In Philippine tax law, the “1% percentage tax” refers to the temporary reduced rate imposed on certain non-VAT taxpayers under Section 116 of the National Internal Revenue Code, as amended. The issue became especially important under the Corporate Recovery and Tax Incentives for Enterprises Act, or CREATE Law, because CREATE reduced the old 3% percentage tax to 1% for a defined period. The subject later evolved further when the reduced rate was extended by subsequent legislation. The practical questions are always the same: who may use the 1% rate, for what period does it apply, when must the tax be filed and paid, and what happens once the temporary period ends.

I. Legal nature of the 1% percentage tax

The percentage tax under Section 116 is a business tax imposed on persons who are not VAT-registered and whose sales or receipts are not otherwise subject to VAT, provided they fall within the statutory threshold and are not covered by other special percentage tax rules. It is distinct from income tax. It is also distinct from VAT. It is a gross-based tax, meaning it is computed from gross quarterly sales or gross receipts, without the input-output mechanism found in VAT.

Before the CREATE regime, the standard rate under Section 116 was 3%. CREATE temporarily lowered this to 1% as a relief measure.

II. Original CREATE rule

Under CREATE, the percentage tax rate under Section 116 was reduced from 3% to 1%. The reduction was meant to provide temporary tax relief to small businesses and non-VAT taxpayers during the recovery period.

The original reduced-rate period was:

From July 1, 2020 until June 30, 2023

That meant that, during that span, qualified taxpayers subject to Section 116 paid only 1% instead of 3% on their gross quarterly sales or receipts.

III. Extension of the 1% rate

The CREATE-era reduced rate did not simply remain limited to June 30, 2023. The 1% rate was later extended, so the reduced rate continued beyond the original CREATE sunset date.

The extended applicable period is:

From July 1, 2020 until December 31, 2025

This is the key rule behind the phrase “CREATE Law 1% Percentage Tax Extension.” In practice, it means the temporary relief first introduced under CREATE remained in force for qualified taxpayers through the end of 2025.

IV. What exactly was extended

What was extended was not the entire percentage tax system, but specifically the reduced rate under Section 116.

So the timeline is best understood this way:

Before July 1, 2020: the regular rate was 3%
From July 1, 2020 to December 31, 2025: the temporary reduced rate is 1%
Beginning January 1, 2026: absent another legislative extension or amendment, the rate reverts to the regular statutory rate of 3%

That last point is crucial. The reduced rate is temporary. It is not the permanent baseline rate unless Congress changes the law again.

V. Taxpayers covered by the 1% percentage tax

The 1% rate generally applies to taxpayers subject to Section 116 of the Tax Code. These are ordinarily persons:

Not VAT-registered, and
Not required to register as VAT taxpayers, and
Engaged in business or profession, whose gross annual sales or receipts do not exceed the VAT threshold, and
Not subject to another special percentage tax provision

In ordinary practice, this includes many small businesses, sole proprietors, and certain professionals who remain non-VAT taxpayers.

The tax is imposed on gross quarterly sales or receipts.

VI. Who are not covered

The 1% Section 116 rate is not a blanket tax rule for all businesses. It does not apply to every taxpayer. In particular, it does not generally govern:

VAT-registered taxpayers
Taxpayers required to register under VAT because they exceed the VAT threshold
Taxpayers subject to other percentage taxes under other provisions of the Tax Code
Taxpayers enjoying special tax regimes where another rule specifically applies

This distinction matters because a taxpayer who is actually VAT-liable cannot simply elect to pay 1% percentage tax under Section 116.

VII. VAT threshold relevance

The Section 116 percentage tax is tied to non-VAT status. If a taxpayer’s gross sales or receipts exceed the VAT threshold, the taxpayer may become liable to VAT rather than percentage tax, subject to the timing and rules on VAT registration.

This means eligibility for the 1% rate depends not just on the calendar date, but also on the taxpayer’s registration status and actual level of gross sales or receipts.

If a business crosses the VAT threshold and becomes VAT-liable, its Section 116 treatment ends and the 1% percentage tax ceases to be the proper tax treatment from the effective point of VAT liability.

