Are Banks Required to Issue VAT or Official Receipts for Interest Charges? Philippine Tax Rules

Introduction

In the Philippine tax system, banks and other financial institutions operate under a specialized framework governed primarily by the National Internal Revenue Code (NIRC) of 1997, as amended by subsequent laws such as Republic Act (RA) No. 8424 (Tax Reform Act), RA No. 10963 (TRAIN Law), RA No. 11534 (CREATE Act), and various revenue regulations issued by the Bureau of Internal Revenue (BIR). A common query among taxpayers, borrowers, and financial professionals pertains to the obligations of banks in issuing receipts for interest charges—specifically, whether these must include Value-Added Tax (VAT) or take the form of official receipts. This article explores the legal basis, exemptions, tax treatments, and practical implications of these requirements, providing a comprehensive overview within the Philippine context.

Interest charges typically refer to amounts levied by banks on loans, credit facilities, overdrafts, credit cards, or other lending activities. These charges represent income for the bank and expenses for the borrower. The key considerations revolve around whether such charges are subject to VAT, the applicability of other taxes like the Gross Receipts Tax (GRT), and the mandatory issuance of receipts to document these transactions.

VAT Treatment of Bank Services and Interest Charges

The VAT system in the Philippines is outlined in Title IV of the NIRC, particularly Sections 106 to 109, which impose a 12% VAT on the sale of goods and the performance of services, unless expressly exempted. For financial institutions, the application of VAT is nuanced due to the nature of their operations.

General Rule on VAT for Services

Under Section 108(A) of the NIRC, VAT applies to the "sale or exchange of services," defined broadly to include the performance of all kinds of services in the Philippines for others for a fee, remuneration, or consideration. This encompasses leasing, construction, and professional services. However, financial services, including those provided by banks, are treated differently.

Exemption of Bank Interest from VAT

Bank interest charges are exempt from VAT pursuant to Section 109(1)(S) of the NIRC, which exempts "services subject to percentage tax under Title V." Title V covers "Other Percentage Taxes," and Section 121 specifically imposes a percentage tax—commonly known as the Gross Receipts Tax (GRT)—on banks and non-bank financial intermediaries performing quasi-banking functions.

The GRT rates under Section 121 vary based on the type of receipt:

5% on interest, commissions, and discounts from lending activities, as well as income from financial leasing (for maturities exceeding five years);
1% on similar receipts for maturities of five years or less;
7% on other items of gross income, such as royalties, rentals, and net trading gains.

This GRT is levied on the gross receipts derived from sources within the Philippines, making it the primary tax on bank interest income. Since these transactions fall under Title V, they are explicitly exempt from VAT. This exemption ensures that banks do not pass on VAT to borrowers for pure interest charges, avoiding double taxation on the same income stream.

Historical Context and Amendments

The exemption has evolved over time. Prior to the Expanded VAT (E-VAT) Law (RA No. 9337) in 2005, banks were generally subject to GRT without VAT overlay. RA 9337 initially aimed to subject certain services, including those of banks, to VAT, but transitional provisions and subsequent clarifications maintained the GRT as the dominant tax for core banking activities like interest. The TRAIN Law (2018) and CREATE Act (2021) further refined exemptions but preserved the VAT-free status for GRT-subject transactions. For instance, the CREATE Act rationalized fiscal incentives but did not alter the fundamental VAT exemption for bank interest.

Distinction from VATable Bank Services

Not all bank revenues are VAT-exempt. Fees for services such as safety deposit box rentals, wire transfers, or advisory services may be subject to VAT if not covered by GRT. For example:

Commissions on letters of credit or trust operations might fall under GRT if tied to lending.
Standalone service fees (e.g., account maintenance) could be VATable under Section 108.

However, pure interest charges—compensation for the use of money—remain firmly under the GRT umbrella and VAT-exempt. Borrowers should review their loan agreements and statements to differentiate interest from ancillary fees.

Gross Receipts Tax: The Primary Tax on Interest Charges

As noted, GRT under Section 121 is the key tax applicable to bank interest. Banks must report and pay GRT quarterly via BIR Form No. 2551Q, based on gross receipts without deductions for costs or expenses. This tax is final and in lieu of income tax for those specific receipts, simplifying compliance for banks.

