Percentage tax vs VAT: the difference
Percentage tax is a flat 3% of gross sales with no credit for purchases; VAT is 12% of sales less the VAT you paid on purchases.
| Percentage tax (Sec. 116) | Value-added tax | |
|---|---|---|
| Who pays | Non-VAT persons with gross sales of ₱3,000,000 or less, not on 8% | Gross sales over ₱3,000,000, or anyone VAT-registered |
| Rate | 3% of gross quarterly sales | 12% of sales |
| Credit for purchases | None | VAT on purchases (input VAT) is deducted |
| Return | 2551Q | 2550Q (April 2024 version) |
| Deadline | 25 days after each quarter | 25 days after each quarter |
| Monthly return | 2551M no longer required | 2550M optional since 2023 |
| Invoices | Required for sales of ₱500 or more, or on request; smaller sales go on one end-of-day invoice once they total ₱500 | Required for every sale; buyer's TIN for ₱1,000 or more to a VAT-registered buyer |
| 8% income tax option | Available to individuals; replaces percentage tax | Not available, whatever the sales |
| Exempt | Cooperatives | Sales listed in Sec. 109(1) |
Sources: NIRC Secs. 106, 108, 113, 114, 116, 237 as amended by RA 11976; RMC 77-2024 (invoice rules); RMC 49-2025 (2550Q version); RR 8-2018 (8% option). As of November 2026.
Percentage tax or VAT: which applies to my business?
Look at gross sales over the past 12 months and what you expect in the next 12, leaving out VAT-exempt sales.
Which business tax do you pay?
1Gross sales: past 12 months, or expected in the next 12
Count sales of goods and services, excluding Sec. 109 exempt sales.
Over ₱3,000,000
Register for VAT
Mandatory under Sec. 236(G).
Charge 12% and file 2550Q
Deduct input VAT on purchases.
VAT-registered; 8% option closed
₱3,000,000 or less
Individual on 8%?
Elected on the first quarterly return: no percentage tax.
Otherwise: 3% percentage tax
File 2551Q quarterly. Cooperatives are exempt.
Non-VAT: 3% or 8%
Percentage tax rate in 2026: 3%, not 1%
The Sec. 116 rate is 3%. CREATE (RA 11534) cut it to 1% only from 1 July 2020 to 30 June 2023.
| Rule | Before | Now |
|---|---|---|
| Percentage tax rate | 1% (1 Jul 2020 – 30 Jun 2023) | 3% from 1 Jul 2023 |
| VAT returns | Monthly 2550M plus quarterly 2550Q | Quarterly 2550Q only, from 1 Jan 2023 |
| Sales documents | Official receipts for services | Invoices from 27 Apr 2024; receipts are supplementary and not valid for input VAT |
| VAT on services | On payments received | On amounts billed (RR 3-2024) |
| Threshold provision | Sec. 109(1)(BB) | Sec. 109(1)(CC) |
| Where to file | Your RDO's banks; 25% surcharge for the wrong venue | Any authorized bank or RDO; venue surcharge abolished (RR 4-2024) |
Sources: RA 11534; RA 10963 Sec. 37; RR 3-2024; RR 7-2024 and RMC 77-2024; RA 11976.
Computing quarterly percentage tax
Q1 2027 gross sales of ₱600,000 × 3%
₱18,000
File 2551Q and pay by 26 April 2027 (25 April is a Sunday). Gross sales are not reduced by expenses.
VAT or percentage tax: which costs more?
At the same sales, VAT payable is usually higher than 3% percentage tax unless purchases subject to VAT are a large share of sales. The chart assumes VATable purchases equal 40% of sales, with both figures before VAT, so VAT payable is 12% × 60% of sales, or 7.2%.
