Why Financing Companies Pay Percentage Tax, Not VAT, Under NIRC Section 122

A licensed financing company or non-bank financial intermediary that isn’t performing quasi-banking functions pays percentage tax — specifically a 5% gross receipts tax under NIRC Section 122 — instead of the standard 12% VAT. This is why a financing company’s official receipt shows “non-VAT” rather than a VAT breakdown, and why it doesn’t add 12% on top of the interest, commissions, and discounts it charges borrowers. The split traces back to Republic Act No. 9238, a 2004 law that deliberately moved these entities out of VAT.

This guide covers the Section 122 legal basis, how a financing company differs from a lending investor for BIR purposes, and a worked example computing the percentage tax due on a quarter’s interest and discount income filed via BIR Form 2551Q.

Why doesn’t a financing company charge 12% VAT? #

A financing company is classified as a “non-bank financial intermediary” under Philippine financial regulation, and NIRC Section 122 specifically taxes that category’s gross receipts at 5% instead of subjecting them to the standard 12% VAT under Section 108. The distinction matters because VAT and gross receipts tax (GRT) are structurally different: VAT lets a registered business claim input tax credits on its purchases, while GRT — a form of percentage tax — is a flat rate on gross receipts with no equivalent input credit. A financing company that mistakenly charged VAT on interest income would be applying the wrong tax entirely, not just the wrong rate.

Direct access to lawphil.net and the Supreme Court E-Library was network-blocked while researching this post, so the operative Section 122 text below is quoted from how it is consistently reproduced across independent secondary tax-reference sources (including a Studocu compilation of NIRC Section 122 and Tax and Accounting Center, Inc.’s summary of NIRC Title V), rather than confirmed against a direct fetch of the codified text itself:

“There shall be collected a tax of five percent (5%) on the gross receipts derived by other nonbank financial intermediaries doing business in the Philippines, from interests, commissions, discounts and all other items treated as gross income under this code.” — Section 122, National Internal Revenue Code, as quoted in secondary tax-reference sources

Beyond that base rate, secondary sources describing the same provision explain — in their own words, not as a direct quote — that interest, commissions, and discounts from lending activities are further split by the remaining maturity of the underlying instrument: the 5% rate applies to a remaining maturity of five years or less, while a reduced 1% rate applies once remaining maturity exceeds five years. Verify this maturity-based schedule against the codified NIRC text or a current BIR issuance before relying on it for a specific filing position.

Lending investors vs. financing companies: are they taxed the same way? #

“Financing company” and “lending investor” are not interchangeable BIR classifications, even though both generally sit outside standard VAT. A financing company is a corporation registered under the Financing Company Act (Republic Act No. 8556), regulated by the SEC, and treated as a non-bank financial intermediary squarely within Section 122’s 5% gross receipts tax. “Lending investor” is an older, broader term for a person or entity that makes a practice of lending its own money at interest; depending on how a given lending investor is registered — as a non-bank financial intermediary, or simply as a service provider under general percentage-tax or VAT rules — its treatment can differ in the fine details from a Section 122-registered financing company. Because this classification question can turn on the specific BIR registration on file, don’t assume a lending investor’s tax treatment mirrors a financing company’s without confirming registration type.

For the broader VAT-vs-percentage-tax framework that applies outside the financial-intermediary rules covered here, see VAT vs. Percentage Tax: Which Applies to Your Business? — and for another narrow carve-out from standard VAT, Franchise Tax vs VAT: When BIR Franchise Grantees Pay 2% or 3% Instead of 12% VAT walks through a comparable Section 119 exception for gas, water, and small broadcasting franchises.

Where did this VAT exclusion come from? #

Republic Act No. 9238, effective February 5, 2004, is the law that pulled banks and non-bank financial intermediaries back out of VAT and re-imposed gross receipts tax on them, ending a brief period when VAT had applied to some of these services. Before RA No. 9238, a 2003 amendment had folded these financial services into VAT’s general coverage; RA No. 9238 reversed that specifically for banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries — restoring the GRT regime under Sections 121 and 122 beginning January 1, 2004. The BIR implemented the change through Revenue Regulations No. 9-2004, which financing companies and similar intermediaries still rely on today as the operative regulation behind their non-VAT status.

