Percentage Tax Exemptions in Philippine Law
(A comprehensive legal guide as of 23 April 2025)
1. What “percentage taxes” are, and why exemptions matter
Percentage taxes are business-style taxes imposed under Title V of the National Internal Revenue Code (NIRC), as amended. Unlike the value-added tax (VAT) they are levied on gross sales, receipts or other statutory bases of specific businesses, and they are indirectly borne by the taxpayer-seller rather than being passed on to customers (except where the law allows). Exemptions therefore directly cut the taxpayer’s bottom-line cost.
2. General or cross-cutting exemptions
| Exemption vehicle | Scope | Key authority | Practical notes |
|---|---|---|---|
| Cooperatives | Full exemption from the 3 % (now 3 % again) tax on persons exempt from VAT | Sec. 116, NIRC citeturn14view0 | Must present valid CDA registration and BIR Certificate of Tax Exemption. |
| 8 % flat-income-tax option (self-employed & professionals with ≤ ₱3 M gross) | 8 % income tax in lieu of graduated income tax and percentage tax | RR 8-2018 & RR 13-2018 citeturn22search1 | Election made in the 1st quarter return/registration; irrevocable for the year. |
| CREATE Act (RA 11534) rate relief | From 1 July 2020 – 30 June 2023, Sec. 116 rate cut from 3 % to 1 % | BIR 2023 Annual Report citeturn22search8 | Rate has reverted to 3 % as of 1 July 2023. |
3. Section-by-section exemptions inside Title V
| NIRC § | Tax description | Embedded exemptions / zero-rate situations | Authority |
|---|---|---|---|
| 116 | 3 % on persons exempt from VAT | • Cooperatives (full exemption)citeturn14view0 | |
| 117 | 3 % on domestic carriers & keepers of garages | Owners of bancas and animal-drawn two-wheel vehicles are completely exempt citeturn14view0 | |
| 118 | 3 % on international air & shipping carriers | After RA 10378: • Carriage of passengers is no longer covered (only outbound cargo is taxed). • Reciprocity or treaty provisions may grant broader income/percentage-tax relief. citeturn3search6 | |
| 119 | Franchise tax (3 % for small radio/TV broadcasters; 2 % for electric, gas, water utilities) | • Radio/TV companies may opt to register for VAT; once VAT-registered they cease to be liable for franchise percentage tax. citeturn14view0 | |
| 120 | 10 % Overseas dispatch/message tax | Statutory exemptions for: 1) Government messages; 2) Diplomatic missions; 3) Recognized international organizations; 4) News-service dispatches. citeturn7view0 | |
| 121 | Gross-receipts tax (GRT) on banks & NBIFIs | • Dividends are expressly 0 %. • Interest & finance income on instruments with > 7-year remaining maturity are 0 %. citeturn14view0 | |
| 122 | 5 % GRT on finance companies & other FIs | Same 0 % break for > 7-year maturities; rate stair-steps down to 1 %. citeturn12view0 | |
| 123 | 5 % on life-insurance premiums | Exempt: • Premiums refunded within 6 months; • Reinsurance accepted by a company that already paid the tax; • Premiums on risks located outside the Philippines; • “Savings” portion of variable life contracts. citeturn12view0 | |
| 124 | Double-rate tax on agents of foreign insurers | Does not apply to reinsurance or when the property owner places insurance abroad directly. citeturn12view0 | |
| 125 | Amusement taxes | Boxing exhibitions for a world or oriental championship are exempt if at least one contender is Filipino and the promoter is 60 % Filipino-owned. citeturn12view0 | |
| 126 | Tax on horse-race winnings | No statutory exemptions; tax withheld at source. | |
| 127 | Stock transaction taxes | Gains on listed-share or IPO sales exempt from capital-gains and regular income tax (tax under §127 is in lieu). citeturn11view0 |
4. Exemptions that do not exist (common misconceptions)
| Myth | Legal reality |
|---|---|
| BMBE registration automatically wipes out percentage tax. | BMBEs enjoy income-tax and some local-tax relief; they remain liable for percentage tax or VAT depending on turnover. citeturn16search3 |
| Interest already hit by final withholding tax is exempt from GRT. | The Supreme Court held the 20 % FWT is part of banks’ gross receipts for GRT purposes; no exclusion is allowed. citeturn15search0 |
5. Compliance snapshot
| Return | Who files | Deadline |
|---|---|---|
| BIR Form 2551Q | All percentage-tax payers except special cases | Within 25 days after each taxable quarter (Sec. 128) citeturn11view0 |
| §120 Overseas-dispatch tax | Telcos/telegraph companies | 20 days after quarter end citeturn7view0 |
| Stock-transaction tax | Stock broker / issuing corp. | 5 banking days after collection (listed shares) or 30 days (IPO) citeturn11view0 |
Documentary support (e.g., CDA certificate for cooperatives, treaty proof for international carriers, boxing-match accreditation) must be kept for at least 10 years under the Tax Code’s bookkeeping rules.
6. Recent & pending changes to watch
- Ease of Paying Taxes Act (RA 11976, 2024) shifted several percentage-tax bases from “gross receipts” to “gross sales” or “amount billed,” potentially broadening exemptions tied to the definition of receipts. Implementing rules are due in 2025. citeturn6search4
- Various bills in Congress propose to (a) raise the VAT threshold again, which would expand the pool of Sec. 116 taxpayers (and therefore the cooperative exemption), and (b) cut GRT rates on long-term loans further to spur capital-market depth.
Key take-aways for practitioners
- Exemption triggers are highly specific—always cross-check the exact wording of each section (and any special law or treaty) before advising clients.
- Documentation is essential: BIR routinely requires proof of status (co-op, CDA, diplomatic, treaty accreditation) at audit.
- Watch the dates: rate relief (like the CREATE 1 % window) or new base definitions apply only inside the statutory period.
- Where an option (VAT registration, 8 % income tax) creates an exemption from percentage tax, make sure the irrevocability rules and turnover ceilings are respected.
With these reference points you have a full map of when—and when not—percentage taxes bite in the Philippines.