98 AUG 2014

Republic of the Philippines
HOUSE OF REPRESENTATIVES
Quezon City

SIXTEENTH CONGRESS
First Regular Session

House BiLLNo._ 4829

Introduced by Representative Romero “Miro” S. Quimbo

EXPLANATORY NOTE

The current income taxes imposed on individuals and corporations have become
uncompetitive and unresponsive. Our tax system's failure to keep in step with
global corporate trends and to adapt with rising inflation rates must be resolved.

Since the effectivity on January 1, 1998 of the National Internal Revenue Code
(NIRC) of 1997, or for 16 long years, the levels of taxable income brackets have
been pegged at the 1998 Consumer Price Index (CPI) of 67.8%, which is starkly
less than half of the present (March 2014) CPI of 137.7%. Meanwhile, as income
of salaried individuals is increased to keep it at par with rising inflation, they are
pushed into higher income brackets, and, thus, are compelled to pay more taxes
than they should. This brings about the so-called “bracket creep”, which is
defined as “a situation where inflation pushes income into higher tax brackets
resulting in an increase in income taxes but without increase in real purchasing
power.” This significant erosion of purchasing power imperils the economic
welfare of our countrymen. This bill hopes to address this problematic situation
by adjusting the taxable income brackets based on the inflation rate.

To illustrate, an individual taxpayer whose income of P25,000 yields a tax of
2,000, will just have to pay a tax of P1,500, if this bill is passed. This will allow
him to enjoy an additional take home pay or disposable income of P500. In
essence, his present tax burden of 8% will be effectively reduced to 6%

' Source: http://www.investopedia.com/terms/b/bracketcreep. asp


By adjusting the taxable income brackets, this measure gives salaried individuals
relief with their financial difficulties, while at the same time stimulating economic
activities through enhanced spending and consumption

Similarly, the tax on corporations must be adjusted to enable the country to
entice more business investments. Presently, the applicable tax rate in our
jurisdiction is 30% on taxable income, lamentably the highest among the
member-countries of the Association of South East Asian Nations (ASEAN), the
rates of which range from 17%-25%.

This bill aims to aptly restructure the income taxes imposed on individuals and
corporations by amending Sections 22; 24; 27 (A) and (E) (1); 28 (A) (1), (2) and
(B) (1); and 34 of the NIRC of 1997, as amended,

Aside from adjusting the levels of taxable income brackets and the corresponding
base amount of tax for compensation income earners based on updated CPI, the
bill also proposes:

« To impose a flat rate of 25% income tax on self-employed
individuals and professionals,

e To impose a 5% minimum income tax rate on self-employed
individuals and professionals,

« To reduce the corporate income tax (CIT) rate from 30% to 25%;
and,

¢ To increase the mii
2% to 5%.

ium corporate income tax (MCIT) rate from

The application of 25% income tax rate for self-employed individuals and
professionals, according them full treatment as corporations, is opportune. Since
both are engaged in business for profit and allowed the same business
deductions, they must be equally treated under our tax regime

This will likewise address the prevalent unfair practice of overutilization of
deductions and gross underdeclaration of revenues by unscrupulous self-
employed individuals and professionals, which practically allows them to trample
the present tax schedule of 5% to 32% in Sec. 24 (A) (2) to their advantage.

This particular amendment is all the more justified citing recent empirical data
showing that only 15% of the total collection of individual income taxes is paid by
self-employed individuals and professionals, while the bigger chunk of 85%
comes from compensation income earners

On reducing the CIT to 25%, corporations will be given the chance to be
competitive with savings that will be realized. This could be used as additional
capital for expansion and other beneficial business activities, which in turn can
translate to additional jobs for the country's growing labor force. The overall effect
will certainly be a renewed and vibrant economic activity.


