Is Percentage Tax 1% or 3%? The CREATE Act Reduction and Why It Reverted

Percentage tax under NIRC Section 116 is 3% in 2026, not 1%. The 1% rate was a temporary CREATE Act relief measure that applied only from July 1, 2020 through June 30, 2023, and it reverted to the standard 3% automatically when that window closed — there was no extension. Taxpayers or bookkeeping templates still defaulting to 1% are understating BIR Form 2551Q liability for every quarter since July 2023.

This guide covers why the rate changed, exactly when it reverted, and a worked example showing the cost of getting it wrong. For the return itself, see How to File BIR Form 2551Q: Quarterly Percentage Tax Return Step-by-Step; for the broader VAT-vs-percentage-tax decision, see VAT vs. Percentage Tax: Which Applies to Your Business?.

Why was percentage tax cut to 1% in the first place? #

Republic Act No. 11534, the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, temporarily reduced the percentage tax rate under NIRC Section 116 from 3% to 1%, effective July 1, 2020, as relief for small non-VAT businesses during the pandemic-era economic downturn. Revenue Regulations (RR) No. 4-2021 implemented the mechanics of the reduction, and — critically — built in an expiration: the reduced rate applied “effective July 1, 2020 until June 30, 2023,” a fixed three-year window rather than an open-ended cut.

A widely cited restatement of the rule captures the same two dates:

“The Percentage Tax was reduced from 3% to 1% effective July 1, 2020 to June 30, 2023. Upon the expiration of the reduction on June 30, 2023, the percentage tax rate reverted to 3% effective July 1, 2023.”

This site relied on secondary tax-practice summaries of RR No. 4-2021 and the CREATE Act’s percentage tax provision for this passage, as the BIR’s own PDF of RR No. 4-2021 could not be reached directly to re-verify the exact regulation wording — confirm the precise text against the BIR’s published regulation before relying on it for a formal filing position.

What is the percentage tax rate today? #

The rate has been 3% since July 1, 2023, with no further reduction or extension enacted. The reversion was not a new BIR decision made in 2023 — it was the CREATE Act’s original relief provision expiring on schedule, since the 1% rate was never framed as permanent.

Who still pays percentage tax instead of VAT? #

Percentage tax under Section 116 applies to self-employed individuals and businesses whose annual gross sales or receipts do not exceed the VAT threshold and who have not registered for VAT, filed quarterly on BIR Form 2551Q. A business that crosses the VAT threshold, or voluntarily registers for VAT, moves to the VAT system and files BIR Form 2550Q instead — see VAT Registration Threshold in the Philippines for that boundary, and You Exceeded the ₱3 Million VAT Threshold Mid-Year — What Do You File Now? for the transition mechanics.

Worked example: the cost of filing at the wrong rate #

A sari-sari store operator with ₱180,000 in quarterly gross receipts who still files BIR Form 2551Q at the old 1% rate understates the tax due by ₱3,600 every quarter.

Over four quarters, that understatement compounds to ₱14,400 in unpaid tax before any surcharge or interest — the kind of gap a BIR desk audit or automated cross-check against reported sales tends to surface eventually. A bookkeeping template, POS system, or accountant’s working file still defaulting to “1%” for percentage tax is the single most common cause of this error; the fix is a one-line rate update, applied retroactively through an amended return for any quarter still affected.

Frequently Asked Questions #

Is percentage tax still 1% in 2026? #

No. The 1% rate was a temporary CREATE Act reduction that applied from July 1, 2020 through June 30, 2023 only. Percentage tax reverted to the standard 3% rate under NIRC Section 116 effective July 1, 2023, and has remained at 3% since, including throughout 2026.

Why was percentage tax reduced to 1% in the first place? #

Republic Act No. 11534, the CREATE Act, reduced the percentage tax rate under NIRC Section 116 from 3% to 1% as pandemic-era relief for non-VAT businesses, effective July 1, 2020. Revenue Regulations No. 4-2021 implemented the reduction and set its expiration at June 30, 2023, three years after the law’s effectivity date.

Did the BIR extend the 1% rate past June 30, 2023? #

No extension was granted. The reduced 1% rate was written into the CREATE Act with a fixed three-year window, and it lapsed automatically when that window closed. Some taxpayers and preparers continued filing at 1% for a period afterward out of habit or outdated software defaults, which understated the tax due starting with returns covering July 2023 activity onward.

What happens if I filed BIR Form 2551Q at 1% after the rate reverted to 3%? #

An underpayment from using the wrong rate is a deficiency percentage tax, subject to the same surcharge, interest, and possible compromise penalty exposure as any other underpaid return. The fix is to amend the affected quarterly return, pay the difference plus applicable interest, and update any recurring template or software default still set at 1%.

Which businesses pay the 3% percentage tax rate instead of VAT? #

Percentage tax under NIRC Section 116 generally applies to self-employed individuals and businesses with annual gross sales/receipts not exceeding the VAT threshold (₱3,000,000) that have not opted into the VAT system, filed quarterly on BIR Form 2551Q. Businesses above the VAT threshold, or that voluntarily register for VAT, are subject to VAT instead of this percentage tax.

Summary #

Percentage tax under NIRC Section 116 is 3% in 2026 — the 1% CREATE Act rate expired on June 30, 2023 and was never renewed. If a filing template, POS system, or working file still shows 1%, every quarter since July 2023 has likely been understated and needs review. Start with How to File BIR Form 2551Q for the return itself.