VAT vs Percentage Tax: Which Applies to Your Lending Company?

One of the most confusing questions for a Philippine lending company is deceptively simple: which business tax do I pay? The answer isn't the same for every lender, because it turns on how the BIR classifies you and how big your receipts are. Getting this wrong means either overpaying or, worse, under-remitting and facing an assessment. This guide untangles the three possibilities and how to know which is yours.

Business tax vs income tax — a reminder

First, keep two different taxes straight. Business tax — VAT, percentage tax, or gross receipts tax — is charged on your receipts. Income tax is charged on your net profit. You owe both. This article is only about the business tax on receipts; your income tax obligation runs alongside it regardless of which business tax applies.

The lending-company default: Gross Receipts Tax

Because a licensed lending company's core activity is lending money and earning interest, the BIR generally treats it as a non-bank financial intermediary, whose lending income is subject to Gross Receipts Tax (GRT) rather than VAT or the ordinary percentage tax. GRT is charged at 5% on interest, commissions, and discounts from loans with a remaining maturity of five years or less, and 1% if the maturity is more than five years. For most lenders whose loans are short-term, the 5% rate applies to the bulk of interest income.

The ₱3M threshold and the 3% percentage tax

There is a simpler regime for the smallest businesses. A taxpayer who is not VAT-registered and whose gross annual receipts do not exceed ₱3,000,000 may fall under the general 3% percentage tax (Section 116). Once receipts cross ₱3M, VAT registration is generally required. But note: for lenders specifically classified as NBFIs, the GRT treatment usually governs regardless of the ₱3M line — which is precisely why classification, not just size, is the deciding factor.

When VAT enters the picture

VAT at 12% generally applies to VAT-registered businesses whose receipts exceed the ₱3M threshold. For a lender, whether VAT or GRT governs your lending income depends on your BIR classification — this is exactly the kind of nuance that a lending company should resolve with its Revenue District Office (RDO) or accountant, using the tax types listed on its BIR Certificate of Registration (Form 2303) as the anchor. Don't assume; confirm.

Your BIR Certificate of Registration (2303) lists your registered tax types. That document, not guesswork, tells you which business tax you actually owe.

Why getting it right matters

Misclassification cuts both ways. Pay VAT when you should pay GRT and you likely overpay and complicate your filings. Pay nothing when GRT applies and you accumulate a liability with surcharge and interest. Because the same interest income can carry a different business tax depending on your classification, resolving your correct type early — and filing the right return (2551Q for percentage tax and GRT) on schedule — protects both your cash and your compliance.

What changes when you cross a threshold

Classification isn't always permanent — it can shift as your business grows, and knowing what triggers a change protects you from a nasty surprise. The clearest trigger is the ₱3M VAT threshold: a non-VAT taxpayer who crosses ₱3,000,000 in gross annual receipts generally becomes required to register for VAT, which changes both your rate and your filing obligations. Crossing that line unnoticed — continuing to file as a percentage-tax payer while legally required to be VAT-registered — accumulates a liability that surfaces, with penalties, in an assessment.

For lenders treated as non-bank financial intermediaries, the gross-receipts-tax treatment often governs regardless of the ₱3M line, but the broader point stands: your business tax obligations can change as you scale, open branches, or shift the mix of what you do. The practical safeguard is to review your registered tax types periodically — not just at registration — and to reconfirm with your RDO or accountant whenever your receipts, structure, or activities change materially. Business tax is not a "set it once" decision; it is a classification you should revisit as the business it describes evolves.

Let your registration drive your filings

The cleanest way to handle business tax is to anchor everything to your registered tax types and let your system compute from there. LendKoPH's Tax Settings capture the tax types on your Certificate of Registration and surface the returns you owe, so your percentage-tax or gross-receipts-tax filing on 2551Q is computed from your actual receipts. Because classification is nuanced, always confirm your exact business-tax treatment with your accountant or RDO.