Lastly, the increased 5% MCIT and the similarly rated minimum income tax rate
for self-employed individuals and professionals are novel changes. These are
intended to cover the expected revenue loss arising from the adjustment in the
levels of taxable income brackets for compensation income earners and the
reduced CIT rate of 25%.

Given this, it is hightime that the country’s individual and corporate income tax
system be subjected to the fine-tuning it needs to regain its responsive and
competitive character, benefitting individual and corporate taxpayers, and the
national economy as a whole.

Accordingly, passage of the measure is earnestly sought.

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C/ eC)

ROMERO “MIRO” S. QUIMBO
Second District, Marikina City



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Republic of the Philippines
HOUSE OF REPRESENTATIVES
Quezon City, Metro Manila

SIXTEENTH CONGRESS
First Regular Session

4829

HOUSE BILL NO. __~

Introduced by Representative Romero “Miro” S. Quimbo

AN ACT

RESTRUCTURING THE INCOME TAXES IMPOSED ON INDIVIDUALS AND
CORPORATIONS, AMENDING FOR THE PURPOSE SECTIONS 22; 24; 27 (A)
AND (E) (1); 28 (A) (1), (2) AND (B) (1); AND 34 ALL UNDER THE NATIONAL

INTERNAL REVENUE CODE OF 1997, AS AMENDED

Be it enacted by the Senate and the House of Representatives of the
Philippines in Congress assembled:

SECTION. 1. Section 22 of the National Internal Revenue Code of 1997, as
amended, is hereby further amended to read as follows:

“SEC. 22. Definitions. — When used in this Title:

(A)

i)

(JJ)

xx

THE TERM ‘COMPENSATION INCOME EARNERS’ MEANS
PERSONS WHO DERIVE THEIR INCOME FROM
PERSONAL SERVICES RENDERED UNDER AN
EMPLOYER-EMPLOYEE RELATIONSHIP.

THE TERM ‘SELF-EMPLOYED’ MEANS PERSONS
ENGAGED IN BUSINESS AND WHO DERIVE THEIR
PERSONAL INCOME FROM SUCH BUSINESS. THIS
INCLUDES SINGLE PROPRIETORSHIPS, VE.
MANUFACTURERS, TRADERS, MARKET VENDORS
OWNERS OF EATERIES, FARMERS AND SERVICE
SHOPS.


(KK) THE TERM ‘PROFESSIONALS' MEANS PERSONS WHO

DERIVE THEIR INCOME FROM THE PRACTICE OF THEIR
PROFESSION. THIS INCLUDES LAWYERS AND OTHER
PERSONS WHO ARE REGISTERED WITH THE
PROFESSIONAL REGULATION COMMISSION SUCH AS
DOCTORS, DENTISTS, CERTIFIED PUBLIC
ACCOUNTANTS AND OTHERS SIMILARLY SITUATED. THE
TERM ‘PROFESSIONAL’ ALSO REFERS TO ONE WHO
PURSUES AN ACT AND MAKES HIS LIVING THEREFROM
SUCH AS ARTISTS, ATHLETES AND OTHERS SIMILARLY
SITUATED.”

SEC. 2. Section 24 of the National Internal Revenue Code of 1997, as amended,
is hereby further amended to read as follows:

“SEC. 24. Income Tax Rates. —

XxX

(1) xxx

(2) Rates of Tax on Taxable Income of Individuals. —

(A) ON COMPENSATION INCOME EARNERS. —

The tax shall be computed in accordance with and at the
rates established in the following schedule:

[Not over P10,000 5%)

[Over P10,000 but not over P30,000 P500+10% of the excess
‘over P10,000]

[Over P30,000 but not over P70,000 P2,500+15% of the excess
cover P30,000}

{Over P70,000 but not over P140,000 P8,500+20% of the excess
cover P70,000]

[Over P140,000 but not over P250,000 P22,500+25% of the excess
‘over P140,000}

[Over P250,000 but not over P500,000 P50,000+30% of the excess
‘over P250,000)

