The ₱3 million VAT threshold explained

Below ₱3,000,000: non-VAT by default

BIR's registration FAQ says a business selling VATable goods or services with gross sales or receipts of ₱3,000,000 or below registers as a non-VAT taxpayer.^[2]

Under NIRC Sec. 236(H), as amended by the TRAIN law (RA 10963), anyone not required to register for VAT may choose to register for it at the RDO over their head office. Once you choose VAT, you cannot cancel it for the next three years. If you chose the 8% income tax, this option is closed to you.^[3]

Non-VAT sellers with gross annual sales not over ₱3,000,000 pay percentage tax, unless they are self-employed individuals who choose the 8% income tax.^[4]

Above ₱3,000,000: 12% VAT

VAT is 12% of the gross selling price of goods, or of gross receipts from services. Export sales and other zero-rated sales are taxed at 0%.^[5]

A VAT-registered business adds VAT to its prices and files VAT returns, but can deduct the input VAT it paid on purchases. That makes bookkeeping heavier, so most micro businesses stay non-VAT while they can.

What happens when you cross the line mid-year

If you are on the 8% option and your sales go over ₱3,000,000 during the year, you are automatically moved to graduated income tax rates and become liable to VAT going forward. The 8% option is not available to anyone VAT-registered.^[6]

Example: a hardware store in General Santos on 8% passes ₱3,000,000 in sales in October 2027. From then on it is liable to VAT, and its income tax for the year moves to graduated rates. The owner should talk to the RDO about updating registration right away, order invoices that show VAT-registered status, and set aside 12% of new sales.^[6]

Should you choose VAT before you have to?

The tax code lets you register as VAT even if you are far below ₱3,000,000. Once you do, you cannot cancel for the next three years. Choosing VAT also closes the 8% option, because 8% is not available to VAT-registered taxpayers.^[3,6]

Voluntary VAT can make sense if most of your customers are VAT-registered businesses that want to claim input VAT, such as a supplier of packaging to restaurants or a printer serving corporate clients. It rarely helps a store that sells to ordinary consumers, who cannot claim input VAT and will only see higher prices. Run the numbers with an accountant before you tick the VAT box on your registration.

How to count your sales against the threshold

BIR's size rules define gross sales as total sales revenue, net of VAT if applicable, during the taxable year, without any other deductions. Expenses do not reduce it: ₱3,000,000 of sales is ₱3,000,000 even if your profit is only ₱300,000.^[7]

Track a running total each month in your books. When you reach about ₱2,500,000 by September, plan ahead: price changes, a VAT registration, or a decision about how you will handle the next quarter. Ask an accountant before you cross, not after.

Where you fall

Questions people ask

Is the VAT threshold based on profit or sales?

On gross sales or receipts. BIR defines gross sales as total sales revenue during the year without other deductions.

Can I register as VAT even if my sales are small?

Yes. NIRC Sec. 236(H), as amended by the TRAIN law, lets anyone not required to register for VAT choose to register. You must then stay VAT-registered for three years, and you cannot use the 8% option.

What is the VAT rate?

12% of the gross selling price of goods or gross receipts from services, and 0% for export and other zero-rated sales.

I sell to big companies that ask for VAT invoices. What should I do?

You may choose to register as VAT even below ₱3,000,000. You then stay VAT-registered for at least three years, so weigh the extra filings against what your customers gain before you switch.

Can a VAT-registered business use 8%?

No. The 8% option is not available to VAT-registered taxpayers, whatever their sales.