The Republic Act No. 12023, also known as the VAT on Digital Services Act, signed by President Ferdinand Marcos Jr., took effect on October 2, 2024, and amended several sections under Chapter 1, Title IV, of the National Internal Revenue Code of 1997. It was established to promote fair tax imposition between foreign and local businesses providing digital services.

Digital service refers to services that are provided through the internet or other online networks with the use of information technology. Digital service shall include online search engines, online marketplaces or e-marketplace, cloud service, online media and advertising, online platform, or digital goods. RA 12023 covers both resident and non-resident digital service providers (NRDSPs). NRDSPs are digital service providers whose businesses are located outside the Philippines.

The transactions covered under RA 12023 include Business-to-business (B2B) transactions and Business-to-consumer (B2C) transactions. B2C transactions involve entities that supply digital services to consumers or persons not engaged in business in the Philippines. Meanwhile, B2B transactions are those entities that provide services to natural or juridical persons engaged in business within the Philippines.

Based on the policies and guidelines of Section 6(B) of Revenue Regulations (RR) No. 3-2025, the VAT compliance requirements applicable to NRDSPs differ depending on whether the transaction is classified as B2B or B2C. In B2B transactions, the consumer engaged in business is responsible for electronically filing the required remittance return and withholding and remitting the 12% VAT under the reverse charge mechanism. In contrast, in B2C transactions, the NRDSP is directly responsible for electronically filing the VAT return and paying the 12% VAT through the simplified pay-only regime based on its gross sales from digital services consumed or used in the Philippines.

The VAT payment must be made at the time of the filing of the VAT return on or before the twentyfifth (25th) day of the month following the close of each taxable quarter.

The table below highlights the amendments to the different sections of the NIRC. The bolded text indicates the new additions to the previous versions of the existing sections.

Section 105: Persons Liable	Non-Resident Foreign Persons are considered to have rendered service in the Philippines if said digital services are consumed within the Philippines.
Section 108: Value-added Tax on the Sale of Services, Including Digital Services, and the Use or Lease of Properties	The phrase “sale or exchange of services” shall now include the supply of digital services.
Section 108-A: Liability of Persons Providing Digital Services	Both resident and non-resident digital service providers are responsible for assessing, collecting, and remitting the 12% VAT on digital services consumed within the Philippines.

Section 108-B: Liability of a Nonresident Digital Service Provider to Withhold and Remit Value-Added Tax	For VAT-registered consumers The consumer engaged in business is liable to withhold and remit the VAT due on their digital service purchases from NRDSPs to the Bureau of Internal Revenue (BIR) under the Reverse Charge Mechanism in Digital Services. For Non-VAT registered consumers The NRDSPs shall be liable for the collection and remittance of the VAT imposed on digital services consumed within the Philippines to the BIR.
Section 109: Exempt Transactions	The sale of online subscription-based services to the Department of Education (DepEd), the Commission on Higher Education (CHED), the Technical Education and Skills Development Authority (TESDA), and other educational institutions recognized by said government agencies is VAT-exempt. Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries, including those rendered through various digital platforms, are also VAT-exempt.
Section 110: Tax Credits	NRDSPs are not allowed to claim creditable input tax.
Section 113: Invoicing and Accounting Requirements for VAT-Registered Persons	A digital sales or commercial invoice must be issued for every sale, barter, or exchange. In case of sale of digital services, including some that are subject to VAT, VAT zero-rated, or VAT-exempt, a clear breakdown of the taxable sale price must be indicated.
Section 114: Return and payment of Value-Added Tax	Under the Reverse Charge Mechanism, VATregistered taxpayers shall withhold and remit VAT on their purchases to the BIR within ten (10) days after the close of the month in which the withholding occurred.
Section 115: Power of the Commissioner to Suspend the Business Operations of a Taxpayer	The Commissioner is vested with the authority to block services from digital service providers, which shall be enforced by the Department of Information and Communications Technology (DICT) through the National Telecommunications Commission (NTC).

Section 128: Returns and Payment of Percentage Taxes	The filing and payment of percentage taxes are now allowed to be made either electronically or manually through authorized channels, including authorized tax software.
Section 236: Registration Requirements	Those digital service providers whose gross sales for the past twelve (12) months, other than those that are exempt under Section 109(A) to (CC), have exceeded the threshold as provided in Section 109(CC) or there are reasonable grounds to believe that the gross sales for the next twelve (12) months will exceed the threshold are required to register for Value-Added Tax.
Section 288: Disposition of Incremental Revenues	Pursuant to Republic Act No. 12023, five percent (5%) of incremental VAT revenue derived from digital service providers shall be earmarked exclusively for the development of creative industries, for a duration of five (5) years from the law’s effectivity. After the lapse of the five (5) year period, the incremental revenues shall accrue to the General Fund.

Republic Act No. 12023 signifies a pivotal reform in the Philippine tax system, ensuring its alignment with the demands of the digital economy. The imposition of VAT on digital service providers promotes fair competition by applying VAT rules to foreign digital service providers, helping create more equal tax treatment while strengthening the country’s tax administration. This measure reflects the government’s commitment to modernizing the tax system, supporting economic growth, and ensuring that taxation remains effective and equitable in an increasingly digital economy.

DISCLAIMER
The information provided herein is intended for general informational purposes only and reflects the current understanding of the given topic. It is subject to change in response to updates in laws or regulations. This material does not constitute legal or financial advice. For tailored advice, please contact De Guzman Pascual and Associates CPAs at ask@dgpcpa.org. The views expressed do not necessarily represent any official position of governmental or financial entities.