[Over P500,000 P125,000+32% of the excess

‘over 500,000]


BONIS

aaa

(C) 0x

(D) xx

NOT OVER P20,000 8%

‘OVER P20,000 BUT NOT OVER P60,000 P1000+10% OF THE EXCESS
‘OVER P20,000

OVER P60,000 BUT NOT OVER P140,000 5000¢15% OF THE EXCESS

OVER P140,000 BUT NOT OVER P280,000 -_—P17,000+20% OF THE EXCESS
OVER P140,000

COVER P280,000 BUT NOT OVER 500,000 _—P45,000+25% OF THE EXCESS
OVER P280,000

(OVER P500,000 BUT NOT OVER P1,000,000 _P100,000"30% OF THE EXCESS
OVER P500,000

COVER P1,000,000 P250,000+32% OF THE EXCESS
‘OVER P 1,000,000

(B)ON SELF-EMPLOYED AND/OR PROFESSIONALS
ENGAGED IN THE PRACTICE OF PROFESSION. —

AN INCOME TAX OF TWENTY-FIVE PERCENT (25%)
IS HEREBY IMPOSED UPON THE TAXABLE INCOME
AS DETERMINED IN SECTION 31 DERIVED DURING
EACH TAXABLE YEAR, OTHER THAN INCOME
SUBJECT TO TAX UNDER SUBSECTIONS (B), (C)
AND (D) OF THIS SECTION, BY THE FOLLOWING
SELF-EMPLOYED INDIVIDUALS AND/OR
PROFESSIONALS IN THE PRACTICE OF THEIR
PROFESSION:

(l) RESIDENT CITIZENS ON ALL INCOME
DERIVED FROM SOURCES WITHIN AND
WITHOUT THE PHILIPPINES;

(Il) NONRESIDENT CITIZENS ON INCOME
DERIVED FROM SOURCES WITHIN THE
PHILIPPINES; AND

(III) ALIEN INDIVIDUALS RESIDING IN THE

PHILIPPINES ON INCOME DERIVED FROM
SOURCES WITHIN THE PHILIPPINES.

XxX


(E) MINIMUM INCOME TAX ON SELF-EMPLOYED AND

PROFESSIONALS. -

(1) IMPOSITION OF TAX, - A MINIMUM INCOME TAX OF
FIVE PERCENT (5%) OF THE GROSS INCOME AS OF
THE END OF THE TAXABLE YEAR, AS DEFINED
HEREIN, IS HEREBY IMPOSED ON A SELF-EMPLOYED
INDIVIDUAL AND/OR PROFESSIONAL UNDER THIS
TITLE, BEGINNING ON THE FOURTH TAXABLE YEAR
IMMEDIATELY FOLLOWING THE YEAR IN WHICH SAID.
SELF-EMPLOYED INDIVIDUAL, AND/OR
PROFESSIONAL COMMENCED BUSINESS
OPERATIONS, WHEN THE MINIMUM INCOME TAX IS
GREATER THAN THE TAX COMPUTED UNDER
SUBSECTION (A) (2) (B) OF THIS SECTION FOR THE
TAXABLE YEAR.

(2) CARRY FORWARD OF EXCESS MINIMUM TAX. — ANY
EXCESS OF THE MINIMUM INCOME TAX OVER THE
NORMAL INCOME TAX AS COMPUTED UNDER
SUBSECTION (A) (2) (B) OF THIS SECTION SHALL BE
CARRIED FORWARD AND CREDITED AGAINST THE
NORMAL INCOME TAX FOR THE THREE (3)
IMMEDIATELY SUCCEEDING TAXABLE YEARS.

