Creating a level playing field for streaming services in the Philippines

On October 2President Ferdinand Marcos Jr. signed the law Republic Act 112023which introduces a 12 percent value added tax (VAT) on digital services. This law addresses a legal loophole that previously exempted non-resident streaming companies from paying VAT on services consumed in the country. Due to RA112023, platforms such as Netflix and HBO now have to adhere to the same tax rules as local providers such as iWantTFC and Vivamax. Supporters of the new law estimate that the VAT could generate an additional PHP83.8 billion ($1.49 billion) in revenue between 2024 and 2028, supporting government infrastructure and social projects.

However, while this law aims to create a level playing field, it may have unintended consequences that significantly offset the desired revenue growth. Foreign providers such as HBO and Netflix, which currently share some of the most affordable subscription rates in Southeast Asia, with monthly fees as low as PHP199 ($3.54) and PHP395 ($7.03) respectively could increase their subscription prices to offset the new tax burden. Such increases, in turn, could significantly reduce the number of paid subscribers, undermining additional revenue generation as Filipino consumers increasingly turn to pirated content.

A broad consensus supports the objectives of RA112023. The imposition of VAT on foreign digital service providers is in line with this international trends aimed at taxing digital services at the places where they are consumed. More specifically, it builds on regulations created in response to the Aces Philippines Cellular Satellite Corp. vs. Commissioner of Internal Revenue case (GR No. 226680, August 30, 2022). In that case, the Supreme Court ruled that income from services provided in the Philippines – despite being provided by foreign entities – was still subject to local taxes. The court found that critical components of these services, such as the use of gateway facilities within the country, justified imposing taxes on earned income. This precedent reinforces the principle of ‘benefits receiving theory’, where the jurisdiction providing the essential income-generating services has the right to tax that income.

Revenue Memorandum Circular (RMC) No. 5-2024 further strengthens this principle by clarifying that cross-border services provided to Philippine companies are subject to VAT and final withholding tax even if the service provider is located outside the country. This means that companies like HBO and Netflix will not only have to comply with the new VAT regulations, but also withhold tax liabilities when providing services to Filipino consumers.

Nevertheless, to achieve the objectives of RA112023, the Philippine government must step up its fight against piracy. According to one recent researchSeven in 10 Filipinos consume pirated content, and higher subscription prices would likely push even more of them in that direction. The Asia Video Industry Association’s Coalition Against Piracy, which also includes HBO, Disney and Fox, has done so marked the seriousness of this issue. Along with lawmakers including Senators Jinggoy Estrada and Ramon Revilla Jr. and House Rep. Joey Salceda, they are calling for changes to the Philippine Intellectual Property (IP) Code, including a law requiring the blocking of sites that could help curb the prevalence of piracy. content online.

The government has recognized the urgency of tackling the country’s high piracy rates. In July, Trade and Industry Minister Alfredo Pascual said announced plans to change the IP code to increase the Intellectual Property Office of the Philippines (IPOPHL)’s ability to block piracy websites. This move aims to protect the creative industries that have been hit hard by illegal content sharing, especially since the COVID-19 pandemic. Senate bills 2150 And 2385in parallel with House bill 7300continue this initiative by expanding IPOPHL’s authority to cooperate with internet service providers in blocking infringing websites and imposing fines of up to PHP 1 million ($18,000) for violations. Without the implementation of these laws, the combination of rising costs and the prevalence of pirated content could pose a significant challenge to streaming companies looking to maintain their reputations. already declining subscriber base.

While the new law aims to create a fairer tax system for digital services, it also brings new challenges for the government, service providers and consumers. Streaming companies will have to weigh compliance with these new tax rules against the risk of losing subscribers to piracy, especially in a market where affordability and competition are proven key factors. The implementation of changes to the Philippine IP Code is crucial to ensure that the country’s digital content market remains sustainable despite rising costs.