VIII. Applicable period in practical terms

Because the reduced rate runs until December 31, 2025, the 1% applies to taxable quarters falling within that period.

That means the following quarters are covered at 1%:

Third quarter of 2020, beginning July 1, 2020
Fourth quarter of 2020
All four quarters of 2021
All four quarters of 2022
All four quarters of 2023
All four quarters of 2024
All four quarters of 2025

Beginning January 1, 2026, the law returns to the regular 3% rate unless there is a new statutory change.

IX. Quarterly filing and payment deadlines

The percentage tax under Section 116 is generally filed quarterly. The return commonly used is the quarterly percentage tax return.

The basic deadline is:

Within 25 days after the close of each taxable quarter

For taxpayers using the calendar quarter, the usual deadlines are:

First quarter (January 1 to March 31) – due April 25
Second quarter (April 1 to June 30) – due July 25
Third quarter (July 1 to September 30) – due October 25
Fourth quarter (October 1 to December 31) – due January 25 of the following year

This deadline rule is the same whether the applicable rate is 1% or 3%. What changes is the rate, not the filing frequency.

X. Deadlines during the extended period

Because the 1% rate continues through December 31, 2025, the reduced rate applies to returns due during that span for quarters covered by the law.

The important filing cycle during the extension is therefore:

For 2023

Q1 2023 – 1% applies; due April 25, 2023
Q2 2023 – 1% applies; due July 25, 2023
Q3 2023 – 1% applies because of the extension; due October 25, 2023
Q4 2023 – 1% applies because of the extension; due January 25, 2024

For 2024

Q1 2024 – 1%; due April 25, 2024
Q2 2024 – 1%; due July 25, 2024
Q3 2024 – 1%; due October 25, 2024
Q4 2024 – 1%; due January 25, 2025

For 2025

Q1 2025 – 1%; due April 25, 2025
Q2 2025 – 1%; due July 25, 2025
Q3 2025 – 1%; due October 25, 2025
Q4 2025 – 1%; due January 25, 2026

That last item is often overlooked. Even though the quarter ends on December 31, 2025, the filing and payment deadline for that quarter falls on January 25, 2026. The applicable tax rate is still 1%, because the taxable quarter itself is within the extended statutory period.

XI. Transition to 3% after the extension

The reduced 1% rate ends after December 31, 2025. So for the quarter beginning January 1, 2026, the default rule is that the taxpayer goes back to the regular 3% percentage tax, assuming the taxpayer remains properly under Section 116.

Thus:

Q4 2025 return filed on January 25, 2026 remains at 1%
Q1 2026 return due on April 25, 2026 is generally at 3%

The governing factor is the taxable period covered by the return, not the date the return is filed.

XII. Basis of computation

The percentage tax is computed on:

Gross quarterly sales or receipts

The basic formula during the extension is:

Gross quarterly sales/receipts × 1%

Before July 1, 2020, and again after December 31, 2025, the formula reverts to:

Gross quarterly sales/receipts × 3%

The term “gross” is important. It generally refers to the total amount received or earned without deductions, subject to the governing tax rules. Since percentage tax is not a net-income tax, operating expenses do not reduce the tax base.

XIII. Sales versus receipts

The statutory wording often refers to sales or receipts, because the nature of the taxpayer’s business matters:

For sale of goods, the relevant tax base is usually gross sales
For services, the relevant tax base is usually gross receipts

In practice, the return captures the appropriate gross amount for the quarter.

XIV. If the taxpayer shifts to VAT during the year

A taxpayer may begin the year as non-VAT and later become VAT-liable by crossing the VAT threshold or by electing VAT registration where allowed.

In that event, the Section 116 percentage tax applies only for the period when the taxpayer was still properly classified as a non-VAT taxpayer. Once VAT liability takes effect, the taxpayer should no longer compute Section 116 percentage tax for the period covered by VAT.

This is one of the most sensitive compliance issues because errors may produce either underpayment or double taxation.

XV. If the taxpayer voluntarily registers under VAT

A taxpayer who is otherwise below the VAT threshold may, in some situations, voluntarily register under VAT. Once validly under the VAT regime, Section 116 percentage tax is no longer the applicable business tax. Therefore, the 1% reduced percentage tax becomes irrelevant to that taxpayer for the covered VAT period.

