Philippine legal and tax primer for borrowers, lenders, and counsel

Executive summary

When a lending company in the Philippines processes your loan, the “taxes” you see in the charges are not arbitrary add-ons. They generally arise from:

Documentary Stamp Tax (DST) on the loan instrument (and, if any, the mortgage/chattel mortgage securing it);
Indirect taxes on the lender’s service fees (e.g., loan processing, appraisal, collection), which are typically VAT or Percentage Tax—or, for banks and non-bank financial intermediaries (NBFIs) performing quasi-banking, Gross Receipts Tax (GRT) instead of VAT; and
Local Business Taxes (LBT) and regulatory costs that lenders commonly pass through in pricing though not always itemized.

Below is the full legal context, how each tax is computed, who bears it, and practical compliance notes.

1) Documentary Stamp Tax (DST)

What it is

DST is a tax on certain documents and transactions, including loan agreements and security instruments such as real estate or chattel mortgages. Even if the parties are private, the law imposes DST upon execution/issuance of these documents.

Why you pay it on loans

A loan agreement is a taxable “debt instrument.” When it’s executed, DST becomes due. If the loan is secured (e.g., by a real estate or chattel mortgage), that separate mortgage instrument carries its own DST in addition to the DST on the loan itself.

Typical computations

DST on the loan/debt instrument:
- Rate: ₱1.00 for every ₱200 (or fraction) of the principal amount (≈ 0.5% effective rate).
- Who usually shoulders: By contract the borrower often shoulders it; in practice lenders collect and remit.
DST on Real Estate or Chattel Mortgage (if applicable):
- Rate (common structure): ₱20 on the first ₱5,000 of the amount secured plus ₱10 on each additional ₱5,000 (or fraction).
- Effect: Roughly 0.20% of the secured amount.

Illustration (unsecured loan): Principal ₱500,000 → Loan DST = ₱1 per ₱200 → 500,000 / 200 = 2,500 → ₱2,500 DST. Illustration (with chattel mortgage securing the full amount): Add mortgage DST ≈ ₱1,000 (≈0.20% of ₱500,000; rounded by statutory brackets).

Timing and compliance

DST is generally due on or before the 5th day after the close of the month of the document’s date of execution (as remitted by the collecting/remitting party).
Evidence of payment is the BIR-validated form/electronic proof and/or official receipt; lenders keep this for audit and may provide a copy on request.

2) Taxes on the lender’s loan processing and other service fees

Lenders charge various non-interest fees (processing, appraisal, documentation, late fees). The tax treatment depends on the lender’s regulatory status and tax registration.

A. Banks and NBQBs/NBFIs

Not subject to VAT on their financial intermediation services.
Instead, their gross receipts from interest, commissions, and service fees are subject to Gross Receipts Tax (GRT) at tiered rates (commonly 1%–5% depending on the remaining maturity of the instrument and the nature of the receipt).
Practical effect to borrowers: You typically won’t see an itemized “12% VAT” line on bank processing fees; the bank embeds GRT in pricing. The receipt may simply show the fee; the bank handles the GRT.

B. Lending companies that are not NBQBs/NBFIs (typical “lending company” under R.A. 9474)

Treated as service providers for their non-interest fees:
- If VAT-registered (mandatory once gross sales/receipts exceed the current VAT threshold; voluntary registration also possible): 12% VAT applies to processing/appraisal/documentation fees.
- If not VAT-registered: subject to Percentage Tax on gross receipts (commonly 3% under current law, collected from the lender and typically priced into fees).
Practical effect to borrowers: You may see either an itemized VAT (12%) on the service fee or no VAT line (if non-VAT), but the fee level will reflect the lender’s percentage-tax cost.

Illustration (non-bank lending company, VAT-registered): Processing fee ₱2,000 → VAT = ₱240 → Total charged = ₱2,240 (excluding other charges). Illustration (non-VAT lending company): Processing fee ₱2,000 → No VAT line; lender pays 3% percentage tax (₱60) out of its gross receipts—often factored into the pricing of the ₱2,000 fee.

3) Local Business Tax (LBT) and other regulatory costs

Cities/municipalities impose Local Business Tax on lenders, commonly as a percentage of gross receipts.
Lenders also incur SEC compliance fees (for lending companies under R.A. 9474) and, where applicable, BSP supervision fees (for banks/NBQBs).
These are not itemized national taxes on your loan, but they influence pricing and may be recovered through fees or interest spreads.