For borrowers, interest payments to banks are not subject to creditable withholding tax (CWT) or expanded withholding tax (EWT), unlike interest paid to individuals or certain non-bank lenders (per Revenue Regulations No. 2-98, as amended). This is because banks are institutional payees responsible for their own tax remittances. However, if the borrower is a top withholding agent (as designated by the BIR), certain payments might trigger withholding, but pure interest to domestic banks generally does not.

Invoicing and Receipt Requirements for Banks

While interest charges are VAT-exempt, banks are still obligated to document transactions properly. The NIRC and BIR regulations mandate the issuance of receipts to ensure transparency, facilitate audits, and allow taxpayers (borrowers) to claim deductions.

General Obligation to Issue Receipts

Section 113 of the NIRC requires all persons subject to internal revenue taxes to issue duly registered invoices or receipts for every sale of goods or services. This applies to banks as taxpayers under the NIRC. Revenue Regulations (RR) No. 16-2005 (Consolidated VAT Regulations), as amended by RR No. 4-2007 and others, distinguish between:

Sales Invoices: For VATable sales of goods.
Official Receipts: For VATable services or non-VAT transactions.

Since interest charges are non-VAT and subject to GRT, banks must issue official receipts (ORs) rather than VAT invoices. These ORs must be BIR-registered, serially numbered, and contain details such as the date, amount, nature of the transaction (e.g., "interest on loan"), and the bank's Taxpayer Identification Number (TIN).

Practical Application to Interest Charges

In practice, banks often provide periodic statements or certificates instead of individual ORs for each interest accrual, especially for ongoing loans or credit cards. However, upon request or for tax purposes, banks are required to issue ORs. For instance:

Loan amortization schedules may include interest breakdowns, but a formal OR is needed for the borrower's expense substantiation.
Credit card statements detail interest charges, but a separate OR may be issued for payments.

RR No. 18-2012 (Regulations on the Printing of Receipts and Invoices) reinforces this by mandating that receipts be issued at the time of transaction or payment. Failure to issue receipts can result in penalties under Section 264 of the NIRC, including fines from PHP 1,000 to PHP 50,000 and potential imprisonment.

Electronic Receipts and Modern Compliance

With the advent of digital banking, the BIR has adapted through RR No. 9-2021 and the Ease of Paying Taxes (EOPT) Act (RA No. 11976, effective 2024), allowing electronic invoicing and receipts (e-invoices/e-receipts) via accredited systems like the Electronic Invoicing/Receipting System (EIS). Banks, as large taxpayers, are mandated to adopt these for efficiency. Electronic ORs for interest charges must still comply with content requirements and be transmissible to the BIR.

Exemptions and Special Cases

Certain low-value transactions (below PHP 100) may be exempt from individual receipt issuance if summarized daily (per RR No. 7-2014), but this rarely applies to significant interest charges. Additionally, for interbank transactions or dealings with government entities, specialized forms like Certificates of Taxes Withheld (BIR Form 2307) may suffice, though not directly for interest charges.

Implications for Borrowers and Tax Deductibility

For borrowers, particularly corporations or individuals engaged in business, interest expenses are deductible from gross income under Section 34(B) of the NIRC, subject to the interest arbitrage rule (33% limitation on deductible interest if subject to final tax). To claim this deduction, substantiation is required via official receipts or equivalent documents (per RR No. 13-97). Without a proper OR from the bank, the BIR may disallow the deduction during audits.

In cases of tax-exempt borrowers (e.g., government agencies), interest may still be charged, but no VAT applies, and receipts remain mandatory for accounting purposes.

Penalties for Non-Compliance

Banks failing to issue required ORs face administrative penalties, including:

Closure of business for repeated violations (Section 115).
Criminal liabilities under Section 255 for willful neglect.

Borrowers should insist on receipts to protect their tax positions.

Conclusion

In summary, Philippine banks are not required to issue VAT receipts for interest charges because these are exempt from VAT under Section 109(1)(S) of the NIRC, being subject instead to GRT under Section 121. However, they are required to issue official receipts to document payments, in compliance with Section 113 and related regulations. This framework balances tax collection with administrative efficiency, ensuring that interest transactions are properly recorded without unnecessary VAT burdens. Taxpayers are advised to consult the latest BIR issuances or seek professional advice for specific scenarios, as amendments to tax laws may introduce nuances.