The digital economy is a broad range of economic activities that uses digitized information and knowledge as key factors of production that result in billions of everyday online connections. With the rise of the digital economy, taxation of intangibles has become a big challenge to policymakers and tax administrators. Among these challenges are tax revenue loss due to difficulty in tracing physical transactions at the border, missing taxable matters, creating competitive pressure on domestic suppliers, exemptions for imports of low valued goods, and unilateral taxing measures. These underlying challenges surfaced even more amid the strict enforcement of quarantine and lockdown measures due to the COVID-19 pandemic, forcing many firms and businesses to adopt new business models to cope with losses.
Notwithstanding the salient features of House Bill (HB) No. 7425 which addresses the issues on (1) tax neutrality by leveling the VAT playing field for domestic providers of digital goods and services and (2) adherence to OECD’s Destination Principle, this policy brief suggests looking into other administrative challenges to effectively levy VAT. As a matter of strategy, there are a number of options to explore such that the compliance and efficiency of the administration of VAT on digital goods and services can be assured.
This policy brief seeks to examine the challenges created by the digital economy in VAT taxation, identify key policy recommendations by analyzing the existing policy framework from the perspective of selected countries’ tax systems and salient provisions as set forth in HB 7425. This further intends to serve as relevant reference material for legislators in the deliberations of related pending legislative measures.