For many small and medium-sized enterprises (SMEs), understanding the Value-Added Tax (VAT) threshold of PHP 3,000,000 in annual gross sales or receipts is crucial. Once this mark is exceeded, VAT registration becomes mandatory, subjecting your sales to the 12% VAT. But what happens if, after hitting that milestone, your sales dip below PHP 3,000,000 in subsequent years? Do you still need to file VAT returns, even with lower sales? Let's break it down based on Bureau of Internal Revenue (BIR) regulations.

The VAT Threshold and Mandatory Registration

Under the National Internal Revenue Code (NIRC) of 1997, as amended by the TRAIN Law (RA No. 10963) and other updates, Section 109(V) specifies the PHP 3,000,000 threshold for VAT registration. Once your business exceeds this threshold within a 12-month period, VAT registration is no longer optional—it becomes mandatory.

This means you must register as a VAT taxpayer and start charging 12% VAT on your taxable sales or services.

VAT Filing Obligations After Registration

Once registered as a VAT taxpayer, you are required to file VAT returns regardless of changes in your income level—until your VAT registration is officially cancelled by the BIR.

This obligation is outlined in Section 114 of the NIRC and Revenue Regulations No. 16-2005, as amended. VAT-registered taxpayers must file:

• Monthly VAT Declaration (BIR Form 2550M) – Note: This is no longer required starting 2023 due to the Ease of Paying Taxes (EOPT) Act’s phased implementation, unless specified otherwise.

• Quarterly VAT Return (BIR Form 2550Q) – This is the primary filing requirement now.

Even if you had no VATable sales in a given period, you are still obligated to file a return indicating zero output VAT.

The Persistent Obligation to File VAT Returns

Once you are VAT-registered, the duty to file VAT returns (BIR Form 2550M for monthly and BIR Form 2550Q for quarterly) remains, as mandated by Section 114 of the NIRC, as amended, and detailed in Revenue Regulations No. 16-2005, as amended. This obligation doesn't automatically cease if your sales dip below the threshold in later years. You must continue filing, declaring zero output VAT if you had no VATable sales during the period.

What if Your Sales Fall Below PHP 3 Million?

If your gross sales or receipts fall below the VAT threshold after registration, your filing obligations do not automatically stop. As long as your VAT registration remains active, you must continue filing VAT returns.

Example:

Let’s say your business exceeded PHP 3,000,000 in 2023 and registered as VAT in 2024. If in Q1 2025, your gross sales total only PHP 500,000, you must still file BIR Form 2550Q for that quarter.

• If the entire PHP 500,000 is VATable, you must compute and remit 12% VAT (PHP 60,000).

• If none of it is VATable, or if you had zero sales, you must file a return declaring zero output VAT.

Deregistering from VAT

If your gross sales or receipts consistently fall below the PHP 3,000,000 threshold and are not expected to exceed it in the next 12 months, you may apply for VAT deregistration under Section 236 of the NIRC.

To initiate this, file BIR Form 1905 (Application for Registration Information Update) with your RDO. The BIR may require:

• Submission of financial documents,

• Settlement of outstanding tax liabilities,

• A tax audit to verify your sales levels.

Once approved, you may switch to Percentage Tax filing under BIR Form 2551Q, depending on your business type.

The New Provision: Potential Automatic Deregistration (RR No. 4-2021)

Here's a significant development introduced by Revenue Regulations (RR) No. 4-2021:

Under this regulation, taxpayers whose gross sales or receipts fall below the VAT threshold (PHP 3,000,000) for three (3) consecutive taxable years may be automatically deregistered from VAT by the BIR.

Important Points Regarding Automatic Deregistration:

• Taxpayer Falling Below: This provision specifically refers to taxpayers who were previously VAT-registered and then their sales consistently fell below the threshold.

• Three Consecutive Years: The sales must be below PHP 3,000,000 for three consecutive taxable years.

• BIR Verification: This automatic deregistration is subject to verification by the BIR. The BIR may still conduct reviews to confirm the taxpayer's eligibility for deregistration.

• No Automatic Cessation of Filing: Even if you meet this three-year criterion, you must continue to file your VAT returns until you receive official notification from the BIR that your VAT registration has been cancelled. Do not assume automatic deregistration has occurred without official confirmation.

• Taxpayer Responsibility: It's still prudent for taxpayers who meet this condition and wish to be deregistered to proactively file BIR Form 1905 to request cancellation, rather than solely relying on potential automatic deregistration. This ensures a more timely and certain outcome.

Key Takeaways

• VAT registration brings an ongoing filing obligation, even if your sales drop below PHP 3 million.

• You must file VAT returns (usually BIR Form 2550Q) every quarter until your VAT registration is officially cancelled.

• If eligible, you can apply for deregistration to stop VAT filing and potentially shift to a different tax type.

BIR References

1. NIRC Sections: 109(v), 114, 236 (as amended by TRAIN Law).

2. Revenue Regulations: RR 16-2005 (VAT filing), RR 7-2012 (deregistration), RR 4-2021 (automatic deregistration).

3. BIR Forms: 2550M/Q (VAT returns), 1905 (deregistration).

Navigating BIR regulations can be overwhelming—especially when your business is growing. At Aboveboard, we specialize in helping MSMEs across the entire Philippines stay fully compliant while optimizing their tax strategy.

• VAT Registration & Filing – Ensure you meet deadlines and avoid penalties

• Deregistration Assistance – Properly transition if your sales fall below the threshold

• BIR Audit Support – Expert guidance if the BIR reviews your records

Stop guessing—let’s get it right. Contact our team today for personalized, stress-free tax support.