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

‘TWENTIETH CONGRESS
First Regular Session

HOUSE BILL no.1736

Introduced by Representative Ryan S. Recto

EXPLANATORY NOTE

This bill seeks to amend Section 27 of the National Internal Revenue Code
(NIRC) of 1997, as amended, by exempting micro and small enterprises (MSEs) with
net taxable income not exceeding P400,000 from the corporate income tax. The
measure also seeks to exempt MSEs from the imposition of minimum corporate
income tax (MCIT).

It goes without saying that MSEs are indeed the backbone of the economy as
they contribute significantly to employment generation and overall national
development. According to the Department of Trade and Industry's (DTI) 2023
Philippine Micro, Small and Medium Enterprises (MSME) Statistics, of the recorded
1,246,373 business enterprises in the country, 99.63% (1,241,733) are MSMEs, while
0.37% (4,640) are large enterprises.

Aside from that, MSMEs provide 63% of employment to the Philippine labor
force and contribute to 40% of the country's Gross Domestic Product (GDP), as per the
United Nations Development Programme's MSME Value Chain Rapid Response Survey
(2020).

However, this particular sector is not without challenges. They are often faced
with limited access to financial resources, intense competition, and a heavy tax burden
that hinders them from experiencing their full economic potential. The current tax


regime being imposed in the country offers some concessions, however, this is not

without challenges.

This proposed measure aims to address such concerns by amending Section
27(A) of the aforementioned law. While the general corporate income tax remains at
twenty-five (25%), this measure proposes that only the net taxable income in excess
of Four Hundred Thousand Pesos (P400,000.00) shall be subject to income tax. This
amendment provides for an income tax exemption for the first P400,000.00 of net
taxable income for all domestic corporations, with a direct and substantial benefit to
MSEs by reducing their taxable base.

The bill also proposes to amend Section 27(E) that concerns the Minimum
Corporate Income Tax on Domestic Corporations of the said law. While the existing
law imposes a minimum corporate income tax (MCIT) of two percent (2%) of gross
income, this piece of legislation proposes that MSEs shall not be subject to tax under
this particular subsection.

This exemption from MCIT will alleviate MSEs from tax obligations that can be
particularly burdensome, most especially during periods of low profit or during their
first few months of operations. This allows them to retain more capital for
reinvestment into their growth, such as expanding operations, hiring more staff or
developing new products and services. Furthermore, it encourages new
entrepreneurial ventures by reducing initial financial pressures, thereby fostering a

more dynamic and competitive business environment.

Beyond financial relief, this reform also sends a strong signal of government
support for small business resilience and long-term viability. It acknowledges the vital
role MSEs play in driving grassroots economic activity and aims to create a more
enabling ecosystem where innovation, adaptability and community-level enterprise
can thrive. The measure envisions that more of our fellow countrymen who operate or
work in sari-sari stores, groceries, and convenience stores are able to thrive and
contribute to a more vibrant emerging economy. This strategic approach to tax reform,

by fostering growth among MSEs, aligns with the broader objective


of the law for the payment of taxes. The objective is to broaden the tax base and this
can be done by encouraging more self-employed individuals, professionals, business
enterprises and other income earners to voluntarily file their income tax returns (ITRs)
and pay the corresponding correct taxes thereon.

In view of the foregoing, the approval of this bill is earnestly sought.

in S. Recto
Representative
6 District, Batangas


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

‘TWENTIETH CONGRESS
First Regular Session

1735

HOUSE BILL NO. _"—"

Introduced by Representative Ryan S. Recto

AN ACT
GRANTING ECONOMIC RELIEF TO MICRO AND SMALL ENTERPRISES, AMENDING
FOR THE PURPOSE SECTION 27 OF THE NATIONAL INTERNAL REVENUE CODE OF
1997, AS AMENDED

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

Section 1. Short Title. - This Act shall be known as the “Economic Relief for
Micro and Small Enterprises Act”.

Sec. 2. Section 27 of the National Internal Revenue Code of 1997, as amended,
is hereby further amended to read as follows:

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

(A) In General. - Except as otherwise provided in this Code, an income
tax rate of twenty-five percent (25%) effective July 1, 2020, 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
corporations with net taxable income not exceeding Five million pesos
(P5,000,000.00) and with total assets not exceeding One hundred million
pesos (P100,000,000.00), excluding land on which the particular business


entity's office, plant, and equipment are situated during the taxable year for
which the tax is imposed, shall be taxed at twenty percent (20%): Provided,
further, That registered business enterprises under the enhanced
deductions regime as provided in Section 249(C) of this Code shall be taxed
at a rate equivalent to twenty percent (20%) on their taxable income derived
from registered projects or activities during each taxable year[.]: PROVIDED,
FINALLY, THAT ONLY THE NET TAXABLE INCOME IN EXCESS OF FOUR
HUNDRED THOUSAND PESOS (P400,000) SHALL BE SUBJECT TO
INCOME TAX UNDER THIS SECTION.

XXX

(E) Minimum Corporate Income Tax on Domestic Corporations. -

(1) Imposition of Tax. - A minimum corporate income tax of two
percent (2%) 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: Provided, That effective July 1, 2020 until June
30, 2023, the rate shall be one percent (1%): PROVIDED, FURTHER, THAT
THE MICRO AND SMALL ENTERPRISES SHALL NOT BE SUBJECT TO TAX
UNDER THIS SUBSECTION.

XXX

Sec. 3. Implementing Rules and Regulations (IRR). - Within thirty (30) days from
the effectivity of this Act, the Secretary of Finance, upon the recommendation of the
Commissioner of Internal Revenue, shall promulgate the necessary rules and
regulations for its effective implementation.


Sec. 4, Separability Clause. - If any provision or part hereof is declared
unconstitutional, the remainder of this Act or any provision not affected thereby shall

remain in full force and effect.

Sec. 5. Repealing Clause. ~ All laws, acts, decrees, executive orders, issuances,
and rules and regulations or parts thereof which are contrary to and inconsistent with

this Act are hereby repealed, amended or modified accordingly.
Sec. 6. Effectivity. - This Act shall take effect fifteen (15) days after its
complete publication in the Official Gazette or in at least two (2) newspapers of general

circulation.

Approved,