The digital economy has become a driving force in global trade, reshaping how services are created, delivered, and consumed across borders. In 2022, digitally delivered services reached a value of $3.82 trillion worldwide, making up 54% of all services traded and growing at a steady annual rate of 8.1% since 2005. For many governments, the rapid rise of digital services represents not only a vehicle for innovation and economic diversification, but also a crucial source of tax revenue.
In response, a growing number of countries are introducing tax measures targeting digital transactions, particularly those provided by non-resident entities. These efforts reflect a broader global shift toward asserting tax jurisdiction over digital consumption to ensure foreign providers contribute on par with domestic businesses. While the aim is to promote tax fairness and strengthen public finances, the measures also carry trade-offs: consumers may face higher prices as taxes are passed on, and foreign providers encounter increased compliance and administrative burdens.
This article examines several recent key developments in digital service taxation. In Canada, the province of Manitoba has just announced plans to extend its retail sales tax (RST) to cloud computing services beginning in 2026. In Southeast Asia, the Philippines will begin enforcing value added tax (VAT) obligations on foreign digital service providers starting June 1, 2025. Similar measures are also under consideration in Sri Lanka. Meanwhile, South Africa will implement a change effective April 1, 2025, that exempts non-resident digital service providers from VAT registration and collection requirements provided they supply services exclusively to VAT-registered businesses and not to consumers. Meanwhile, the Dominican Republic has failed to enact digital tax legislation for the third time. Taken together, these developments highlight how governments worldwide are evolving their tax systems to keep pace with the realities of an increasingly digitalized global economy.
Philippines to enforce 12% VAT on foreign digital services starting June 2025
Foreign digital service providers that offer services to customers in the Philippines will soon be subject to new tax compliance obligations. Starting June 1, 2025, a 12% VAT will apply to digital services consumed within the Philippines, even if the provider does not have a physical presence in the country.
Under the new rules, digital services are broadly defined as any service delivered online or through other electronic networks with minimal human involvement. This includes a wide range of offerings such as cloud computing services, online advertising, digital marketplaces, streaming platforms, mobile apps, e-learning tools, and virtual goods like e-books, music, or software. If a digital service is used in the Philippines—determined by indicators such as the customer’s billing address, IP address, or payment method—it will be subject to the 12% VAT.
The regulations distinguish between business-to-business (B2B) and business-to-consumer (B2C) transactions. In B2B transactions, it is the responsibility of the local Philippine business customer to withhold and remit the VAT to the Bureau of Internal Revenue (BIR), under what is known as a reverse charge mechanism. In B2C transactions, however, the foreign digital service provider is required to handle the tax directly—filing VAT returns and remitting the appropriate amount to the BIR.
To comply with these requirements, nonresident digital service providers must register with the BIR through the newly established VAT on Digital Services (VDS) Portal. The registration period runs from February 1 to April 2, 2025, ahead of the June implementation date. Providers do not need to open a local office or appoint a Philippine representative, although they may designate a local third-party service provider to assist with filings and communications. Any such appointment must be reported to the BIR within 30 days.
Once registered, foreign providers are required to issue compliant invoices for sales to Philippine customers. These invoices, which may be issued electronically, must include essential details such as the date of the transaction, buyer information, a description of the service, and a breakdown showing the VAT component. It’s important to note that while foreign providers must collect and remit VAT, they are not allowed to claim input tax credits, which are generally available to businesses operating locally.
The BIR has the authority to enforce compliance, including the power to suspend or block access to digital platforms operating in violation of the rules. Failure to register, collect, or remit VAT may lead to civil, administrative, and even criminal penalties.
Sri Lanka to introduce 18% VAT on foreign digital services in 2025
Sri Lanka is preparing to introduce a major tax reform in 2025 by applying an 18% VAT on digital services supplied by foreign companies to consumers in the country. This move is part of the government’s broader effort to modernize its tax system and ensure that international digital service providers contribute to the local economy in the same way as domestic businesses.
The proposed VAT will cover a wide variety of digital services used by individuals in Sri Lanka. These include streaming platforms for music and video, mobile apps, e-books, online news or magazine subscriptions, cloud-based software services, online gaming, and digital tools for advertising and data analytics. In general, if a service is delivered online and used within Sri Lanka, it will fall within the scope of the new VAT rules. Non-resident companies offering these services to Sri Lankan consumers will be required to register with the Sri Lankan Inland Revenue Department. Once registered, they must charge the 18% VAT on applicable sales and remit the tax to the authorities.
The reform was originally expected to take effect on April 1, 2025, but implementation is pending as detailed regulations and procedural guidelines have yet to be issued. These guidelines are expected to provide clarity on registration processes, tax return filings, and payment timelines.
