Franchise Tax vs VAT: When BIR Franchise Grantees Pay 2% or 3% Instead of 12% VAT

Most Philippine franchise holders charge 12% VAT like any other VAT-registered business — but NIRC Section 119 carves out a narrow exception: gas and water utility franchises pay a 2% franchise tax, and small radio/TV broadcasting franchises pay 3%, instead of VAT. Electric utilities used to be in this group too, until Republic Act No. 9337 moved them onto standard VAT.

This guide explains who actually qualifies for Section 119 franchise tax, the rates involved, and the one-way VAT registration option built into the provision.

What does NIRC Section 119 actually say? #

Section 119 is narrower than its name suggests — “Tax on Franchises” doesn’t mean every franchise grantee, only two specific categories the law names directly. The statutory text reads:

“SECTION 119. Tax on Franchises. - Any provision of general or special law to the contrary notwithstanding, there shall be levied, assessed and collected in respect to all franchises on radio and/or television broadcasting companies whose annual gross receipts of the preceding year does not exceed Ten million pesos (P10,000,000), subject to Section 236 of this Code, a tax of three percent (3%) and on electric, gas and water utilities, a tax of two percent (2%) on the gross receipts derived from the business covered by the law granting the franchise: Provided, however, That radio and television broadcasting companies referred to in this Section shall have an option to be registered as a value-added taxpayer and pay the tax due thereon: Provided, further, That once the option is exercised, it shall not be revoked.”

The section still names “electric” utilities in its original text, but a later amendment narrowed the practical scope — see below.

Why doesn’t the 2% rate apply to electric utilities anymore? #

Republic Act No. 9337 (the 2005 VAT Reform Act) removed electric utilities from Section 119’s franchise tax treatment and subjected them to the standard 12% VAT instead. So although the base text of Section 119 still lists “electric, gas and water utilities” together, the 2% franchise tax rate currently applies only to gas and water utilities in practice — electric utility franchise holders charge VAT like other VAT-registered businesses.

The radio and TV broadcasting threshold and the one-way VAT option #

Small radio and television broadcasting companies get a specific, revenue-based test: if the company’s gross receipts for the preceding year did not exceed ₱10,000,000, it pays the 3% franchise tax instead of VAT. Cross that threshold, and the broadcaster moves to standard VAT treatment.

Even below the threshold, Section 119 gives qualifying broadcasters a choice: stay on the 3% franchise tax, or voluntarily register as a VAT taxpayer. The catch is in the text itself — “once the option is exercised, it shall not be revoked.” A broadcaster that opts into VAT registration under this provision can’t later switch back to the 3% franchise tax, even if gross receipts later drop well below ₱10,000,000 again. That’s a materially different rule from ordinary VAT deregistration for falling below the general VAT threshold — see How to Cancel Your VAT Registration and Shift Back to Non-VAT for how that separate process works for typical VAT-registered businesses.

Franchise tax vs VAT: what’s actually different #

Beyond the rate itself, franchise tax under Section 119 is a percentage tax, not VAT — which changes how input taxes and pass-through charges work. A percentage taxpayer generally cannot claim input tax credits the way a VAT-registered business can, and doesn’t charge a separate, creditable VAT line to its customers.

For a broader look at how percentage tax and VAT compare generally, see VAT vs. Percentage Tax: Which Applies to Your Business?

Worked example: a small provincial radio station #

A provincial AM radio station under a legislative franchise has gross receipts of ₱8,000,000 for the preceding year — below the ₱10,000,000 threshold — and has not opted into VAT registration.

If the same station’s gross receipts had exceeded ₱10,000,000 the prior year, it would instead compute 12% VAT on the same ₱2,000,000 — a materially larger amount, though offset in part by the ability to claim input VAT credits on the station’s own VATable purchases, which the franchise-tax version of the station cannot do.

Frequently asked questions #

Do all franchise businesses in the Philippines pay franchise tax instead of VAT? #

No. Only two specific groups fall under NIRC Section 119’s franchise tax: gas and water utilities (2%), and radio and/or television broadcasting companies whose prior-year gross receipts do not exceed ₱10,000,000 (3%). Electric utility franchises were removed from this treatment by RA No. 9337 and now pay the standard 12% VAT.

What is the franchise tax rate for gas and water utilities? #

2% of gross receipts derived from the business covered by the franchise, under NIRC Section 119, instead of the standard 12% VAT that would otherwise apply to their sales.

What is the franchise tax rate for small radio and TV broadcasting companies? #

3% of gross receipts, but only for radio and/or television broadcasting companies whose annual gross receipts of the preceding year do not exceed ₱10,000,000. Broadcasters above that threshold are subject to VAT instead.

Can a radio or TV broadcaster under the ₱10 million threshold choose to register for VAT instead of paying the 3% franchise tax? #

Yes. NIRC Section 119 gives qualifying radio and television broadcasting companies the option to register as VAT taxpayers instead of paying the 3% franchise tax. Once that option is exercised, however, it cannot be revoked.

Does an electric utility company pay franchise tax under Section 119? #

No. Republic Act No. 9337 removed electric utilities from the Section 119 franchise tax and subjected them to the standard 12% VAT, so the 2% franchise tax rate under this section currently applies only to gas and water utilities.

Summary #

NIRC Section 119 replaces standard 12% VAT with a 2% franchise tax for gas and water utilities and a 3% franchise tax for radio/TV broadcasters under the ₱10,000,000 gross receipts threshold — a narrower group than “franchise” might suggest, since electric utilities were moved to VAT by RA No. 9337. Qualifying broadcasters can opt into VAT registration instead, but that choice is permanent once made. For the general VAT-vs-percentage-tax framework, see VAT vs. Percentage Tax: Which Applies to Your Business? and VAT Registration Threshold in the Philippines