Gross Receipts Tax on Banks and Financial Institutions: NIRC Section 121 Rates

Banks and non-bank financial intermediaries do not pay VAT on their financial income — they pay Gross Receipts Tax (GRT), a percentage tax under NIRC Section 121, at tiered rates: 5% or 1% on lending income depending on the loan’s remaining maturity, 0% on dividends and subsidiary equity shares, and 7% on other income. The maturity-based split on lending income is the rule most often computed wrong.

Banks are taxed on gross receipts, not VAT #

Financial institutions sit outside the VAT system: instead of 12% VAT on services, a bank pays Gross Receipts Tax on its gross income under NIRC Section 121. This is why a bank’s interest and fee income never carries VAT — the law channels financial services into the percentage-tax regime. The distinction between VAT and percentage tax generally is covered in VAT vs Percentage Tax in the Philippines; the parallel rule for common carriers and insurers is in Percentage Tax on Common Carriers, Banks, and Insurance.

The Section 121 rate schedule #

Section 121 sets different rates for different kinds of bank income, and the lending-income rate turns on the loan’s remaining maturity. The statute provides:

“There shall be collected a tax on gross receipts derived from sources within the Philippines by all banks and non-bank financial intermediaries in accordance with the following schedule: (a) On interest, commissions and discounts from lending activities as well as income from financial leasing, on the basis of remaining maturities of instruments from which such receipts are derived: Maturity period is five (5) years or less — 5%; Maturity period is more than five (5) years — 1%; (b) On dividends and equity shares in net income of subsidiaries — 0%; (c) On royalties, rentals of property, real or personal, profits from exchange and all other items treated as gross income under Section 32 of this Code — 7%; (d) On net trading gains within the taxable year on foreign currency, debt securities, derivatives, and other similar financial instruments — 7%.”

— NIRC of 1997, Section 121 (as amended by RA 9337)

Watch the maturity direction #

The lower 1% rate applies to longer loans (remaining maturity of more than 5 years) and the higher 5% rate to shorter loans (5 years or less) — a direction that is easy to reverse and produces a material error either way. The rate follows the remaining maturity of the instrument at the time the receipt is earned, not the loan’s original tenor, so a long-term loan approaching its final years can migrate from the 1% bracket into the 5% bracket. Financial institutions track maturities precisely for this reason.

Worked example: a bank’s quarter #

Assume a bank earns, in one quarter, ₱10,000,000 interest on loans maturing within 5 years, ₱4,000,000 interest on loans maturing in more than 5 years, and ₱2,000,000 of rental income from foreclosed property. Each stream is taxed at its own Section 121 rate.

The bank reports the ₱680,000 on BIR Form 2551Q within 25 days after the quarter closes. Note how the same ₱1 of interest is taxed five times as heavily on a short loan (5%) as on a long one (1%) — the incentive Section 121 builds in for longer-tenor lending. For how GRT compares with the franchise tax on utilities, see Franchise Tax vs VAT Under BIR Section 119.

Frequently asked questions #

Do banks pay VAT or Gross Receipts Tax? #

Banks and non-bank financial intermediaries performing quasi-banking functions pay Gross Receipts Tax (GRT), a percentage tax under NIRC Section 121 — not VAT. Their financial services are outside the VAT system and are instead taxed on gross receipts at the tiered rates in Section 121.

What are the Gross Receipts Tax rates under Section 121? #

On interest, commissions, and discounts from lending and financial leasing: 5% if the remaining maturity is 5 years or less, 1% if more than 5 years. On dividends and equity shares in the net income of subsidiaries: 0%. On royalties, rentals, profits from exchange, and other gross income: 7%.

Why does loan maturity change the Gross Receipts Tax rate? #

Section 121 taxes lending income at 5% for shorter-term loans (remaining maturity of 5 years or less) and a lower 1% for longer-term loans (more than 5 years), to encourage longer-tenor lending. The rate is based on the instrument’s remaining maturity, not its original term.

Which BIR form is used to pay the Gross Receipts Tax? #

BIR Form 2551Q, the Quarterly Percentage Tax Return, filed and paid within 25 days after the close of each taxable quarter. The GRT is a percentage tax, so it is reported on the percentage tax return rather than a VAT return.

Are non-bank financial intermediaries covered? #

Yes. NIRC Section 121 covers banks and non-bank financial intermediaries performing quasi-banking functions. Non-bank financial intermediaries without quasi-banking functions are taxed under a separate provision (Section 122), but both are subject to Gross Receipts Tax rather than VAT.

Summary #

Financial institutions live in the percentage-tax world, not the VAT world: NIRC Section 121 taxes a bank’s gross receipts at 5% or 1% on lending income by remaining maturity, 0% on subsidiary dividends and equity shares, and 7% on rentals, exchange profits, and other income. Get the maturity direction right — 1% is the long-loan rate, 5% the short — file quarterly on BIR Form 2551Q, and confirm the current schedule against the BIR website before computing a quarter’s GRT.