Manitoba to introduce sales tax on cloud computing in 2026
Starting January 1, 2026, Manitoba will expand its retail sales tax (RST) to include cloud computing services. This marks a major development in the province’s approach to digital taxation, as part of the 2025 Budget announcement made on March 20, 2025. While the proposed changes are still progressing through the legislative process, Manitoba Finance has already updated its official guidelines to help businesses prepare for the upcoming tax shift.
Currently, Manitoba applies its 7% RST to most prewritten or “off-the-shelf” software, regardless of whether it is delivered physically or downloaded online. Custom software, developed specifically for a client, is generally exempt from tax. Modifications to prewritten software may also qualify for exemption if the custom changes are extensive enough and priced higher than the original software itself.
Under the current rules, if a Manitoban consumer accesses software that is hosted on a server outside the province, they are not charged RST. However, that is set to change on January 1, 2026. From that date forward, cloud computing services will be taxable, including Software as a Service (SaaS), Platform as a Service (PaaS), and Infrastructure as a Service (IaaS). Examples of taxable services include video game subscriptions, cloud storage solutions, and website hosting.
The tax will apply whether the service is provided by a business based in Manitoba or elsewhere. Both resident and non-resident providers will be responsible for collecting and remitting RST when their services are used in Manitoba. For services used across multiple provinces, the RST may be prorated based on how much of the service is used within Manitoba.
South Africa’s upcoming VAT exemption for B2B digital services
In April 2025, South Africa is set to implement new VAT rules that will impact foreign providers of B2B digital services. This update builds on the country’s longstanding efforts to modernize tax policy in response to the digital economy. In 2014, South Africa became the first African nation to introduce VAT on digital services supplied by non-resident companies to local consumers.
The tax framework was significantly expanded in 2019 to include both B2C and B2B transactions. However, in practice, enforcing VAT compliance for B2B services has proven difficult. Additionally, the South African Revenue Service (SARS) gains little to no financial benefit from collecting VAT on B2B digital service transactions. This is because South African businesses, as VAT-registered entities, are generally entitled to claim input tax credits on the VAT they are charged. As a result, the tax paid by businesses on these digital services is refunded, effectively neutralizing any revenue that SARS would otherwise collect from these transactions.
In response to these challenges, the South African government has introduced a new rule that will take effect on April 1, 2025. Under this reform, foreign suppliers that provide electronic services exclusively to South African VAT-registered businesses will no longer be required to register for or charge VAT. However, the responsibility will fall on the foreign supplier to verify and prove that all of their South African customers are indeed VAT-registered.
While the intention behind the reform is to simplify tax obligations and reduce unnecessary administrative burdens, concerns have been raised about how the rule will work in practice. The exemption applies only if 100% of the foreign supplier’s services are provided to VAT-registered customers. If even a single digital service is supplied to a non-registered customer—regardless of the value—the exemption is lost entirely. In such cases, the supplier must register for VAT and account for all digital service transactions in South Africa, including when determining whether they have exceeded the VAT registration threshold of ZAR 1 million within a 12-month period.
Critics argue that the lack of a minimum threshold or tolerance for incidental supplies to non-registered customers makes the regime unnecessarily rigid. For many foreign providers, a minor transaction with a non-VAT-registered customer could trigger full compliance obligations, undermining the goal of administrative simplicity the reform was meant to achieve.
Dominican Republic’s third failed attempt to tax digital services
While many countries are expanding their tax systems to capture revenue from foreign digital service providers, the Dominican Republic has taken a markedly different path. Over the past few years, the country has made multiple attempts to introduce VAT on digital services provided by non-resident companies to local consumers—only to reverse course each time.
The first major proposal came in September 2022, when the Ministry of Finance submitted the Draft Law for the 2023 General State Budget to the National Congress. Among its provisions was a plan to apply VAT to digital services offered in the Dominican Republic by foreign providers.
A similar initiative resurfaced on October 8, 2024, when the Ministry of Finance introduced the Fiscal Modernization Law, again seeking to impose VAT on cross-border digital services. However, just eleven days later, on October 19, 2024, the President publicly withdrew the bill due to a lack of political consensus and legislative support.
In a renewed effort, the government issued Decree 30-25 on January 25, 2025, in another attempt to implement VAT obligations for non-resident digital service providers. But once again, the policy was short-lived. On March 3, 2025, Decree 107-25 was issued, repealing the earlier decree and halting the initiative entirely.
These rapid reversals mark the third unsuccessful attempt to introduce VAT on digital services in the Dominican Republic, setting the country apart from the global trend. While most jurisdictions are moving forward with digital tax reforms to ensure that foreign providers contribute to public revenue, the Dominican Republic has so far stepped back—highlighting the complex political and economic considerations that influence digital tax policy.
The opinions expressed in this article are those of the author and do not necessarily reflect the views of any organizations with which the author is affiliated.
Read the full article here
