When a Philippine company is not required to — or chooses not to — register for VAT, it falls under the percentage tax regime instead. Understanding which regime applies to your business, and whether voluntary VAT registration would be beneficial, is one of the first tax decisions to make.
The Core Distinction
VAT (12%) applies to gross sales or receipts, with an offset for input VAT paid on purchases and expenses. The net amount is remitted to the BIR monthly and quarterly. VAT registration is mandatory once annual gross sales or receipts exceed ₱3 million.
Percentage tax (3%) applies to gross quarterly sales or receipts of non-VAT registered entities — no input tax credit is available. It is simpler to administer but potentially more costly if your business has significant VAT-registered suppliers.
The 3% Rate is Back
During the COVID recovery period, the CREATE Act temporarily reduced the percentage tax to 1%. That reduction expired on June 30, 2023, and the rate reverted to 3% per BIR RMC 69-2023. Any guidance citing 1% is outdated. Plan your cash flow at 3%.
Which Regime to Choose Below the Threshold
For businesses with gross sales under ₱3 million, the choice between percentage tax and voluntary VAT registration comes down to your cost structure:
| Factor | Favours Percentage Tax | Favours VAT |
|---|---|---|
| Supplier base | Most suppliers are non-VAT | Most suppliers are VAT-registered |
| Administrative capacity | Simpler returns preferred | Can handle monthly/quarterly VAT returns |
| Clients | Individual consumers who cannot claim input VAT | Other VAT-registered businesses |
| Growth trajectory | Likely to stay below ₱3M | Likely to cross ₱3M threshold soon |
If your main clients are other registered businesses (B2B), they will prefer to receive VAT invoices so they can claim input tax credits. Operating as a non-VAT entity can limit your competitiveness in certain market segments.
Transactions Exempt from Both
Certain transactions are exempt from both VAT and percentage tax under NIRC Section 109 and special laws — including agricultural inputs, educational services, and certain health services. If your business involves these categories, the analysis changes further.
Percentage Tax Filing
Percentage tax is filed using BIR Form 2551Q on a quarterly basis. Unlike VAT, there is no monthly return — quarterly only, due within 25 days from the close of each quarter.
How Chamberlain Helps
Chamberlain advises on the optimal tax registration at setup — VAT vs percentage tax — and manages whichever regime applies, including the quarterly 2551Q or monthly/quarterly VAT returns. See our pricing or book a consultation.
For the full comparison of VAT rules, see VAT in the Philippines. For the broader tax compliance picture, visit the taxes hub.
Frequently asked questions
What is the percentage tax rate in the Philippines?
The standard percentage tax rate is 3% of gross quarterly sales or receipts. The temporary 1% rate introduced by the CREATE Act expired on June 30, 2023 and reverted to 3% per BIR Revenue Memorandum Circular No. 69-2023.
Who pays percentage tax instead of VAT?
Non-VAT registered businesses with annual gross sales or receipts below ₱3 million are subject to the 3% percentage tax. Businesses above the ₱3 million threshold must register for VAT. Some businesses are specifically exempt from both (see NIRC Section 109 and special laws).
Can a business below the ₱3 million threshold choose VAT?
Yes. Optional VAT registration is available even below the threshold. It can make sense for businesses with high input costs from VAT-registered suppliers, since voluntary VAT registration allows input tax credits that percentage-tax payers cannot claim.