XVI. Importance of registration data with the BIR

The legal entitlement to the 1% rate depends not only on the law but also on the taxpayer’s actual registration profile. A business may believe it is still subject to percentage tax, but if its BIR registration has been updated to VAT, or if it is legally required to be VAT-registered, the 1% rate would not be the correct treatment.

The taxpayer’s Certificate of Registration, tax type, and actual business profile therefore matter.

XVII. Filing mechanics

The percentage tax return is ordinarily filed through BIR-prescribed channels. The taxpayer must comply with the method applicable to its registration category, such as electronic or manual filing where permitted under current BIR procedures.

The legal deadline remains the same: 25 days after the close of the taxable quarter.

Payment should accompany the filing if tax is due.

XVIII. Penalties for late filing or late payment

Failure to file or pay on time may trigger the ordinary tax penalties under the Tax Code and BIR rules, including:

Surcharge
Interest
Compromise penalty, where applicable

The fact that the rate is only 1% does not reduce the obligation to file correctly and on time. A taxpayer with zero tax due may still need to comply with filing rules, depending on the applicable administrative requirements.

XIX. Does the extension eliminate the need to file?

No. The extension changes the rate, not the compliance duty. Taxpayers still need to determine whether they are liable under Section 116, compute the tax correctly, and file on time.

A common mistake is to assume that because the tax rate is reduced, compliance is relaxed. It is not.

XX. Why the extension matters

The extension matters for three main reasons.

First, it lowers the tax burden of covered non-VAT taxpayers from 3% to 1%, which is a significant reduction in cash outflow.

Second, it clarifies that the reduced rate did not stop in mid-2023. Many taxpayers initially associated the 1% rate only with the original CREATE window ending on June 30, 2023. The extension continued the relief up to the end of 2025.

Third, it affects return preparation and tax mapping for multiple years, especially 2023, 2024, and 2025.

XXI. Common legal and compliance misconceptions

One recurring misconception is that the 1% rate is the permanent rate for all non-VAT taxpayers. It is not. It is temporary.

Another misconception is that the rate depends on the filing date rather than the taxable quarter. That is also incorrect. The proper rate depends on the period covered by the return.

A third misconception is that every small business automatically falls under Section 116. That is not always true. Some businesses may be VAT taxpayers, while others may be subject to different percentage tax provisions.

XXII. The most important date rules summarized

The most important rules can be stated simply:

The old Section 116 rate is 3%
CREATE reduced it to 1%
The reduced 1% rate originally covered July 1, 2020 to June 30, 2023
The reduced rate was later extended up to December 31, 2025
Returns are filed quarterly
The deadline is within 25 days after the close of each taxable quarter
The Q4 2025 return is still computed at 1%, even though it is due on January 25, 2026
The rate generally returns to 3% beginning January 1, 2026, unless the law changes again

XXIII. Effect on accounting and tax planning

From a legal-compliance perspective, the extension affects not only tax computation but also pricing, cash flow forecasting, and registration review.

Businesses that remained non-VAT through 2023 to 2025 benefited from a lower gross-based business tax. Those close to the VAT threshold had to monitor whether they could continue using Section 116. For accountants and tax counsel, the extension required careful quarter-by-quarter validation to ensure the correct rate and tax type were used.

XXIV. Final legal takeaway

The phrase “CREATE Law 1% Percentage Tax Extension” refers to the continued application of the reduced 1% percentage tax under Section 116 for qualified non-VAT taxpayers beyond the original CREATE sunset date.

The controlling legal takeaway is this:

The 1% rate applies from July 1, 2020 until December 31, 2025, and the tax must generally be filed and paid within 25 days after the close of each taxable quarter.

Thus, for Philippine taxpayers properly covered by Section 116:

all qualified quarters from Q3 2020 through Q4 2025 are taxed at 1%, and
the regular 3% rate generally resumes for quarters beginning January 1, 2026

That is the operative framework for determining the applicable period and deadlines under Philippine law.