Businesses in the Philippines may be able to register for VAT or Percentage Tax. Both are types of business-related taxes incurred on the sale of services or goods.
We previously wrote about VAT for corporations in the Philippines. In this article, we deal with Percentage Tax!
What is Percentage Tax in the Philippines? What is the Percentage Tax rate? What kind of businesses can register for Percentage Tax? What’s the difference between VAT and Percentage Tax? What are the filing requirements for Percentage Tax?
This article explains the key elements of Percentage Tax in the Philippines!
What is Percentage Tax?
Percentage Tax in the Philippines is a form of sales tax. The Percentage Tax computation is based on gross sales, receipts or earnings (except for insurance companies which is based on the total premium collected/paid) within the Philippines.
Certain businesses in the Philippines that sell or lease goods, properties or services can be treated under the Percentage Tax system. This may depend, for example, on the value of sales generated in a year or the particular business model and industry.
Title V of The National Internal Revenue Code of 1997 (as amended), otherwise known as the Tax Code of the Philippines, outlines the various requirements and criteria for businesses under the Percentage Tax regime.
What kind of businesses can be subject to Percentage Tax?
The most common criteria used to understand if a business can fall under the Percentage Tax system in the Philippines is as follows. Percentage Tax may be applicable for:
- Businesses with gross annual sales and/or receipts not exceeding P3,000,000; and
- Business that are not VAT-registered businesses or are VAT-Exempt.
For an explanation of the VAT system in the Philippines, check out our recent article on VAT for Corporations in the Philippines.
However, the Tax Code of the Philippines and the BIR do also provide a list of designated businesses and activities that may also fall under the Percentage Tax system. For example, domestic carriers, keepers of garages, franchise grantees of water or gas utilities, lessees or operators of cockpits and racetracks, banks and finance companies.
For a full list of businesses to which the Percentage Tax system may apply in the Philippines, you can check out the BIR’s Percentage Tax Description under the section “Who are required to file“.
Rate of Percentage Tax
3% is the general base rate of Percentage Tax on gross sales and receipts for standard non-VAT registered businesses.
The rate does vary, however, for more specific types of business. For example, the Percentage Tax rate (and in certain cases, the monetary threshold rate) for banks, non-bank financial intermediaries and insurance agents all differ.
You can check out the Percentage Tax rates for different kinds of businesses and activities in the BIR’s Quarterly Percentage Tax Rates Table.
Percentage Tax Vs. Value-Added Tax (VAT)
Value Added Tax, or VAT, and Percentage Tax are both business taxes collected from the sale of goods and services. The taxes differ, however, in their applicability. Business owners must understand which tax they are registered for and the financial implications for their business.
Percentage Tax is a direct tax – the seller is the one who shoulders the tax and files it with the BIR. Whereas, VAT is an indirect tax – the end consumer is charged for the tax, while the seller is responsible for remitting to the BIR.
In the Philippines, the rate of VAT is 12%. To compute for VAT, deduct the input VAT from the output VAT to arrive at the VAT due and payable. Again, to understand what is meant by input VAT and output VAT, check out our recent article on VAT.
Computing Percentage Tax is much simpler. Multiply the applicable Percentage Tax rate against the taxable base (i.e. for standard businesses – the total value of the gross sales or receipts) and the resulting amount is the Percentage Tax due and payable to the BIR.
Let’s use an example! WXY Company is registered for Percentage Tax and is in the business of selling goods. WXY Company sold goods worth P180,000 in a particular quarter. By applying the Percentage Tax rate of 3%, WXY’s Percentage Tax due and payable to the BIR would be P5,400 for the quarter.
Percentage Tax and Business Registration
When registering with the BIR, companies can generally opt to register as a VAT taxpayer or a Percentage Tax payer.
Remember – a businesses will have to fulfil the criteria referenced above to register for Percentage Tax!
If a business registers for Percentage Tax, once its gross annual sales and/or receipts exceed the P3,000,000 monetary threshold, the business will become liable for VAT and should immediately seek to change their tax registration status with the BIR to VAT registered.
Filing and Payment of Percentage Taxes
The primary BIR Form required for the filing of Percentage Tax in the Philippines is BIR Form No. 2551Q. Percentage Tax in the Philippines is filed on a quarterly basis.
This Percentage Tax return should be filed and paid to the BIR within 25 days after the end of each taxable quarter.
For a full list of the relevant filing requirements, check out the BIR Form 2551Q Guidelines.
Remember – the tax, compliance and regulatory framework in the Philippines can be difficult to navigate! To understand more about the complexities of the tax system in the Philippines, check out – Taxes for Corporations in the Philippines – Why so complex?
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