Percentage Tax in the Philippines: Rates, Who Pays, and BIR Form 2551Q

Percentage tax is a business tax imposed on persons or entities that sell goods or services but are NOT registered for value-added tax (VAT). Under Section 116 of the National Internal Revenue Code (NIRC), as amended, it applies to non-VAT taxpayers whose annual gross sales or receipts do not exceed the ₱3,000,000 VAT threshold and who did not voluntarily opt to register for VAT.

It is a tax on the act of doing business, computed as a flat percentage of gross sales or gross receipts, not on net income or profit. This makes it distinct from income tax (a tax on net earnings) and from VAT (a tax on the value added at each stage of sale).

The most common form, under Section 116, is the general percentage tax for small non-VAT businesses. The NIRC also imposes several other percentage taxes at different rates on specific industries (common carriers, franchises, banks, insurance, amusement places, and stock transactions) under Sections 117 through 127.

The current Section 116 percentage tax rate is THREE PERCENT (3%) of quarterly gross sales or receipts. This is the standard rate for non-VAT businesses below the ₱3,000,000 threshold.

There is an important history that causes confusion. The CREATE Law (Republic Act No. 11534) TEMPORARILY reduced the Section 116 rate from 3% to ONE PERCENT (1%). This 1% rate applied only from July 1, 2020 to June 30, 2023, as a pandemic-era relief measure.

Effective July 1, 2023, the rate REVERTED to 3%. For all quarters in 2024, 2025, and 2026, the correct rate is 3% — not 1%. Online articles, templates, and older calculators that still show 1% are out of date. Always apply 3% to current-period gross sales or receipts.

You pay Section 116 percentage tax if you are NOT VAT-registered, your annual gross sales or receipts do not exceed ₱3,000,000, and you did not elect the 8% income tax option. If any of those three conditions changes, your liability changes.

You do NOT pay Section 116 percentage tax if you are VAT-registered (you pay 12% VAT instead), if you elected the 8% flat income tax option (the 8% is in lieu of both graduated income tax and percentage tax), or if your transactions are otherwise specifically exempt.

Note that crossing the ₱3,000,000 VAT threshold makes VAT registration mandatory going forward, which ends Section 116 liability and replaces it with VAT obligations.

If a self-employed individual or professional elects the 8% income tax option, they are NOT subject to percentage tax. The 8% flat rate is imposed in lieu of BOTH the graduated income tax and the Section 116 percentage tax.

Eligibility mirrors the percentage-tax population: the taxpayer must be non-VAT, with annual gross sales or receipts not exceeding ₱3,000,000. Individuals (not corporations) compute the 8% on gross sales/receipts in excess of the ₱250,000 income tax exemption allowance, where applicable, and file it through the income tax returns rather than Form 2551Q.

Because the 8% replaces percentage tax, electing it means you stop filing BIR Form 2551Q for that taxable year. Choosing between graduated rates plus 3% percentage tax versus the flat 8% is a planning decision that depends on your margins and deductible expenses.

Section 116 percentage tax is reported on BIR Form 2551Q, the Quarterly Percentage Tax Return. It is filed QUARTERLY, due within 25 days after the end of each taxable quarter.

For a calendar-year taxpayer, the deadlines fall on or before April 25 (Q1, January–March), July 25 (Q2, April–June), October 25 (Q3, July–September), and January 25 of the following year (Q4, October–December). When a deadline lands on a weekend or holiday, it generally moves to the next working day.

File and pay through the BIR's electronic channels — eFPS or eBIRForms — and pay via the authorized agent banks or accredited e-payment facilities. Late filing or payment exposes the taxpayer to surcharge, interest, and compromise penalties under the NIRC, so calendaring the 25-day deadline is essential.

Form 2551Q filing checklist

• Confirm you are non-VAT and did not elect the 8% option for the year
• Total your gross sales or receipts for the quarter
• Apply the 3% Section 116 rate (use the correct Alphanumeric Tax Code, e.g. PT 010)
• Deduct any valid tax credits or prior creditable percentage tax withheld (BIR Form 2307)
• File via eBIRForms or eFPS within 25 days after quarter-end
• Pay through an authorized agent bank or accredited e-payment channel and keep the confirmation

Beyond the general 3% under Section 116, the NIRC imposes other percentage taxes at distinct rates on specific industries. These apply regardless of the ₱3M threshold and are governed by their own sections.

These rates differ from the Section 116 rate and from one another, so a business in one of these industries should apply its specific rate and form rather than the general 3%. The table below lists common examples; it is not exhaustive.

Whether you pay percentage tax or VAT depends almost entirely on the ₱3,000,000 annual gross sales/receipts threshold and your registration choice. Below the threshold and non-VAT, you pay 3% percentage tax; at or above it, VAT registration becomes mandatory.

Percentage tax (3%) is simpler — a flat rate on gross sales with no input-tax mechanism. VAT (12%) lets you credit input VAT on purchases against output VAT on sales, which can favor businesses with large taxable purchases, but it carries heavier compliance (invoicing rules, VAT relief, monthly/quarterly returns).

A non-VAT taxpayer below the threshold may VOLUNTARILY register for VAT (for example, to credit input VAT or to serve VAT-registered clients who want input credits). Voluntary VAT registration ends Section 116 percentage tax liability but is generally binding for a fixed period, so weigh it carefully.