[In This Economy] The economics of Marcos’ tax on digital services

On October 2, Filipinos were greeted by a new tax on digital services such as online subscriptions (think Netflix, Spotify, etc.), online marketplaces or e-marketplaces (Shopee, Lazada, etc.), online search engines, cloud services, online media and advertising, online platforms, and digital goods.

Specifically, a 12% value-added tax (VAT) will be imposed on all these digital services.

President Ferdinand Marcos Jr. said this is not a new tax. He said at the ceremonial signing, “Make no mistake, we are not imposing new taxes, we are simply strengthening the authority and streamlining the process of the BIR to collect value-added tax on digital services.”

Recto, for his part, said: “We are not imposing a new tax. We are just collecting the tax that foreign digital service providers are supposed to be paying.”

But they’re wrong. The extension of the VAT to digital services, is in effect, a new tax on these things.

Why the lie? I think they don’t want to be remembered as an administration that passed a new tax, especially right before elections. Recto also got burned before when, as a senator, he authored the original VAT law in the mid-2000s. It’s widely thought that this law cost him a Senate reelection in 2007.

At any rate, what are the benefits and costs of this new tax? Who exactly will pay for this tax? Let me list my concerns.

First, this won’t give the government too much extra cash.

As with any tax, a VAT on digital services is expected to help earn money for the government. Officials expect to raise about P100 billion (some say P105 billion) in the next five years.

In the grand scheme of things, that’s small.

For perspective, P100 billion is not even a third of the average revenues collected by government every month. Put another way, P100 billion in five years comes down to just P1.67 billion of extra revenues per month, which is just not even 1% of the average revenues collected by the government every month.

The government is in desperate need of cash. In 2023, its spending exceeded its revenues by a whopping P1.5 trillion, and colossal deficits add to our nation’s debt. Finding new revenue sources is supposed to help abate this.

But is taxing digital services the way to go? I can think of other, low-hanging fruit.

For instance, why doesn’t the Marcos government go after the incomes of corporations and the rich instead? Why not increase taxes on corporate profits through, say, the CREATE MORE bill now awaiting the President’s signature? Why not increase mining taxes and sin taxes? Why not impose congestion taxes, which will also help abate the monstrous traffic in Metro Manila?

Lest we forget, the Marcoses also owe the Bureau of Internal Revenue (BIR) at least P203.8 billion in unpaid estate tax liabilities, already more than twice the total expected revenues from the VAT on digital services. This is on top of the P125 billion or so of ill-gotten wealth that has yet to be recovered from them.

If the Marcoses don’t want to pay their dues, how can they expect the people to do so as well?

Second, it’s not so easy to implement this law.

One reason for the puny expected revenues from this tax is that collection could be a nightmare.

How can the Philippine government collect money from Netflix or YouTube or Amazon, global companies headquartered overseas, and over which the Philippine government has no jurisdiction?

The government also needs to rely on the data on online transactions, and only the digital service providers can supply such data. If the platforms don’t voluntarily comply or find loopholes, enforcement becomes too difficult, if not impossible.

Third, this tax penalizes Filipino consumers, not the digital service providers.

In a bid to further sugarcoat the law, Marcos assured the public that the providers of digital services abroad will pay for this tax, not consumers.

He addressed the digital service providers: “With this law, we say that ‘if your presence in the Philippine market is as real as your profits, then your tax responsibilities should also be equally tangible.’”

“Local business and international digital platforms now compete on equal terms. We no longer will be playing by different sets of rules. If you are reaping the rewards of a fruitful digital economy here, it is only right that you contribute also to its growth,” Marcos added.

Some have argued that both consumers and digital service providers will pay for the VAT. But a bit of economics tells us otherwise.

You see, from the perspective of digital service providers like Netflix or YouTube, it costs next to nothing to supply more of their digital services. The extra costs of one extra subscriber are zero or near zero. Servicing more people won’t entail too much costs.

This means they can easily continue providing their services even with the  new VAT in place. They can simply raise their prices and pass the entire value of the tax to Filipino consumers.

Since the pandemic, a great number of Filipinos have come to rely on the digital services not just for their entertainment and shopping, but also for their livelihoods. Most consumers will continue using digital services anyway, despite the VAT.

In the end, consumers lose. This same thought has been articulated by tax experts such as Mon Abrea.

The Filipino middle class, in particular, will be hurt by this new tax. And since the Philippines’ middle class is ballooning as we speak, this new tax isn’t the wisest policy to make right before an election year.

Fourth, this might stifle the growth of the online economy.

While Filipino consumers will bear the greater portion of this VAT, digital service providers will feel the pinch on their revenues, too. To the extent that his new law hurts them, the digital services providers might scale back their operations in the Philippines or choose to exit altogether.

In particular, nonresident digital service providers failing to register with the BIR, or failing to designate a local representative to handle their tax responsibilities in the Philippines, may face temporary suspension of their operations in the country. Their services will be blocked by the National Telecommunications Commission.

Digital service providers who exit the country operate globally, anyway, and might be able to afford letting go of the Philippine market and focus their operations in other countries where the tax system is more favorable to them.

Mass exit of digital service providers may prove devastating for Filipinos who have come to depend on a wide variety of digital services. This will prove to be a major setback to our economy, particularly our online economy which has flourished since the pandemic.

Another potential consequence is that the VAT will end up taxing the remaining Filipino digital service providers, who will tend to be smaller and less globally diversified. They will have no choice but to continue paying the VAT, and they might be discouraged from innovating or making future investments.

In other words, the VAT law may end up making the playing field even more tilted than before.

On the part of Filipino consumers, they might resort to pirated products (which are of course not taxed) or rely more on VPNs to access digital services from abroad without detection.

The risk of increased piracy may contravene one of the VAT law’s provisions, which says that 5% of the revenues from the tax on digital services will be earmarked for the creative industry.

Five percent of P100 billion in five years is just P1 billion per year. By contrast, on October 2, it was announced that the Korean government set up a $454 million (P25.6 billion) fund for K-pop, Korean movies, dramas, games, and webtoons and “help domestic production studios adapt popular Korean intellectual property across multiple formats rather than selling its rights to overseas streaming platforms.”

Maybe direct support from government is the better way to help the creative industry, rather than taxing digital services at large.

All in all, Marcos Jr.’s new tax on digital services is well-meaning but might spawn a host of unintended consequences. As with many other laws, the most well-meaning laws trip us up the most. – Rappler.com

JC Punongbayan, PhD is an assistant professor at the UP School of Economics and the author of False Nostalgia: The Marcos “Golden Age” Myths and How to Debunk Them. In 2024, he received The Outstanding Young Men (TOYM) Award for economics. Follow him on Instagram (@jcpunongbayan) and Usapang Econ Podcast.