The Philippines became the latest country to impose a tax on digital services.
Such taxes force Netflix and Spotify to pay local sales taxes even though their services are provided – legally, conceptually, and physically – beyond local jurisdiction.
The Philippines chose a rate of 12 percent, reflecting local value-added taxes.
“We have now clarified that digital services and goods and services traded through digital service providers should generally be subject to VAT. It’s just a matter of fiscal common sense,” said Joey Salceda, Member of the Philippine House of Representatives and a supporter of changing the nation’s tax code.
Salceda has linked the change to the post-pandemic economic recovery.
“If physical establishments, which are hardest hit by the pandemic, have to pay VAT, e-commerce giants should not be exempt,” he said.
However, local businesses that are already exempt from VAT due to low turnover will not be caught up by extending the tax to the virtual domain.
Salceda’s amendments are designed to catch content streamers, but also online software sales – including mobile apps – as well as SaaS and hosted software. The Philippine News Agency’s report on the adoption of the amendment even mentions firewalls as subject to VAT.
The Philippines isn’t the only one to introduce a digital services tax to generate more revenue after the COVID-19 pandemic hurt government revenues – Indonesia used the same logic in 2020.
But taxes are controversial because they are seen as a one-sided response to the larger problem of multinational corporations choosing the jurisdictions in which to pay taxes – a practice that erodes national tax bases. The G7 group of countries and the OECD believe that collaborations that shift tax obligations to countries where goods and services are acquired and consumed are the most appropriate response, and that the harmonization of global tax laws to charge taxpayers big tech wherever they do business is a better plan than taxes on digital services.
The United States has backed this view on taxes on digital services, announcing that it will impose tariffs on countries that introduce them – but has yet to adopt this plan.
Meanwhile, the process of creating a comprehensive approach to multinational tax shenanigans takes years to agree and implement.
But the Philippines wants more money in their coffers – and to demonstrate that local businesses aren’t at a disadvantage – as soon as possible. ®