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BIR Rules on Proper Tax Treatment of Passed-on Gross Receipts Tax

On June 13, 2016, the then Commissioner of Internal Revenue issued Revenue Memorandum Circular No. 62-2016
purporting to clarify the proper tax treatment of percentage tax or gross receipts tax (GRT) due on transactions covered by
Sections 1211 and 1222 of the Tax Code which are shifted through contractual stipulations to borrowers/customers/clients
(“passed-on” GRT). Banks, non-bank financial intermediaries performing quasi-banking functions are subject to GRT under
Section 121 while financing companies and other financial intermediaries not performing quasi-banking functions are
subject to GRT under Section 122. The effectivity of this circular was suspended on July 1, 2016 by the new Commissioner of
Internal Revenue. However, on November 15, 2016, the suspension was lifted by RMC No. 127-2016 rendering RMC No. 62-
2016 effective immediately.

Section 121 imposes GRT at the rates of 1% to 5% on interest, commissions and discounts from lending activities of banks
and non-bank financial intermediaries performing quasi-banking functions depending on the remaining maturities of
instruments from which such receipts are derived. Section 121 imposes GRT at a higher rate of 7% on other items of gross
income. Section 122 on the other hand imposes GRT at the rate of 5% on gross receipts from interest, commissions,
discounts and all other items treated as gross income except that interests, commissions and discounts are taxed at rates of
1% and 5% depending on the remaining matures of the related instruments.

The circular, consistent with the Tax Code, provided that banks, non-bank financial intermediaries performing quasi-
banking functions, financing companies and other financial intermediaries not performing quasi-banking functions doing
business in the Philippines are directly liable for GRT on gross receipts derived by them from business operations. However,
if under a contract, the GRT is “passed-on” to the borrower/customer/client, such “passed-on GRT” paid by the borrower/
customer/client to the bank or other financial intermediary shall be treated as receipt of gross income under the Tax Code
and shall itself be subject to GRT under Section 121 or Section 122 of the Tax Code, as applicable. However, the “passed-on
GRT” will not be treated as interests, commissions or discounts (even if, for example, the GRT “passed-on” arose because of
interests, commissions or discounts) but as other items of gross income taxable at 7% under Section 121, and at 5% under
Section 122.

To illustrate, if the recipient is a bank, the interest received by the bank under a loan agreement which provides that the
borrower is liable for GRT on the interest, shall be subject to GRT at the rate of 5% GRT pursuant to Section 121(a) of the
Tax Code. The borrower will remit this “passed-on” GRT to the bank along with the interest due. Such amount of “passed-
on” GRT shall form part of the other items treated as gross income under Section 32 of the Tax Code which is subject to 7%

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FOR MORE INFORMATION MAKATI OFFICE

Please contact your account partner SyCipLaw Center, 105 Paseo de Roxas
or the author of this Client Alert: Makati City, Metro Manila
Carina C. Laforteza cclaforteza@syciplaw.com Philippines 1226
Hiyasmin H. Lapitan hhlapitan@syciplaw.com Phone +632 982-3500, 982-3600, 982-3700
Camille Angela M. Espeleta camespeleta@syciplaw.com Fax +632 817-3896, 817-3567
Email sshg@syciplaw.com
 www.syciplaw.com

(Continued from page 1)

GRT under Section 121(c) of the Tax Code. In case the recipient is a financing company or financial intermediary not
performing quasi-banking functions, the interest received shall be subject to the 1% or 5% GRT and the “passed-on” GRT
shall be subject to 5% GRT pursuant to Section 122 of the Tax Code. The borrower/customer/client can claim the interest it
paid and the “passed-on” GRT as deductible expenses for income tax purposes. The circular also clarified that while the
“passed-on” GRT shall be considered as receipt of income by the banks, non-bank financial intermediaries performing quasi
-banking functions, financing companies and other financial intermediaries not performing quasi-banking functions, they
can claim the GRT paid as a deductible expense subject to the actual remittance of the GRT to the Bureau of Internal
Revenue.

1
Tax on banks and non-bank financial intermediaries performing quasi-banking functions
2
Tax on other non-bank financial intermediaries

About SyCip Salazar Hernandez & Gatmaitan

Founded in 1945, SyCip Salazar Hernandez & Gatmaitan is one of the most established and largest law firms in the
Philippines. Although its work centers on business activity, the firm has offered a broad and integrated range of legal
services that cover such areas as family relations, constitutional issues, and other matters of law unrelated to commerce.

Client alerts are for general informational purposes and should not be regarded as legal advice.

FOR MORE INFORMATION MAKATI OFFICE

Please contact your account partner SyCipLaw Center, 105 Paseo de Roxas
or the author of this Client Alert: Makati City, Metro Manila
Carina C. Laforteza cclaforteza@syciplaw.com Philippines 1226
Hiyasmin H. Lapitan hhlapitan@syciplaw.com Phone +632 982-3500, 982-3600, 982-3700
Camille Angela M. Espeleta camespeleta@syciplaw.com Fax +632 817-3896, 817-3567
Email sshg@syciplaw.com