Percentage tax vs. VAT for a non-bank financial intermediary #

Worked example: computing the quarterly percentage tax on interest and discount income #

A registered financing company earns ₱2,000,000 in interest and discount income for the quarter, entirely from loans with a remaining maturity within the five-year Section 122 bracket. At the applicable 5% rate, the percentage tax due is:

The company reports this ₱100,000 on BIR Form 2551Q, the quarterly percentage tax return, alongside its other gross-receipts items for the period. It does not separately compute or add 12% VAT on top of that ₱2,000,000 — doing so would mean charging borrowers roughly ₱240,000 in VAT the company has no legal basis to collect, since Section 122, not Section 108, governs its receipts. If a portion of that quarter’s receipts instead came from instruments with a remaining maturity of more than five years, that portion would be taxed at the reduced 1% rate rather than 5%, so a financing company with a mixed loan-maturity book needs to split gross receipts by remaining maturity before applying the schedule, not apply one flat rate to the whole total.

How does BIR Online Tools fit into percentage tax filing? #

BIR Online Tools’ SAWT module supports Form 2551Q conversion alongside its other quarterly and annual return tools, letting a non-VAT filer — including a Section 122 financing company reconciling any withholding certificates it received as a payee — build the DAT file that attaches to its quarterly percentage tax filing without re-keying data by hand.

Frequently asked questions #

Do lending companies pay VAT or percentage tax in the Philippines? #

A licensed financing company, or another non-bank financial intermediary not performing quasi-banking functions, generally pays percentage tax — specifically the 5% gross receipts tax under NIRC Section 122 — rather than the standard 12% VAT. This is why a properly registered lending or financing company issues a non-VAT official receipt and does not add 12% VAT to interest and other loan-related charges.

What is the gross receipts tax rate for financing companies under Section 122? #

The rate is 5% on gross receipts from interest, commissions, discounts, and other items of gross income, for instruments with a remaining maturity of five years or less. A reduced 1% rate applies to interest, commissions, and discounts on instruments with a remaining maturity of more than five years.

What law moved financing companies from VAT to gross receipts tax? #

Republic Act No. 9238, effective February 5, 2004, excluded banks and non-bank financial intermediaries from VAT coverage under NIRC Section 108 and re-imposed the gross receipts tax on them under Sections 121 and 122 instead. The BIR implemented the change through Revenue Regulations No. 9-2004.

Is there a difference between a lending investor and a financing company for BIR purposes? #

Yes, though both generally fall outside VAT. A financing company is a corporation registered under the Financing Company Act (Republic Act No. 8556) and classified as a non-bank financial intermediary subject to Section 122 gross receipts tax. A lending investor is a broader term for a person or entity that regularly lends its own money at interest; the applicable percentage-tax treatment can depend on how that lending investor is registered and classified with the BIR, so it should not automatically be assumed identical to a financing company’s Section 122 treatment without checking the specific registration.

What BIR form is used to file the percentage tax on gross receipts for financing companies? #

Financing companies and other non-bank financial intermediaries subject to Section 122 gross receipts tax file BIR Form 2551Q, the quarterly percentage tax return, the same form used for other percentage-tax filers such as small businesses under Section 116.

Summary #

A financing company doesn’t charge 12% VAT because NIRC Section 122 places it — and other non-bank financial intermediaries not performing quasi-banking functions — under a 5% gross receipts tax instead, a percentage tax filed quarterly on BIR Form 2551Q rather than the VAT return. Republic Act No. 9238 is the law that drew this line in 2004, pulling these intermediaries out of VAT and restoring GRT, implemented through Revenue Regulations No. 9-2004. “Lending investor” is a broader, older classification that doesn’t automatically inherit a financing company’s Section 122 treatment, so registration type still has to be checked case by case. On the numbers, a company with ₱2,000,000 in quarterly interest and discount income on eligible-maturity loans owes ₱100,000 in percentage tax — not a separate VAT charge on top.