Analysis and Opinion
By Joe America
I was curious about the forthcoming VAT on digital services. I used the Senate's third reading of their bill for reference, which is available in PDF format: S. No. 2528
- A) THE TERM 'DIGITAL SERVICE' SHALL REFER TO ANY SERVICE THAT IS SUPPLIED OVER THE INTERNET OR OTHER ELECTRONIC NETWORK WITH THE USE OF INFORMATION TECHNOLOGY AND WHERE THE SUPPLY OF THE SERVICE IS ESSENTIALLY AUTOMATED. DIGITAL SERVICES SHALL INCLUDE, BUT NOT LIMITED TO: (1) ONLINE SEARCH ENGINE; (2) ONLINE MARKETPLACE OR E-MARKETPLACE; (3) CLOUD SERVICE; (4) ONLINE MEDIA AND ADVERTISING; (5) ONLINE PLATFORM; OR (6) DIGITAL GOODS.
There are exclusions for education and banking services.
The tax applies to domestic and foreign distributors of digital products and services. In my opinion, writing the IRRs for this bill will be challenging.
I currently pay for a variety of services obtained over the internet. I have subscriptions to 1) a Microsoft family package at about $120 per year, 2) Adobe at $30 per year, and 3) Windy.com's premium weather service at $20 per year. I also buy 4) Amazon books electronically; that's about $200 per year.
Do these providers know I am in the Philippines? That will be the IRR's first challenge. Will they require all internet service providers on the planet to track the locations of their customers so they know when they are in the Philippines? Their services are available anywhere. They are global services. Not Philippine services.
I use a lot of Google services but don't pay anything for them. Google makes money selling ads and I never buy anything from internet ads. But does Google have to track clicks on ads that come from the Philippines, calculate a value, and remit it to the Philippine tax authorities? How will tax authorities audit Google?
What happens if Microsoft, Adobe, Windy, Amazon, and Google say they cannot track customers? What happens if the US cries "no fair taxing our companies, we don't tax yours!"?
What happens if the US companies will not provide services in the Philippines because the scheme is onerous?
I conduct stock transactions through a US broker. It is unclear if this is a banking exclusion or not. If it is not an exclusion, I would expect the broker to stop accepting trades from the Philippines. They do know I reside here and already limit what I can do because of the Philippines' bad reputation (money laundering).
The problem with this digital tax scheme is that the internet is a free range services provider. Chickens, or customers, can wander onto anyone's property looking for bugs. The Philippines wants to charge the chicken ranchers if the chickens eat bugs from their property. And they want the chicken ranchers to tabulate the weight of the bugs the chickens eat. And bear the cost of doing it.
Well, enough of that and the chicken ranchers will put up fences so the chickens don't eat in the Philippines.
And I'll have to move to Guam.
The biggest chicken rancher, of course, is the United States. And the US thinks it is improper for other nations to tax its companies. The US is threatening to apply retaliatory tariffs against countries that hatchet its chicken ranchers. European countries lead the hatchet pack, as this article delineates: Digital Services Taxes in Europe, 2024
The article reviews Organisation for Economic Co-operation and Development (OECD) efforts to build an agreed international taxing scheme called Pillar One, but you can imagine the rats nest of conflicting self-interests that entails. Here is OECD's progress report on the program: Fact Sheet Amount A. It's complicated.
The Philippine Government seems to me to be approaching desperation in its fiscal management. It is expanding VAT levies and recently raided Phil Health reserves to the tune of 90 billion pesos. Debt is reaching record highs and they just can't get inflation down, or growth up, to projected ranges. Poor fiscal discipline is exactly what drove Marcos Senior out. Now we hear echoes.
I'm also reminded of the SMS registration fiasco which was supposed to curtail text scams but didn't. This digital tax scheme will have fallouts that the simplistic minded legislators do not care about. They are driven by greed. Give them taxes and give us headaches, or Phil Health clients death, it matters little to them.
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Cover photo from Word Press image creator using the article as a prompt.
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