VAT on Digital Services: What RMC 59-2026 means for taxpayers

Keeping up with the tax regulations is already challenging, and the inclusion of digital services adds further complexity. Recent guidance from the Bureau of Internal Revenue (BIR), however, provides welcome clarity.

Through Revenue Memorandum Circular (RMC) No. 59-2026 issued on June 2, 2026, the BIR provides timely and necessary clarifications on how value-added tax (VAT) applies to digital services.

RMC 59-2026 builds on the framework established under Republic Act (RA) No. 12023 and Revenue Regulations (RR) No. 3-2025. While these earlier issuances laid the groundwork for taxing digital services consumed in the Philippines, several practical questions remained, particularly regarding registration, reporting, and compliance obligations. RMC No. 59-2026 addresses these gaps and serves as a critical guide for both non-resident digital service providers (NRDSPs) and Philippine entities engaged in cross-border digital transactions.

WHAT ARE THE KEY CLARIFICATIONS?
• Compliance obligations despite VAT exemption

It was clarified under the circular that VAT exemption does not automatically relieve taxpayers from their compliance responsibilities. Even where digital services provided by an NRDSP are qualified as VAT-exempt, the provider must still register with the BIR and file the appropriate VAT returns. In these instances, transactions are simply reported as VAT-exempt sales.

• Determining the VAT responsibilities in cross-border transactions and cost-sharing arrangements

The circular also clarifies the VAT treatment of cross-border transactions and cost-sharing arrangements, which are common among multinational groups.

In such arrangements, digital services may be centrally procured by a foreign affiliate and subsequently allocated to Philippine entities. The party required to register as an NRDSP is the entity that supplies digital services subject to VAT to Philippine consumers and exercises control over key aspects of the transaction as follows:

• sets, directly or indirectly, any of the terms and conditions under which the supply of digital services is made (i.e., price, payment terms, delivery conditions,) or

• is involved, directly or indirectly, in the ordering of delivery of digital services, that is having influence over the conditions of delivery, transmission of approval to supplier, and provision of order fulfilment services.

When the Philippine entity ultimately consumes the digital service, the transaction remains subject to VAT, regardless of whether payment is made through a cost-sharing arrangement. These transactions are treated as business-to-business (B2B) and are subject to the reverse charge mechanism. Under this system, the Philippine entity must file the VAT return and withhold and remit the 12% VAT using BIR Form 1600-VT within 10 days after the end of the month in which the withholding was made and as evidenced by the billing or invoice issued by the foreign affiliate.

• Clarification on the VAT treatment of digital platform fees

The circular also addresses the VAT implications of payments made by Philippine entities to foreign digital platforms, such as online booking intermediaries. These payments including subscription fees, commission fees, and service fees are treated as payments for digital services. Where the Philippine entity is engaged in business, it is liable to withhold the VAT and remit the same to BIR under the reverse charge mechanism for B2B transaction.

Importantly, the circular clarifies that VAT applies only to the aforementioned fees charged by the platform and not to the full value of the underlying sales or rental income of the Philippine entity. This ensures that VAT is imposed solely on the digital service provided by the platform.

• VAT implications of advance payments for digital services

The circular also provides guidance on advance payments for digital services, particularly where service periods overlap with the effectivity of VAT on digital services rules. VAT applies only to the portion of the service rendered on or after June 2, 2025. Philippine entities must therefore allocate payments accordingly and compute the VAT based on the applicable period, in accordance with Section 6(B) of RR No. 03-2025.

• Clarification on e-marketplace advance VAT collection

Another important clarification relates to e-marketplaces that collect VAT on behalf of sellers. An e-marketplace may still be treated as a digital service provider even if payments are made directly to the NRDSP. Where the platform facilitates transactions and collects VAT on a pre-collected basis, it assumes responsibility for filing the appropriate VAT return (BIR Form 2550-DS) and remitting the 12% VAT on the covered Business-to-Consumer (B2C) transactions.

• VAT treatment of digital services availing of treaty benefits

Last, the circular further clarifies that tax treaties do not affect VAT obligations. Even where an NRDSP is a resident of a treaty country and holds a Certificate of Entitlement to Treaty Benefits (CoE) or regardless of the existence of a Double Taxation Agreement (DTA), the provision of digital services remains subject to VAT. These treaties generally apply only to income taxes and do not extend to indirect taxes such as VAT. However, zero-rating or exemption may apply in the sales treatment if the transaction satisfies the relevant provisions under the National Internal Revenue Code.

RMC No. 59-2026 marks a significant step toward aligning the Philippine VAT system with the realities of a rapidly evolving digital economy. By clarifying key areas such as compliance obligations, cross-border arrangements, platform fees, and advance payments, the BIR provides both Philippine businesses and NRDSPs with clearer direction on how to navigate their VAT responsibilities. Ultimately, the circular underscores the importance of reassessing existing digital service arrangements, particularly for businesses engaged in cross-border transactions. Taxpayers should review their registration status, invoicing flows, and VAT reporting processes to ensure full compliance. As the digital economy continues to grow, proactive tax compliance will be key to avoiding exposure and maintaining operational efficiency.

Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.

Mary Grace Ontar is a semi-senior from the Tax Advisory & Compliance practice area of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.

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