3% tax on gross receipts of non-VAT registered businesses with annual gross receipts not exceeding ₱3,000,000. Filed quarterly using BIR Form 2551Q.
Percentage Tax is the simpler alternative to VAT for small businesses. Instead of the complex VAT mechanism of tracking output and input taxes, Percentage Tax is simply 3% of all gross receipts — no deductions, no credits, no input tax computations. It is filed quarterly using BIR Form 2551Q, due on the 25th of the month following each quarter.
Businesses automatically fall under Percentage Tax if their annual gross receipts are ₱3,000,000 or below and they have not opted to register for VAT. Some specific industries (transportation, domestic carriers, franchise businesses) have their own percentage tax rates that differ from the standard 3%.
In practice: Margarita's Tailoring Shop in Quezon City earned ₱180,000 in gross receipts for Q1 2025. Her percentage tax due = ₱180,000 × 3% = ₱5,400, payable by April 25. She does not collect any tax from her customers — the percentage tax comes out of her own gross receipts.
Why it matters: Percentage Tax is simpler but can become more expensive than VAT for businesses with high purchases (because you cannot deduct input VAT). As a rule of thumb: if your purchases are more than 50% of your gross receipts, registering for VAT might actually lower your total tax burden. Consult a CPA when approaching the ₱3M threshold.
Self-employed individuals and professionals who opt for the 8% flat tax rate are exempt from Percentage Tax — the 8% covers both income tax and percentage tax in one simplified rate. This makes the 8% option especially attractive for high-margin service businesses.