Percentage tax vs VAT payable at six sales levels
Assumes VATable purchases = 40% of sales
- 3% percentage tax
- VAT payable (12% × sales less purchases)
| Row | 3% percentage tax | VAT payable (12% × sales less purchases) |
|---|---|---|
| ₱500,000 | ₱15,000 | ₱36,000 |
| ₱1,000,000 | ₱30,000 | ₱72,000 |
| ₱1,500,000 | ₱45,000 | ₱108,000 |
| ₱2,000,000 | ₱60,000 | ₱144,000 |
| ₱2,500,000 | ₱75,000 | ₱180,000 |
| ₱3,000,000 | ₱90,000 | ₱216,000 |
Worked example: ₱2,400,000 sales, ₱1,100,000 VATable purchases
- 1
Percentage tax: ₱2,400,000 × 3% = ₱72,000
Four 2551Q returns. No credit for purchases.
- 2
Output VAT: ₱2,400,000 × 12% = ₱288,000
Charged on sales.
- 3
Input VAT: ₱1,100,000 × 12% = ₱132,000
From suppliers' VAT invoices.
- 4
VAT payable: ₱288,000 − ₱132,000 = ₱156,000
Four 2550Q returns.
2551Q, 2550Q, 2551M and 2550M: forms and deadlines
Both returns are due on the 25th day after each calendar quarter, moved to the next working day if that is a weekend or holiday.
| Quarter | Months | 2551Q and 2550Q due |
|---|---|---|
| Q4 2026 | Oct–Dec 2026 | 25 January 2027 |
| Q1 2027 | Jan–Mar | 26 April 2027 (25 April is a Sunday) |
| Q2 2027 | Apr–Jun | 26 July 2027 (25 July is a Sunday) |
| Q3 2027 | Jul–Sep | 25 October 2027 |
NIRC Secs. 114(A) and 128(A) as amended by RA 11976. Full list on the BIR tax calendar 2027; the BIR's own 2027 calendar overrides computed dates.
“beginning January 1, 2023, the filing and payment ... shall be done within twenty-five (25) days following the close of each taxable quarter”
- 2550M: not mandatory for transactions from 1 January 2023; VAT is filed and paid on 2550Q. A 2023 circular (RMC 52-2023, reported by tax advisers) lets taxpayers keep paying monthly on 2550M if they wish, as long as they file 2550Q.
- 2551M: percentage tax is filed quarterly on BIR Form 2551Q. A monthly 2551M return is no longer required (NIRC Sec. 128 as amended by TRAIN). To pay ahead of the quarter, use Form 0605 with the 2551Q codes (RMC 49-2025; see our 0605 guide).
- Both: file through eBIRForms or eFPS if enrolled, and pay at any authorized bank or RDO.
What happens when sales exceed ₱3,000,000?
- 1
Update to VAT within the month after the month you crossed ₱3,000,000
Use Form 1905 or ORUS, and cancel the percentage tax type.
- 2
VAT applies from the first day of the following month
Charge 12% from then on and file 2550Q.
- 3
Pay percentage tax on earlier sales
From the start of the year until VAT applies; no penalty if paid on time.
- 4
Income tax switches to graduated rates
If you were on 8%, graduated rates apply for the whole year; 8% payments are credited.
These rules come from RR 8-2018 Sec. 12 and Sec. 2 for individuals. VAT registration can be cancelled if sales in the next 12 months will not exceed ₱3,000,000, effective the first day of the following month (Sec. 236 as amended).
VAT-exempt transactions in the Philippines
Sales listed in Sec. 109(1) carry no VAT. Exempt sellers below ₱3,000,000 who are not VAT-registered pay percentage tax instead.
