In the Philippine lending landscape, it is common practice for financial institutions and private lenders to include stipulations in loan agreements that require the borrower to shoulder all applicable taxes. This often raises a crucial question for borrowers: Is it legal for a lender to require me to pay the taxes on my own loan?

Under Philippine law, the answer is generally yes, provided these stipulations are clearly defined in the contract and do not violate specific consumer protection laws or the "unconscionability" doctrine.

1. The Principle of Autonomy of Contracts

The bedrock of this practice is Article 1306 of the Civil Code of the Philippines, which establishes the "Autonomy of Contracts." It states:

"The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy."

When a borrower signs a loan agreement agreeing to pay for taxes (such as Documentary Stamp Tax or Gross Receipts Tax), they are entering into a voluntary contractual obligation. Since no law expressly forbids a lender from passing on the economic burden of a tax to a borrower, these clauses are typically upheld.

2. Common Taxes Involved in Loan Transactions

In the Philippines, several taxes are triggered by a loan, and lenders often shift these to the borrower:

Documentary Stamp Tax (DST): Under the National Internal Revenue Code (NIRC), DST is imposed on documents evidencing loans (like Promissory Notes). While the law says the person "making, signing, issuing, accepting, or transferring" the document is liable, it also allows the parties to agree on who will actually pay it.
Gross Receipts Tax (GRT): Banks and non-bank financial intermediaries pay GRT on the interest income they earn. While the bank is the statutory taxpayer, the Supreme Court has ruled (e.g., in Asia United Bank vs. Goodland Company, Inc.) that banks may pass this cost onto borrowers as a contractual fee, provided it is disclosed.
Creditable Withholding Tax (CWT): In certain corporate loans, the borrower is actually required by law to withhold a percentage of the interest payment and remit it to the BIR. This is a legal mandate, not just a contractual whim.

3. Key Regulatory Safeguards

While the practice is legal, it is not unregulated. Lenders must comply with the following:

The Truth in Lending Act (Republic Act No. 3765)

Lenders are legally required to provide a Disclosure Statement before the consummation of the loan. This document must clearly itemize:

The cash price or amount of the loan.
All other charges incident to the extension of credit (including taxes).
The total finance charge.
The effective interest rate.

If a lender fails to disclose that the borrower will be charged for taxes before the loan is signed, they may be liable for penalties, and the borrower may not be held liable for those specific undisclosed charges.

BSP Circulars on Transparency

The Bangko Sentral ng Pilipinas (BSP) strictly enforces transparency. Banks cannot hide "hidden charges." Any tax being passed on must be clearly identified as a component of the borrowing cost.

4. When Does it Become Illegal?

The legality of passing on taxes ends where Unconscionability begins. Philippine courts have the power to strike down or reduce charges if they are:

Iniquitous or Shocks the Conscience: If the combined interest, penalties, and passed-on taxes result in a debt that is impossible to repay.
Contract of Adhesion Issues: While "take-it-or-leave-it" contracts are not illegal per se, if the terms are so one-sided that they deprive the borrower of any meaningful choice or are buried in fine print to deceive, the court may rule in favor of the borrower.

5. Conclusion

In the Philippine context, the burden of paying taxes on loan proceeds—most notably the DST and the passed-on GRT—rests on the borrower if the contract says so. This is a matter of private agreement supported by the Civil Code. However, the validity of these charges depends entirely on full disclosure. A borrower cannot be surprised by tax charges after the fact; they must be presented upfront in the Disclosure Statement as required by the Truth in Lending Act.