Quick answer

Businesses in the Philippines are subject to one of two main consumption taxes on their sales, and which one applies depends principally on the level of gross sales or receipts. Value-added tax (VAT) is a tax on the value added at each stage of production and distribution. A person whose gross sales or receipts for the past twelve months (or are expected to exceed) the VAT threshold set by law must register as a VAT taxpayer; VAT-registered persons impose the VAT rate on their sales (output tax), may credit the VAT they paid on their purchases (input tax), and remit the difference. This input tax credit mechanism is the defining advantage of VAT registration: a VAT taxpayer effectively pays tax only on the value it adds, and businesses selling to other VAT-registered businesses can pass on a creditable input tax. Percentage tax, by contrast, applies to persons who are not VAT-registered and whose gross sales or receipts do not exceed the VAT threshold; it is computed as a straight percentage of gross sales or receipts, with NO input tax credit, so the whole gross amount is taxed at the applicable rate without deduction for taxes paid on purchases. The percentage tax rate for these small taxpayers was temporarily reduced and then restored under recent legislation, so the current rate must be checked. Certain businesses are subject to specific percentage taxes regardless of the threshold, such as domestic carriers and keepers of garages, franchises, banks and non-bank financial intermediaries, life insurance, and amusement places, each with its own rate. A taxpayer below the threshold may nevertheless opt to register as VAT, which is often advantageous where the business has substantial input VAT or sells mainly to VAT-registered buyers, but the option is generally irrevocable for a period. So VAT applies above the threshold with input tax credits, while percentage tax applies below it as a straight rate on gross receipts with no credits, and certain industries pay specific percentage taxes regardless.

Two Consumption Taxes

A business pays either VAT or percentage tax, depending mainly on whether gross sales/receipts exceed the VAT threshold.

VAT: Credits for Input Tax

A VAT-registered person charges VAT on sales (output tax), credits the VAT paid on purchases (input tax), and remits the difference — effectively taxing only the value added.

Percentage Tax: No Credits

Applies to those not VAT-registered and below the threshold. It is a straight percentage of gross sales/receipts with NO input tax credit. Certain industries (carriers, franchises, banks, life insurance, amusement) pay specific percentage taxes regardless of the threshold.

The Option to Register

A taxpayer below the threshold may opt into VAT — often advantageous with substantial input VAT or when selling mainly to VAT-registered buyers — but the option is generally irrevocable for a period.

Practical Takeaways

Frequently Asked Questions

What is the difference between VAT and percentage tax? VAT applies to those above the registration threshold and allows crediting input tax against output tax, taxing only the value added. Percentage tax applies below the threshold as a straight percentage of gross receipts with no input tax credit.

Who must register for VAT? A person whose gross sales or receipts for the past twelve months exceed, or are expected to exceed, the VAT threshold set by law must register as a VAT taxpayer.

Can a small business choose to register for VAT? Yes. A taxpayer below the threshold may opt to register as VAT, which can be advantageous where the business has substantial input VAT or sells mainly to VAT-registered buyers, though the option is generally irrevocable for a period.

Are some businesses always subject to percentage tax? Yes. Certain businesses pay specific percentage taxes regardless of the threshold, such as domestic carriers and keepers of garages, franchises, banks and non-bank financial intermediaries, life insurance, and amusement places.

This commentary is for general informational purposes only and does not constitute legal advice. For guidance specific to your situation, please consult a licensed attorney.

If you have questions about your rights or options under Philippine law, our firm is available to assist. You may reach us via Viber or WhatsApp, call us at 0995 433 5550, or send an email to vivasnobles@gmail.com. We look forward to hearing from you.