1) The “percentage tax” in context

In the Philippine National Internal Revenue Code (NIRC), percentage taxes are business taxes imposed as a percentage of gross sales, gross receipts, or gross income (depending on the provision). They generally apply to taxpayers not subject to Value-Added Tax (VAT) or to specific industries subject to special percentage tax regimes.

The “reduced percentage tax rate” associated with the CREATE Act (Republic Act No. 11534) refers primarily to the general percentage tax on persons not VAT-registered under Section 116 of the NIRC, as amended.

A. The baseline rule (before the reduction)

Ordinarily, a taxpayer who:

is engaged in business or the practice of profession,
is not VAT-registered, and
is not subject to another specific percentage tax (e.g., franchise tax, amusement tax, etc.)

is generally subject to percentage tax at 3% of quarterly gross sales or receipts under NIRC Section 116.

2) What CREATE changed: the reduced rate and its legal basis

A. The CREATE amendment (Section 116, NIRC)

CREATE amended the NIRC to provide a temporary reduction of the general percentage tax rate under Section 116 from 3% to 1% for a limited period.

B. Legal “validity”: why the reduced rate is legally effective

From a legal standpoint, the reduced rate is valid and enforceable because:

It is statutory: the rate change is contained in a duly enacted law (CREATE) that amended the NIRC.
Taxation power: Congress has broad constitutional authority to set tax bases, rates, exemptions, and relief measures, subject to constitutional limitations (e.g., due process, equal protection, uniformity and equity principles).
Amendatory effect: because the NIRC is a statute, Congress may alter it through subsequent legislation like CREATE, and the amended provision governs during its effectivity.

In practice, the key “validity” questions are rarely about constitutionality and more about proper application, namely:

Who qualifies for the 1% rate;
When the 1% rate applies (effectivity window); and
How taxpayers should compute, file, and correct returns during transitions.

3) Coverage: who can use the reduced 1% rate

A. Taxpayers covered (general)

The temporary 1% percentage tax under Section 116 is generally relevant to:

Non-VAT businesses (sole proprietors, partnerships, corporations, other entities) that are not VAT-registered and are not subject to a special percentage tax; and
Self-employed individuals / professionals who are not VAT-registered and did not elect an option that removes them from percentage tax.

B. Taxpayers not covered (common exclusions)

The 1% reduction under Section 116 does not apply where the taxpayer is:

VAT-registered (VAT taxpayers generally do not pay Section 116 percentage tax).
Subject to other percentage taxes under the NIRC (examples include certain franchise taxes, amusement taxes, tax on banks and non-bank financial intermediaries, etc.).
Electing a regime in lieu of percentage tax, where allowed.

4) Interaction with the 8% income tax option for individuals

Under the TRAIN-era framework (still relevant during CREATE’s 1% period), certain individuals may elect 8% income tax on gross sales/receipts (beyond the statutory threshold amount) in lieu of:

graduated income tax rates and
the percentage tax under Section 116.

Practical consequence: If an eligible individual validly elected the 8% option for the taxable year, the individual generally does not pay the 1% (or 3%) percentage tax under Section 116 for that year—because the 8% is intended as a substitute.

However, if the taxpayer is not eligible, did not elect properly, or shifted regimes midstream under rules not allowing it, the taxpayer may revert to being subject to the regular percentage tax rules (and the applicable rate for the period).

5) Effectivity window and “extensions”: understanding the timeline

A. The policy design: temporary relief

The reduced rate was designed as time-bound relief for micro, small, and non-VAT taxpayers, particularly in the pandemic and recovery period.

B. The legal effectivity approach

CREATE’s reduced rate is best understood as:

a specific reduced rate for a defined period, after which the law reverts the rate to the default 3% unless Congress enacts a new amendment.

C. Transition and “extension” issues in practice

When taxpayers and advisers talk about “extensions,” they may mean any of the following:

Statutory extension – Congress passes a new law extending the reduced rate beyond the original end date.
Administrative accommodation – the tax authority issues guidance on transition rules (e.g., return amendments, carryovers, corrections).
Legislative proposals – bills filed to continue relief, which do not change the law unless enacted.

Compliance reality: once the statutory window ends, taxpayers must apply the rate in force for the quarter/period. Temporary rates typically do not continue by implication.

6) Computation: how the 1% percentage tax is computed

A. Tax base

For Section 116 taxpayers, the base is generally:

Gross sales (for sellers of goods) or
Gross receipts (for service providers / professionals)

for the taxable quarter.

“Gross” generally means without deduction for costs, expenses, or withholding taxes. For services, it typically includes amounts received/earned as gross receipts within the period, subject to the taxpayer’s applicable accounting and tax rules.

B. Rate

During the CREATE reduced-rate period:

Percentage tax = 1% × Quarterly gross sales/receipts

Outside the reduced-rate window (default rule):

Percentage tax = 3% × Quarterly gross sales/receipts

C. Illustrative computations

Non-VAT retailer (covered by Section 116) Quarterly gross sales: ₱800,000

At 1%: ₱8,000
At 3%: ₱24,000

Non-VAT professional (not under 8% option; covered by Section 116) Quarterly gross receipts: ₱500,000

At 1%: ₱5,000
At 3%: ₱15,000

7) Filing and payment: forms, frequency, and deadlines (core compliance)

A. Return

Percentage tax under Section 116 is commonly reported in the quarterly percentage tax return (commonly the BIR’s quarterly percentage tax form used for Section 116 taxpayers).