(3) RELIEF FROM THE MINIMUM. INCOME TAX UNDER
CERTAIN CONDITIONS. - THE SECRETARY OF
FINANCE IS HEREBY AUTHORIZED TO SUSPEND THE.
IMPOSITION OF THE MINIMUM INCOME TAX ON ANY
SELF-EMPLOYED INDIVIDUAL AND/OR
PROFESSIONAL WHO SUFFERS LOSSES ON
ACCOUNT OF PROLONGED LABOR DISPUTE, OR
BECAUSE OF FORCE MAJEURE, OR BECAUSE OF
LEGITIMATE BUSINESS REVERSES.

THE SECRETARY OF FINANCE IS HEREBY
AUTHORIZED TO PROMULGATE, UPON
RECOMMENDATION OF THE COMMISSIONER, THE
NECESSARY RULES AND REGULATIONS THAT SHALL
DEFINE THE TERMS AND CONDITIONS UNDER WHICH
THE IMPOSITION OF THE MINIMUM INCOME TAX MAY
BE SUSPENDED IN A MERITORIUS CASE.

(4) GROSS INCOME DEFINED. — FOR PURPOSES OF
APPLYING THE MINIMUM INCOME TAX PROVIDED


UNDER THIS SUBSECTION, THE TERM ‘GROSS
INCOME’ SHALL MEAN GROSS SALES LESS SALES
RETURNS, DISCOUNTS AND ALLOWANCES AND
COST OF GOODS SOLD. ‘COST OF GOODS SOLD’
SHALL INCLUDE ALL BUSINESS EXPENSES DIRECTLY
INCURRED TO PRODUCE THE MERCHANDISE TO
BRING THEM TO THEIR PRESENT LOCATION AND
USE.

FOR A TRADING OR MERCHANDISING CONCERN, ‘COST OF
GOODS SOLD’ SHALL INCLUDE THE INVOICE COST OF THE
GOODS SOLD, PLUS IMPORT DUTIES, FREIGHT IN
TRANSPORTING THE GOODS TO THE PLACE WHERE THE
GOODS ARE ACTUALLY SOLD INCLUDING INSURANCE WHILE
THE GOODS ARE IN TRANSIT,

FOR A MANUFACTURING CONCERN, ‘COST OF GOODS
MANUFACTURED AND SOLD’ SHALL INCLUDE ALL COSTS OF
PRODUCTION OF FINISHED GOODS, SUCH AS RAW
MATERIALS USED, DIRECT LABOR AND MANUFACTURING
OVERHEAD, FREIGHT COST, INSURANCE PREMIUMS AND
OTHER COSTS INCURRED TO BRING THE RAW MATERIALS
TO THE FACTORY OR WAREHOUSE.

IN THE CASE OF TAXPAYERS ENGAGED IN THE SALE OF
SERVICE, ‘GROSS INCOME' MEANS GROSS RECEIPTS LESS
SALES RETURNS, ALLOWANCES, DISCOUNTS AND COST OF
SERVICES, ‘COST OF SERVICES’ SHALL MEAN ALL DIRECT
COSTS AND EXPENSES NECESSARILY INCURRED TO
PROVIDE THE SERVICES REQUIRED BY THE CUSTOMERS
AND CLIENTS INCLUDING (A) SALARIES AND EMPLOYEE
BENEFITS OF PERSONNEL, CONSULTANTS AND
SPECIALISTS DIRECTLY RENDERING THE SERVICE AND (B)
COST OF FACILITIES DIRECTLY UTILIZED IN PROVIDING THE
SERVICE SUCH AS DEPRECIATION OR RENTAL OF
EQUIPMENT USED AND COST OF SUPPLIES.”

SEC. 3. Section 27 (A) and (E) (1) of the National Internal Revenue Code of
1997, as amended, is hereby further amended to read as follows.


