations to businesses or increase the number of transactions subject to VAT. But looking at it closely, nothing changes for resident providers. If you’re already VAT-registered with the BIR and have been offering digital services, your responsibilities stay the same. The added burden falls on nonresident providers, who now have to comply with the rules and pay VAT for the first time.
For example, take Zoom—a digital platform widely used for virtual meetings. It has no office, representatives, or regional headquarters in the Philippines. In fact, its nearest presence may be in China. Still, Zoom is a vital part of our daily work and business interactions in the Philippines. Clearly, however, it operates without any physical presence in our country.
Zoom, which has earned significant revenue since the start of the pandemic – with even schools relying on it – has provided services to many Filipinos without ever being subject to VAT. This is simply because there was no mechanism for the BIR to require payment. The DST seeks to fix that by giving the government the legal means to collect VAT from foreign digital service providers.
What the Bureau of Internal Revenue (BIR) and the government aim to achieve through this new law is to ensure that companies like Zoom — global businesses heavily used in the Philippines – are made to pay VAT. Previously, the government had no way of collecting VAT from Zoom because it had no physical office or legal presence in the country. That was the gap this law intends to address.
A few days ago, streaming giant Netflix announced its updated subscription prices for Philippine users, effective June 1, 2025. This is clearly a result of DST implementation. We can expect, then, that Amazon Prime Video, Spotify, and the like will follow suit.
Netflix is popular even among ordinary Filipinos. The standard subscription, currently priced at PHP399, is set to increase to PHP449 per month. The mobile plan, which costs PHP149, will rise to PHP169 – a change that will impact many ordinary Filipinos who rely on their smartphones as their main source of entertainment. With 2.71 million subscribers, Netflix holds a dominant 34 percent share of the country’s streaming service market.
At the outset, it is clear that the imposition of the DST will affect many Filipinos, as the burden ultimately falls on the subscribers. The 12 percent VAT on digital service providers will directly lead to higher subscription costs, with platforms like Netflix expected to pass the tax on to consumers through price increases. Service providers collect the tax, but users effectively bear the burden. This may prompt some subscribers to reconsider their plans or shift to more affordable options. While the tax is intended to promote fair competition between local and foreign providers, it also adds to the financial strain on digital consumers.
Nonetheless, from the government’s perspective, it has both the mandate and responsibility to collect taxes from businesses, including digital service providers, to ensure the continuous delivery of essential public services such as education, healthcare, infrastructure, and social protection. Taxation is a fundamental tool for nation-building, enabling the government to fund programs that promote inclusive growth and long-term development. As the digital economy expands, it becomes increasingly important for the government to capture revenue from this sector to ensure fairness in the tax system and to prevent traditional, tax-compliant businesses from being placed at a disadvantage.
(To be concluded)
