When you incorporate a company in the Philippines, one of the first tax decisions you face is whether you will pay Value-Added Tax (VAT) or Percentage Tax. They are mutually exclusive business taxes on your sales, and the choice has real consequences for your pricing, your cash flow, and how much paperwork you carry every month. At Chamberlain, this is one of the most common questions foreign founders ask us once their entity is registered with the Bureau of Internal Revenue (BIR).
The ₱3,000,000 threshold decides for you
The single most important number is ₱3,000,000 in annual gross sales or receipts. This figure is the dividing line.
If your business meets or exceeds ₱3,000,000 in a twelve-month period, you are required to register as a VAT taxpayer and charge 12% VAT on your taxable sales. There is no opt-out at this level.
If you stay below ₱3,000,000, you have a choice. You can register as a non-VAT taxpayer and pay Percentage Tax instead, or you can voluntarily elect to register for VAT even though you are under the threshold. That voluntary election is exactly what some foreign-owned companies do, and we will come back to why.
How VAT works
VAT is a 12% tax you add on top of your sale price and collect from your customers. You then remit it to the BIR. The defining feature of VAT is the input tax credit: the 12% VAT you pay on your own business purchases (suppliers, equipment, rent, services) can be credited against the 12% you collect from customers. You only remit the difference.
For exporters, there is a further advantage. Export sales can be zero-rated, meaning you charge 0% VAT on the sale but can still recover the input VAT you paid on local costs. That frequently turns into a refund rather than a cost. For a deeper walkthrough, see our guide to VAT in the Philippines for foreign companies and the detailed mechanics on our Value-Added Tax (VAT) page.
How Percentage Tax works
Percentage Tax is the simpler alternative for businesses under the threshold. It is generally 3% of gross sales or receipts, with no input credits of any kind. You pay a flat percentage on what you take in, full stop.
One caveat on the rate: under the CREATE law, Percentage Tax was temporarily lowered to 1% for a defined period. That relief is time-bound, so always confirm the current rate with the BIR or your accountant before you file. Our Percentage Tax page tracks the applicable rate and filing requirements.
The trade-off is straightforward. Percentage Tax is lighter on compliance and predictable, but it credits you nothing on your purchases. VAT is heavier on paperwork but lets you recover input tax.
VAT vs Percentage Tax at a glance
| VAT | Percentage Tax | |
|---|---|---|
| Threshold | Mandatory at or above ₱3,000,000 annual gross | Optional below ₱3,000,000 annual gross |
| Rate | 12% on taxable sales (0% zero-rated on qualifying exports) | Generally 3% (temporarily 1% under CREATE — confirm current rate) |
| Input credits | Yes — credit input VAT on purchases | No — credits nothing |
| Best for | B2B sellers, exporters, capital-heavy businesses | Small domestic-service businesses with few input costs |
Which should a foreign-owned company choose?
The right answer depends on your customers and your cost base.
If you are B2B or an exporter, VAT registration usually wins, even voluntarily under the threshold. Your business customers can claim the VAT you charge as their own input credit, so it does not deter them. Meanwhile you recover input VAT on your local purchases, and zero-rated export sales can generate refunds. Companies that invest heavily up front — fit-out, equipment, software — also benefit, because that early input VAT becomes recoverable.
If you run a small domestic-service business selling to end consumers — who cannot reclaim VAT — and you carry few creditable input costs, Percentage Tax is often the better fit. Your customers see a lower headline price, and you avoid monthly VAT filings.
Remember that this business-tax choice sits alongside, not instead of, your income tax obligations. Whichever route you take on VAT or Percentage Tax, your company still files corporate income tax on its profits. The two are separate layers, and a sound setup considers both together.
The practical takeaway
Use the ₱3,000,000 threshold as your starting point. Above it, VAT is mandatory. Below it, model both options against your actual customer mix and purchasing pattern before you elect. A B2B exporter buying heavily in the Philippines will usually be better off registered for VAT; a lean consumer-facing service firm will usually prefer Percentage Tax. Because the Percentage Tax rate has moved in recent years, confirm the current figure before you commit, and revisit the decision as your sales approach the threshold.
Frequently asked questions
What is the VAT threshold in the Philippines?
The dividing line is ₱3,000,000 in annual gross sales or receipts. At or above this level you must register for and charge 12% VAT. Below it, you may elect to be a non-VAT taxpayer paying Percentage Tax instead.
How much is Percentage Tax in the Philippines?
Percentage Tax is generally 3% of gross sales or receipts. It was temporarily lowered to 1% under the CREATE law for a defined period, so confirm the current rate with the BIR or your advisor before filing.
Can a VAT-registered company claim input tax credits?
Yes. VAT-registered businesses can credit the input VAT paid on their purchases against the output VAT they charge customers. Percentage Tax registrants cannot claim any input credit.
Should a foreign-owned exporter register for VAT?
Usually yes. Export sales can be zero-rated, and VAT registration lets the company recover input VAT on local purchases, often producing refunds rather than a net tax cost.