24

36
37
38
390
40
41
42
43
44
45
46

“SEC. 27. Rates of Income Tax on Domestic Corporations. —

(A) In General. ~ Except as otherwise provided in this Code, an
income tax of [thirty-five] TWENTY-FIVE percent [(35%)] (25%)
is hereby imposed upon the taxable income derived during each
taxable year from all sources within and without the Philippines
by every corporation, as defined in Section 22 (B) of this Code
and taxable under this Title as a corporation, organized in, or
existing under the laws of the Philippines[: Provided, That
effective January 1, 2009, the rate of income tax shall be thirty
percent (30%)]

2X
(E) Minimum Corporate Income Tax ori Domestic Corporations. —

(1) Imposition of Tax. — A minimum corporate income tax of [two]
FIVE percent [(2%)] (5%) of the gross income as of the end of
the taxable year, as defined herein, is hereby imposed on a
Corporation taxable under this Title, beginning on the fourth
taxable year immediately following the year in which such
Corporation commenced its business operations, when the
minimum income tax is greater than the tax computed under
Subsection (A) of this Section for the taxable year.

Xxx,

SEC. 4. Section 28 (A) (1), (2) and (B) (1) of the National Internal Revenue Code
of 1997, as amended, is hereby further amended to read as follows:

“SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. —

(1) In General. — Except as otherwise provided in this Code, a
corporation organized, authorized, or existing under the laws of
any foreign country, engaged in trade or business within the


Philippines, shall be subject to an income tax equivalent to
[thirty-five] TWENTY-FIVE percent [(35%)] (25%) of the taxable
income derived in the preceding taxable year from all sources
within the Philippines[: Provided, That effective January 1, 2009,
the rate of income tax shall be thirty percent (30%)},

(2) Minimum Corporate Income Tax on Resident Foreign
Corporations. = A minimum corporate income tax of [two] FIVE
percent [(2%)] (5%) of gross income, as prescribed under
Section 27 (E) of this Code, shall be imposed, under the same
conditions, on a resident foreign corporation taxable under
paragraph (‘) of this Subsection.

(B) Tax on Nonresident Foreign Corporations. —

(1) In General, - Except as otherwise provided in this Code, a
foreign corporation not engaged in trade or business in the
Philippines shall pay a tax equal to [thirty-five] TWENTY-FIVE
percent [(35%)] (25%) of the gross income received during each
taxable year from all sources within the Philippines, such as
interests, dividends, rents, royalties, salaries, premiums (except
reinsurance premiums), annuities, emoluments or other fixed or
determinable annual, periodic or casual gains, profits and
income, and capital gains, except capital gains subject to tax
under subparagraph 5(c)[: Provided, That effective January 1,
2008, the rate of income tax shall be thirty percent (30%)]

2X.

SEC. 5. Section 34 of the National Internal Revenue Code of 1997, as amended,
is hereby further amended to read as follows:

“SEC. 34. Deductions from Gross Income. - Except for
taxpayers earning compensation income arising from personal


services rendered under an employer-employee relationship where
no deductions shall be allowed under this Section other than under
Subsection (M) hereof, in computing taxable income subject to
income tax under Sections [24 (A)] 24 (A) (2) (B); 25 (A); 26; 27 (A),
(B) and (C); and 28 (A) (1), there shall be allowed the following
deductions from gross income:

Xxx,

SEC. 6. Implementing Rules and Regulations. ~ The Secretary of Finance shall,
upon the recommendation of the Commissioner of Internal Revenue, promulgate
upon the effectivity of this Act the necessary Rules and Regulations for its
effective implementation

SEC. 7. Separability Clause. - If any provision of this Act is subsequently
declared invalid or unconstitutional, other provisions hereof which are not
affected thereby shall remain in full force and effect.

SEC. 8. Repealing Clause. - All laws, acts, presidential decrees, executive
orders, issuances, presidential proclamations, rules and regulations or parts
thereof which are contrary to and inconsistent with any provisions of this Act are
hereby repealed, amended or modified accordingly.

SEC. 9. Effectivity Clause. - This Act shall take effect fifteen (15) days after its
complete publication either in the Official Gazette, or in at least two (2)
newspapers of general circulation

Approved,