| Sec. 109(1) | Exempt transaction | Note |
|---|---|---|
| (A)–(C) | Agricultural and marine food in original state; fertilizers, seeds, feeds; certain imported personal effects | Original wording, not re-checked for this page: confirm with your RDO |
| (D) | Professional tools and personal effects of returning residents and OFWs | |
| (E) | Services subject to percentage tax | Avoids taxing the same service twice |
| (G), (H) | Medical, dental, hospital and veterinary services (not professionals'); educational services of accredited and government schools | |
| (I) | Services under an employer-employee relationship | Salaries carry no VAT |
| (L)–(N) | Sales and lending of qualifying cooperatives | Conditions apply |
| (O) | Export sales by non-VAT persons | |
| (P) | Real property not held for sale; residential lots and houses below thresholds | Thresholds CPI-adjusted from 2024; current amounts not confirmed: check with your RDO |
| (Q) | Lease of a residential unit at ₱15,000 a month or less | |
| (R) | Books and periodicals, including digital formats | |
| (V) | Services of banks, quasi-banks and non-bank financial intermediaries | |
| (W) | Sales to senior citizens and persons with disability | |
| (Y) | Homeowners' and condominium association dues | |
| (AA) | Medicines for diabetes, high cholesterol, hypertension, cancer, mental illness, tuberculosis, kidney disease | Last four added from 1 Jan 2021 |
| (dd) | Imports of export-oriented enterprises with at least 70% export sales, directly attributable to exports | CREATE MORE; RR 10-2025 |
| Special law | Indigenous natural gas and power generated from it | RA 12120; RR 2-2026 |
Sources: NIRC Sec. 109(1) as amended by RA 10963, RA 11534 and RA 12066 (RR 10-2025); RR 2-2026. Also exempt: (F) contract growers and millers, (J) regional headquarters, (K) special laws, (S)–(U) international carriers, (X) Sec. 40(C)(2) exchanges, (Z) gold sold to the BSP. The temporary COVID-19 items in (BB) expired on 31 December 2023. As of November 2026.
Other percentage taxes besides the 3%
| NIRC section | Who pays | Rate |
|---|---|---|
| 117 | Domestic carriers and keepers of garages | 3% of quarterly gross sales |
| 118 | International carriers, on cargo from the Philippines | 3% |
| 119 | Radio and TV franchises (prior-year sales ≤ ₱10M); gas and water utilities | 3%; 2% |
| 120 | Overseas dispatch, message or conversation | 10% |
| 127 | Sale of listed shares (stock transaction tax) | 0.1% from 1 Jul 2025 |
| 121–126 | Banks, finance companies, life insurance, amusement, winnings | Not re-confirmed for this page: check with your RDO |
Sources: RA 11976 Secs. 25–28; RR 20-2025 (stock transaction tax). Taxpayers under these sections, other than Sec. 116, cannot elect 8% (RR 8-2018).
Common mistakes and consequences
| Mistake | Consequence | How to avoid it |
|---|---|---|
| Still paying 1% | Underpayment since July 2023 | Use 3% |
| Paying percentage tax while on 8% | Tax paid twice | 8% replaces it; if Form 1905 is not yet updated, file 2551Q showing zero with a note |
| Missing the ₱3,000,000 crossover | VAT assessed on sales you did not charge VAT on | Track rolling 12-month sales; register within the month after |
| Claiming input VAT on a receipt | Input VAT disallowed | Only invoices support input VAT since 27 April 2024 |
| Leaving 2551Q open after registering for VAT | Open-case notices | Cancel the tax type in Form 1905 |
| Filing 2550M as if mandatory | Extra work; 2550Q is still required | File 2550Q every quarter |
Late filing costs a 25% surcharge and 12% interest a year (10% and 6% for micro and small taxpayers). Estimate with the BIR penalty calculator or run VAT figures in the VAT calculator.
Buod sa Tagalog
Ang percentage tax ay 3% ng kabuuang benta kada quarter, para sa negosyong hindi VAT at hindi lalampas sa ₱3,000,000 ang benta sa isang taon; ifa-file ito sa BIR Form 2551Q. Kapag lumampas sa ₱3,000,000, kailangang magparehistro sa VAT: 12% ng benta bawas ang VAT sa binili, ifa-file sa 2550Q. Pareho itong dapat bayaran sa ika-25 araw matapos ang quarter. Hindi na kailangan ang buwanang 2550M at 2551M. Kung pinili mo ang 8% income tax, wala kang percentage tax.
Frequently asked questions
+What is percentage tax in the Philippines and who pays it?
It is a business tax of 3% of gross quarterly sales under Sec. 116 of the Tax Code. It is paid by persons who are not VAT-registered and whose gross sales do not exceed ₱3,000,000 a year. Cooperatives are exempt, and individuals who elect the 8% income tax rate do not pay it.
+Is percentage tax 1% or 3% in 2026?
