In the Philippine tax landscape, small business owners—particularly sole proprietors, professionals, and small corporations—often find themselves navigating between two primary types of business taxes: Value-Added Tax (VAT) and Percentage Tax. For many emerging enterprises, the Percentage Tax serves as a simpler, more manageable alternative to the complexities of VAT.
The following is a comprehensive guide to the legal requirements and compliance standards for Quarterly Percentage Tax under the National Internal Revenue Code (NIRC), as amended by the TRAIN Law and the CREATE Act.
1. Definition and Legal Basis
Percentage Tax is a business tax imposed on persons or entities who sell or lease goods, properties, or services in the course of trade or business. Unlike VAT, which is an indirect tax that allows for "input tax" credits, Percentage Tax is a direct percentage of gross sales or receipts.
It is primarily governed by Title V of the National Internal Revenue Code (NIRC). Under Section 116, small businesses that do not exceed the mandatory VAT threshold are required to pay this tax.
2. Who is Required to Pay?
You are generally liable for Quarterly Percentage Tax if you meet the following criteria:
- Non-VAT Registered: Your annual gross sales or receipts do not exceed the threshold of PHP 3,000,000.
- Exempt from VAT: You are specifically exempted from VAT under Section 109 (BB) of the Tax Code but are not otherwise exempt from other business taxes.
- Specific Industries: Certain businesses are required to pay Percentage Tax regardless of their gross sales (e.g., domestic carriers, keepers of garages, international air/shipping carriers, and certain franchises).
Note on the 8% Income Tax Option: Small businesses have the option to avail of a flat 8% Income Tax rate on gross sales/receipts in excess of PHP 250,000. If a taxpayer elects this 8% option, they are exempt from paying the 3% Percentage Tax.
3. Applicable Tax Rates
The standard rate for Percentage Tax under Section 116 is 3%.
However, it is important to note that under the CREATE Act (Republic Act No. 11534), the rate was temporarily reduced to 1% to provide economic relief during the pandemic. As of July 1, 2023, the rate has reverted to the original 3% of gross quarterly sales or receipts.
| Type of Business | Tax Rate |
|---|---|
| General Non-VAT Taxpayers (Sec. 116) | 3% |
| Domestic Carriers and Keepers of Garages | 3% |
| International Carriers | 3% |
| Franchise Grantees (Gas and Water) | 2% |
| Franchise Grantees (Radio/TV - under threshold) | 3% |
4. Compliance: Filing and Payment
The Bureau of Internal Revenue (BIR) requires strict adherence to filing schedules. Failure to comply results in hefty surcharges and interest.
The Tax Form
The relevant form is BIR Form No. 2551Q (Quarterly Percentage Tax Return).
Deadlines
Percentage tax is filed and paid on a quarterly basis. The deadline is generally the 25th day following the close of each taxable quarter:
- 1st Quarter (Jan-Mar): Deadline April 25
- 2nd Quarter (Apr-Jun): Deadline July 25
- 3rd Quarter (Jul-Sep): Deadline October 25
- 4th Quarter (Oct-Dec): Deadline January 25
Filing Methods
- eFPS (Electronic Filing and Payment System): For large taxpayers or those mandated to use the system.
- eBIRForms: For non-eFPS filers; taxpayers download the offline package, fill out the form, and submit it online.
- Manual Filing: Only allowed under specific circumstances (e.g., system downtime).
5. Essential Documentation
To ensure legal compliance and survive a potential BIR audit, small businesses must maintain the following:
- Books of Accounts: Specifically the Sales Journal or simplified books where daily gross receipts are recorded.
- Registered Receipts/Invoices: All sales must be supported by BIR-registered principal receipts or invoices.
- Certificate of Registration (Form 2303): This document dictates which taxes the business is liable for. If "Percentage Tax" is listed, 2551Q filings are mandatory.
6. Penalties for Non-Compliance
The Philippine Tax Code imposes significant penalties for late filing or "no-payment" returns:
- Surcharge: 25% of the tax due (50% in cases of willful neglect or fraud).
- Interest: 12% per annum on the unpaid amount.
- Compromise Penalty: A graduated scale based on the amount of tax due, intended to settle the criminal liability for the violation.
7. Shifting from Percentage Tax to VAT
Once a small business exceeds the PHP 3,000,000 gross annual sales threshold, it is legally required to update its registration from Non-VAT to VAT. This must be done within the first month following the month the threshold was breached. Once registered as VAT, the taxpayer is no longer liable for Percentage Tax but must comply with the 12% VAT regulations.