B. Filing frequency

Quarterly filing and payment is the standard for the general percentage tax.

C. Timing

Deadlines are generally set by regulation and can be affected by later administrative or statutory adjustments (e.g., reforms simplifying payment and filing). As a compliance discipline:

determine the quarter covered,
apply the rate applicable for that quarter, and
file/pay by the deadline applicable to that return for the period.

Because deadline rules can change through later reforms, the legally safest framing is: the return must be filed and the tax paid within the deadline prescribed for the quarter by prevailing BIR rules.

8) Documentation and invoicing/receipting implications

A. VAT vs non-VAT invoices/receipts

A Section 116 percentage taxpayer is generally a non-VAT taxpayer, so the receipts/invoices typically:

do not show VAT as a separate component, and
must comply with invoicing/receipting rules for non-VAT persons.

B. Proof of gross sales/receipts

The percentage tax is computed on “gross,” so audit exposure often centers on:

unrecorded sales/receipts,
timing of recognition (cutoff issues),
classification errors (VAT vs non-VAT), and
treatment of discounts, returns, and allowances.

9) Registration issues: VAT threshold, voluntary VAT registration, and changes in status

A. Exceeding the VAT threshold

A taxpayer whose gross sales/receipts exceed the statutory VAT threshold (or otherwise becomes required to register) may become VAT-liable, which generally removes the taxpayer from Section 116 percentage tax going forward.

Key compliance risks include:

late VAT registration,
wrong tax type filed (continuing to file percentage tax when VAT is already required),
penalties for incorrect registration and returns.

B. Voluntary VAT registration

Taxpayers sometimes opt into VAT registration even below the threshold. This can affect eligibility for percentage tax. Once VAT-registered, the taxpayer generally follows the VAT regime until valid deregistration under applicable rules.

10) Corrections, overpayments, and retroactive application issues (practical “validity” disputes)

A recurring real-world issue during temporary rate changes is returns already filed at the old rate while a new law takes effect (or is made applicable to an earlier period). The typical legal questions are:

A. If a taxpayer paid 3% when 1% applied

Possible remedies typically fall into these paths (subject to procedural rules):

Amended return reflecting the correct rate; and/or
Carryover / tax credit against future percentage tax liabilities, if allowed; and/or
Refund claim, if carryover is not available or not chosen, following strict substantiation and prescriptive periods.

Practice note: refund claims in tax law are procedure-heavy; taxpayers usually prefer carryover/credit if administratively permitted, but the correct remedy depends on the prevailing rules for that tax type and period.

B. If a taxpayer underpaid due to using 1% when 3% already applied

This typically results in:

deficiency percentage tax,
surcharge and interest (and possibly compromise penalties), unless corrected promptly through amended filings and payment under the rules.

11) Common compliance pitfalls and audit triggers

Misclassification of tax type Filing percentage tax despite VAT-liability, or filing VAT returns despite being properly non-VAT.
Incorrect eligibility assumption Assuming the 1% applies to industries actually subject to other percentage taxes or special regimes.
8% option errors (individuals) Invalid or late election; switching when not allowed; paying neither the 8% nor the percentage tax correctly.
Timing errors in transition quarters Applying the wrong rate to a quarter that straddles the end of the reduced-rate period.
Gross base issues Netting out withheld taxes, or deducting expenses, or failing to include all receipts.
Invoicing/receipting noncompliance Receipt content, authority to print/issue, serial integrity, and consistency with reported gross.

12) Penalties and exposure framework

Noncompliance can lead to:

deficiency tax assessments,
civil penalties (surcharge, interest),
compromise penalties depending on the violation,
and, in serious cases, potential criminal exposure under general tax enforcement provisions (typically requiring willfulness or fraudulent intent in higher-stakes scenarios).

The most defensible posture is:

correct tax type registration,
correct quarter-by-quarter rate application,
accurate gross reporting, and
contemporaneous documentation (books, receipts, schedules).

13) Practical compliance checklist (rate-focused)

Confirm tax regime
- VAT-registered or non-VAT?
- Subject to a special percentage tax or the general Section 116?
Confirm whether Section 116 applies
- If yes, check if an individual elected 8% in lieu of percentage tax.
Apply the correct rate per quarter
- Use 1% only for quarters within the statutory reduced-rate window.
- Revert to 3% for quarters after the window, absent a new statutory change.
File the correct return and pay on time
- Use the prescribed quarterly percentage tax return for Section 116 taxpayers.
Maintain support
- Sales/receipt summaries, official receipts/invoices, books of accounts, and reconciliations.
Handle corrections properly
- Amend returns where needed.
- Document overpayments and the chosen remedy (credit/carryover/refund) consistent with procedural rules.

14) Bottom line

The CREATE Act’s reduced percentage tax rate is a statutory, time-bound adjustment to the general percentage tax under NIRC Section 116, lowering the rate from 3% to 1% during the covered period as a relief measure for eligible non-VAT taxpayers not subject to other percentage taxes. The most important legal and compliance questions are not abstract “validity,” but eligibility, correct quarter-by-quarter rate application, and procedurally correct handling of transition issues (especially amended returns and overpayment remedies), all anchored on accurate gross reporting and proper VAT vs non-VAT classification.