3%. The CREATE Act cut the Sec. 116 rate to 1% only from 1 July 2020 to 30 June 2023. From 1 July 2023 the rate returned to 3% of gross quarterly sales, and no later law has changed it as of November 2026.
+What is the difference between percentage tax and VAT?
Percentage tax is 3% of gross sales with no deduction for purchases, for non-VAT businesses up to ₱3,000,000 in sales. VAT is 12% of sales less the VAT paid on purchases, mandatory above ₱3,000,000. Percentage tax goes on Form 2551Q and VAT on Form 2550Q, both quarterly.
+Do I file 2551Q if I chose the 8% income tax rate?
No percentage tax is due, because the 8% rate replaces both graduated income tax and the 3% percentage tax. Update your registration with Form 1905 to end the percentage tax type. If it is not updated in time, RR 8-2018 says to keep filing 2551Q showing zero tax with a notation.
+When is the deadline for BIR Form 2551Q and 2550Q?
Both are due within 25 days after the end of each quarter. For 2027: 25 January for the fourth quarter of 2026, 26 April and 26 July (moved from Sundays), and 25 October. If the 25th falls on a weekend or holiday, file on the next working day.
+Is BIR Form 2550M (monthly VAT) still required?
No. Under the TRAIN Law, VAT has been filed and paid quarterly on Form 2550Q since 1 January 2023, so the monthly 2550M is no longer mandatory. A 2023 circular, as reported by tax advisers, allows optional monthly payment on 2550M as long as the quarterly 2550Q is still filed.
+Who still files BIR Form 2551M?
Percentage tax is filed quarterly on BIR Form 2551Q. A monthly 2551M return is no longer required: Sec. 128 of the Tax Code, as amended by TRAIN, makes the return quarterly. If you want to pay before the quarter ends, RMC 49-2025 lets you pay in advance on Form 0605 using the 2551Q codes.
+What happens when my sales exceed ₱3 million?
Register for VAT within the month after the month you crossed ₱3,000,000. VAT applies from the first day of the following month. Percentage tax is still due on sales before that. If you were on the 8% income tax rate, graduated rates apply for the whole year, with your 8% payments credited.
+Can a small business register for VAT voluntarily, and is it worth it?
A business below ₱3,000,000 can be VAT-registered, but it then loses the 8% option. It tends to make sense when customers are VAT-registered businesses that claim input VAT, or purchases subject to VAT are large. Confirm the Sec. 109(2) conditions with your RDO before registering.
+What transactions are VAT-exempt in the Philippines?
Sec. 109(1) lists them, including sales to senior citizens and PWDs, residential rent of ₱15,000 a month or less, medical and educational services, books and periodicals, salaries, association dues, and medicines for diabetes, hypertension, high cholesterol, cancer, mental illness, tuberculosis and kidney disease. See the table above for the full list.
Sources and references
- RA 10963 (TRAIN Law) — quarterly VAT from 2023, Sec. 109(1) list (checked November 12, 2026)
- RA 11534 (CREATE) — temporary 1% rate; Sec. 109 changes (checked November 12, 2026)
- RA 11976 (Ease of Paying Taxes Act) — Secs. 109(1)(CC), 116–128, 236 (checked November 12, 2026)
- RR 8-2018 — 8% option, crossing ₱3,000,000 (checked November 12, 2026)
- RR 3-2024 — VAT on services on billing basis (checked November 12, 2026)
- RMC 77-2024 — invoices replace receipts (checked November 12, 2026)
- RMC 49-2025 — 2550Q version; advance percentage tax on 0605 (checked November 12, 2026)
- RR 10-2025 — CREATE MORE VAT changes (checked November 12, 2026)
- RR 2-2026 — indigenous natural gas exemption (checked November 12, 2026)
Related tools and guides
Author and editorial review
Deepak Middha, Chartered Accountant
Chartered Accountant with 18 years in hedge funds; writes and maintains sulat.ph. Every rate, ceiling, deadline and fee on this page is taken from the National Internal Revenue Code or a BIR issuance and was checked against that source on November 12, 2026. Where a figure could not be confirmed officially, the page says so.
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