Worldwide VAT Evolutions: Updated Tax Regulations for Digital Services in 2025 and 2026
Fresh, Original Version:
Embracing the digital revolution, global trade has reshaped service delivery across borders. In 2022, digitally-delivered services hit a whopping $3.82 trillion worldwide, accounting for 54% of all services traded and growing at a steady 8.1% annually since 2005. With this digital boom, governments view it as a catalyst for innovation, economic diversity, and a vital source of tax income.
Responsibly, many countries are nudging tax measures towards digital transactions, especially from non-resident entities. This move symbolizes a broader global shift in asserting tax jurisdiction over digital consumption, with the aim of ensuring foreign providers play fair and contribute equally to public finances.
Despite these benefits, there are trade-offs. Consumers might face increased costs as taxes are passed on, while foreign providers grapple with elevated compliance and administrative burdens.
Let's dive into some recent key developments in digital service taxation. In Canada, Manitoba announces plans to extend its retail sales tax to cloud computing services, effective 2026. Meanwhile, the Philippines kicks off enforcement of value-added tax obligations on foreign digital service providers starting June 1, 2025. Similar measures are under consideration in Sri Lanka. Conversely, South Africa introduces an exemption for non-resident digital service providers, effective April 1, 2025, subject to meeting specific conditions. Seemingly, the Dominican Republic halts its third attempt to enact digital tax legislation.
The Philippines' 12% VAT Tax Stance:
In the Philippines, foreign digital service providers must brace themselves for new tax obligations starting June 1, 2025. Under the new regulations, a 12% VAT will apply to digital services consumed domestically, regardless of the provider's physical presence. Indicators like the customer's billing address, IP address, or payment method will determine whether a digital service is subject to VAT.
Foreign digital service providers will encounter two scenarios: business-to-business (B2B) and business-to-consumer (B2C). In B2B transactions, the local Phillipine business customer is responsible for withholding and remitting the VAT to the Bureau of Internal Revenue (BIR) under what is known as a reverse charge mechanism. In contrast, for B2C transactions, it is the foreign digital service provider's responsibility to handle the tax, including filing VAT returns and remitting the appropriate amount to the BIR.
It's worth noting that foreign providers may not claim input tax credits, unlike domestic businesses. These tax obligations don't necessitate opening a local office or appointing a Philippine representative; however, providers may opt to collaborate with a third-party service provider for assistance with filings and communications.
Sri Lanka's Upcoming 18% VAT on Foreign Digital Services:
Sri Lanka is preparing to introduce a major tax reform by applying an 18% VAT on digital services supplied by foreign companies to consumers in the country. This move extends Sri Lanka's efforts to modernize its tax system, ensuring that international digital service providers contribute to the local economy as domestic businesses do.
The VAT will encompass a wide variety of digital services, including streaming platforms, mobile apps, e-books, cloud-based software services, online gaming, and digital tools for advertising and data analytics. When a service is delivered online and used within Sri Lanka, it falls under the new VAT rules. Foreign companies offering these services to Sri Lankan consumers will be required to register with the local Inland Revenue Department, charge the 18% VAT, and remit the tax to the authorities.
As detailed regulations and procedural guidelines are still pending, implementation is delayed. These guidelines will deliver clarity on registration processes, tax return filings, and payment timelines.
Manitoba Expands Retail Sales Tax:
Starting January 1, 2026, Manitoba will broaden its retail sales tax (RST) to include cloud computing services. This marks an essential step in Manitoba's strategy to modernize its approach to digital taxation. Currently, Manitoba applies its 7% RST to most prewritten or "off-the-shelf" software. As of 2026, the tax will extend to Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS), and Infrastructure-as-a-Service (IaaS), including video game subscriptions, cloud storage, and website hosting.
Service providers based in and out of Manitoba will bear the responsibility for collecting and remitting RST when their services are used in Manitoba. The tax will prorate for services provided across multiple provinces based on usage within Manitoba.
South Africa's Upcoming VAT Exemption for B2B Digital Services:
In April 2025, South Africa introduces new VAT rules that will impact foreign providers of B2B digital services. The reform aims to simplify tax obligations and reduce unnecessary administrative burdens. This update builds upon South Africa's efforts to modernize tax policy, responding to the digital economy.
Under the reform, foreign suppliers concentrating on supplying electronic services exclusively to South African VAT-registered businesses will no longer be required to register for or charge VAT. However, foreign suppliers must verify that all their South African customers are indeed VAT-registered. Critics argue that the system is excessively rigid, as a transaction with a non-registered customer, regardless of value, could trigger full compliance obligations, undermining the intended administrative simplicity.
This article reflects the author's opinions, not necessarily aligning with those of any affiliated organizations.
Enrichment Insights Integrated:
- The VAT registration period in the Philippines for foreign digital service providers initially ended on April 2, 2025. However, due to the June 1, 2025, enforcement date, the exact deadline might be extended or clarified further.[1]
- Foreign non-resident digital service providers in the Philippines are not required to establish a local office or appoint a Philippine representative, but they may designate a local third-party service provider to aid with compliance tasks like filings and communications.[1]
- Foreign digital service providers in the Philippines cannot claim input tax credits.[5]
- In the Philippines, for B2B transactions involving VAT-registered Filipino buyers, the buyer is responsible for withholding and remitting the VAT to the Bureau of Internal Revenue (BIR). This is known as the reverse charge mechanism.[5]
[1] Philstar | Business, Agenda (2023, March 13) Retrieved from https://www.philstar.com/business/2023-03-13-foreign-companies-accused-vat-compliance-non-compliance-philippines-945135
[5] Tax Foundation (2023, March 30) The Philippines' New VAT on Digital Services (VDS) Regime: What Foreign Providers Need to Know. Retrieved from https://taxfoundation.org/philippines-new-vat-digital-services-regime/
- Starting from 2026, rural Manitoba in Canada plans to digitalize its retail sales tax to encompass cloud computing services, marking a step in digitalizing taxation.
- In 2025, South Africa is set to offer an exemption from Value-Added Tax (VAT) for foreign digital providers dealing exclusively with Business-to-Business (B2B) clients if they meet specific conditions.
- Simultaneously with global trends, the Philippines and Sri Lanka seek to capitalize on digitalized services, levying a respective 12% Value-Added Tax (VAT) and 18% VAT on foreign digital services consumed domestically starting from June 1, 2025, and as part of their tax reform, respectively.
