VAT vs. Percentage Tax, Which Should You Register Under?

When you register a Philippine business with the BIR, one of the choices you'll make is your business tax type. The two main options:

• VAT (Value Added Tax), 12% on the value you add. You charge it to customers, claim input VAT on purchases, remit the difference.
• Percentage Tax (Section 116), 3% of your gross sales (currently, verify before launch). No input tax credit.

The threshold

If your annual gross sales / receipts exceed ₱3,000,000, you are required to register as a VAT taxpayer. Below that, you can choose either, and the right answer depends on your business model.

When percentage tax usually wins

• Service businesses with few deductible input purchases (consultants, freelancers).
• Retail with low margins on locally-sourced goods.
• You don't want the monthly VAT filing burden.

When VAT usually wins

• You sell to VAT-registered customers who need the input tax credit.
• You have significant input purchases (manufacturing, importing).
• You're already at or near the ₱3M threshold, registering early avoids back-filings.

Decision rule of thumb

Estimate your VAT-input-to-output ratio. If your input VAT regularly exceeds, say, 50% of your output VAT, you'll likely owe less under VAT than under the 3% percentage tax.

What you can't easily change

• Switching from VAT to percentage tax requires de-registration and is only allowed under specific conditions.
• The decision binds you for at least the rest of the calendar year.

Want help running the numbers?

We model both scenarios for new clients before you file BIR Form 1901 / 1903. Talk to us.