1) Overview: what “reduced percentage tax” refers to

In Philippine tax practice, the phrase “reduced percentage tax under CREATE” almost always refers to the temporary reduction of the percentage tax imposed on certain non-VAT taxpayers under Section 116 of the National Internal Revenue Code (NIRC), as amended.

This is the percentage tax on persons whose gross sales/receipts are not VAT-registered and who are not otherwise subject to another specific percentage tax (e.g., banks, common carriers, amusement operators) under Title V of the NIRC.

CREATE (Republic Act No. 11534) lowered the Section 116 rate from 3% to 1% for a limited period, then restored the 3% rate after the period ended.

2) The governing law: CREATE’s amendment of NIRC Section 116

A. The tax and its “normal” rate

Under NIRC Section 116, non-VAT persons (as a general rule) are subject to a percentage tax based on gross quarterly sales/receipts.

Before CREATE’s temporary relief, the generally applicable Section 116 rate was 3% (this 3% rate itself traces to earlier amendments before CREATE).

B. CREATE’s temporary reduced rate (the core rule)

CREATE amended Section 116 to provide a reduced rate of 1%, but only for a defined window. The law’s structure is essentially:

1% for a limited period; then
3% thereafter.

3) The duration: the exact start and end dates

A. Start of the reduced rate

The reduced percentage tax rate is effective beginning:

July 1, 2020

This is a key feature: although CREATE was enacted later, the reduced Section 116 rate was written to apply from July 1, 2020.

B. End of the reduced rate

The reduced rate ended on:

June 30, 2023

C. Reversion after the period

Starting:

July 1, 2023, the rate reverted to 3%.

Summary timeline (Section 116)

July 1, 2020 to June 30, 2023 → 1%
July 1, 2023 onward → 3%

4) Who was covered by the reduced rate (and who was not)

A. Generally covered

The reduced 1% rate applied to taxpayers who are:

Not VAT-registered, and
Not required to be VAT-registered, and
Not subject to another specific percentage tax under Title V, and
Not enjoying an exemption or a separate regime that removes them from Section 116.

In plain terms: if you were a typical small business taxpayer paying the “regular” percentage tax under Section 116, you benefited from the temporary reduction.

B. Not automatically covered

The reduced rate did not automatically apply to taxpayers who:

Are VAT-registered (VAT rules apply instead);
Are liable under other percentage tax provisions (e.g., certain financial institutions, life insurance companies, amusement taxes, etc., depending on classification);
Are exempt by law (including certain entities or transactions expressly exempted);
Elected and validly used an 8% income tax option (discussed below), because that option is designed to be in lieu of the 3% percentage tax (and generally in lieu of graduated rates + percentage tax, subject to the statutory rules).

5) Relationship to the 8% income tax option (why this matters for “duration”)

Many MSMEs and self-employed individuals toggle between:

paying percentage tax under Section 116, or
electing the 8% income tax rate (for qualified taxpayers), which is generally in lieu of the percentage tax and the graduated income tax rates, subject to conditions.

Practical point

If a taxpayer validly elected the 8% option for a taxable year, the taxpayer is generally not paying Section 116 percentage tax at all for that year. In that situation, the CREATE “1% period” is less relevant because the taxpayer is outside the Section 116 computation.

However:

Not everyone qualifies for 8%, and
Not everyone elects it properly or timely, and
Certain mixed-income scenarios and threshold issues can complicate the analysis.

So, the CREATE reduction mainly mattered to taxpayers actually paying Section 116 percentage tax during the covered quarters.

6) How the duration applies in real compliance: quarterly periods, cutoffs, and transitions

Because Section 116 is computed and filed quarterly, the June 30, 2023 cutoff is especially important.

A. Quarters fully inside the 1% window

For quarters falling entirely within July 1, 2020–June 30, 2023, the applicable rate is 1%.

B. The turning point quarter in 2023

Q2 2023 (April–June 2023) is within the 1% window.
Q3 2023 (July–September 2023) begins the reversion to 3%.

In practice, taxpayers needed to ensure that starting the first quarter beginning July 1, 2023, their returns and computations reflect 3%, not 1%.

C. No “blended rate” concept in the statute

The rule is date-based. Since the tax is quarterly, compliance typically follows the quarter as defined by the tax system. The clean break is June 30 / July 1, 2023.

7) Policy context: why the reduced rate existed only temporarily

CREATE was enacted as a broad tax reform and economic recovery measure. The percentage tax reduction functioned as temporary relief, especially relevant to smaller businesses that were:

non-VAT, and
often operating on thinner margins during pandemic recovery.

The built-in reversion to 3% signals that the relief was intended as a time-bound stimulus, not a permanent restructuring of the Section 116 regime.

8) Common issues and audit-risk points tied to the “duration”

A. Continuing to use 1% after June 30, 2023

A frequent compliance error is failure to revert to 3% starting July 1, 2023, especially for taxpayers whose bookkeeping templates, POS configuration, or accounting worksheets still carried the 1% rate.

B. VAT threshold changes and late VAT registration

Taxpayers hovering near the VAT threshold sometimes:

continue filing percentage tax at 1% (during the period) or 3% (after), even when they should already be VAT-registered; or
incorrectly switch regimes without properly updating registration and invoicing requirements.

C. Interaction with invoicing/receipting and “non-VAT” labeling

The percentage tax regime is closely tied to whether a taxpayer is VAT-registered and whether their invoices/receipts are correctly issued. Misalignment can trigger assessment issues beyond the rate itself (e.g., VAT exposure, surcharge/interest, compromise penalties).

9) Quick reference: the rule in one paragraph

Under the CREATE Law (RA 11534), the percentage tax under NIRC Section 116 for non-VAT taxpayers was temporarily reduced from 3% to 1% for the period July 1, 2020 until June 30, 2023. Beginning July 1, 2023, the Section 116 percentage tax reverted to 3%. The reduced rate applied only to taxpayers who are properly within Section 116 (i.e., non-VAT and not subject to another percentage tax provision or an alternative regime such as a valid 8% election).

10) Practical checklist for taxpayers and advisers

Confirm the taxpayer is properly classified under Section 116 (non-VAT and not subject to another percentage tax).
Confirm whether the taxpayer elected 8% income tax for the year (if valid, Section 116 may not apply).
For quarters up to June 30, 2023, apply 1% if Section 116 applies.
For quarters starting July 1, 2023, apply 3% if Section 116 applies.
Validate registration status, invoices/receipts, and accounting system tax-rate settings to avoid rate carryover errors.
If an error occurred (e.g., 1% used after June 30, 2023), assess exposure and consider corrective filing and payment approaches consistent with tax procedure rules.

This article is for general information in the Philippine legal and tax context and is not a substitute for formal legal advice based on specific facts.