4) Interest vs. fees: different tax buckets

Interest income (what you pay over time) and fees (what you pay up front/incidentally) can be taxed differently on the lender’s side (GRT vs. VAT/percentage tax).
DST is document-based and ties to the principal (and the security instrument), not to interest or service tax regimes.

5) Who is legally liable vs. who actually pays

Statutory liability (who the law says must remit) is often the lender for VAT/percentage tax/GRT and the person making/issuing the instrument for DST.
Economic incidence (who bears the cost) is typically the borrower, because contracts usually allocate costs and lenders price in their tax burden. Review the Disclosure Statement (required in consumer loans) and the Schedule of Fees.

6) Common line items you’ll see on a loan cost breakdown

Documentary Stamp Tax (Loan) – ~0.5% of principal (rounded per statutorily required brackets).
Documentary Stamp Tax (Mortgage) – ~0.20% of the amount secured, if there is a chattel/real estate mortgage.
Processing/Appraisal/Docs Fee – subject to 12% VAT if lender is VAT-registered and not a bank/NBQB; otherwise embedded GRT (for banks/NBQs) or percentage tax (for non-VAT lenders).
Notarial fees – professional charge, not a tax; may carry VAT if the notary is VAT-registered (rare for small fees).
Insurance (e.g., MRI/FCI/credit life) – if required, premiums may carry VAT (non-life insurance services are generally VAT-able), and insurance policies have their own DST regime; whether the borrower or lender contracts determines the payor.

7) Illustrative end-to-end example

Scenario: ₱500,000 personal loan from a non-bank lending company (not an NBQB), secured by a chattel mortgage; the lender is VAT-registered.

Principal: ₱500,000
Processing fee: ₱2,000 → VAT (12%) = ₱240 → Total processing = ₱2,240
DST (Loan): 0.5% ≈ ₱2,500
DST (Chattel Mortgage): ≈0.20% ≈ ₱1,000
Notarial fee: ₱500 (no VAT assumed)
Cash-out at release (if net-of-charges): ₱500,000 − ₱2,240 − ₱2,500 − ₱1,000 − ₱500 = ₱493,760 (before any insurance or other optional charges)

If the lender were a bank, you would typically not see the 12% VAT on the processing fee (GRT applies at the bank level instead), but the DST figures would remain.

8) Contracting, disclosures, and borrower protections

Disclosure Statement on Loan/Credit Transaction (for consumer loans) must itemize finance charges and fees. Compare the APR/Effective Interest Rate that includes taxes and fees.
Allocation of taxes is a matter of contract unless the law fixes liability. Most loan documents stipulate that borrowers shoulder DST and other documentary charges; service taxes follow the lender’s registration status.
Prepayment or renewal can trigger additional DST if a new note/instrument is issued or the credit line is re-documented.
Late fees/penalties form part of the lender’s gross receipts; tax treatment follows the same regime (VAT/percentage tax for non-banks; GRT for banks/NBQs).

9) Practical tips

Ask which regime applies to your lender (bank/NBQB with GRT vs. non-bank lending company with VAT/percentage tax). That alone explains why you do—or don’t—see a VAT line on processing.
Verify DST computations against principal and security amount; they’re formulaic. Rounding up to the next bracket is normal because the law taxes any fraction of the bracket as a full bracket.
Keep official receipts and proof of DST payment; they matter for audits, refinancing, or contesting charges.
Compare “all-in” cost (net proceeds & APR), not just the nominal interest rate.

10) Quick FAQ

Is VAT always added to loan processing fees? No. Banks/NBQs don’t charge VAT on financial intermediation; their receipts fall under GRT. For non-bank lending companies, VAT applies only if they’re VAT-registered; otherwise they’re subject to percentage tax (built into pricing).

Why is there DST even if the loan is private and unregistered? DST attaches to the document/transaction by operation of law upon issuance, not to the act of registration.

Why is there a second DST for a mortgage? Because the security instrument is a separate taxable document from the loan/debt instrument.

Can the lender legally pass these taxes to me? Generally yes, by contract. The law fixes who remits the tax; parties can allocate who bears the cost unless a statute prohibits it.

Bottom line

You “pay tax on loan processing” because (i) DST is legally due on the loan (and any security) and is commonly passed on to borrowers, and (ii) processing and related fees are taxable services—either under VAT/percentage tax for non-bank lenders or GRT for banks/NBQs—costs that lenders typically embed in their pricing or itemize on your bill. Understanding which regime your lender falls under lets you verify each line item and ensure you’re paying only what the law requires.