Republic of the Philippines
HOUSE OF REPRESENTATIVES
Quezon City
FIFTEENTH CONGRESS

First Regular Session

3927

HOUSE BILL NO.

Introduced by Representative Hermilando |. Mandanas

EXPLANATORY NOTE

This bill seeks to amend Section 27 (A) of the National Internal Revenue
Code (NIRC) of 1997, as amended, which provides for income tax rates on
domestic corporations. Under the present law, the President may allow the option
to be taxed based on the gross income upon the recommendation of the
Secretary of Finance when the following conditions have been satisfied: (1) A tax
effort ratio of twenty percent (20%) of Gross National Product (GNP); (2) A ratio
of forty percent (40%) of income tax collection to total tax revenues; (3) A VAT
tax effort of four percent (4%) of GNP; and (4) A 0.9 percent (0.9%) ratio of the
Consolidated Public Sector Financial Position (CPSFP) to GNP. However, the
concurrence of these conditions are hardly attainable.

The proposal simplifies corporate income taxation by removing all of these
unattainable requisites in taxing corporation based on gross income. This bill
provides another option on the part of corporate taxpayers in paying their
income. Taxpayers need not substantiate and specify all of the allowable
deductions which entail tedious compliance and administration process and is
perceived to be susceptible to abuse or manipulation by both taxpayers and tax
examiners. Every item of expense can be subjected to scrutiny as to whether or
not such is really a necessary or legitimate expense. This situation greatly erodes
the tax base and consequently reduces the tax take of the government.


In consistency with one of the principles of a sound tax system, proper
and efficient administration of the government and its enforcement with the least
inconvenience to the taxpayer will be achieved. With this measure, tax
administration will be much easier

Further, areas of discretion are minimized as the tax examiners shall
validate only the accuracy of the taxpayer's declared gross sales/receipts and
cost of goods sold or cost of services. Cost of goods sold are business expenses
directly incurred to produce merchandise. On the other hand, cost of services are
all direct cost and expenses necessarily incurred to provide services required by
the customers and clients.

It would lessen paper work for both the taxpayer and tax examiner as
substantiation requirement will be significantly reduced. More taxpayers will be
encouraged to file their returns. And with more taxpayers, tax collection will
consequently increase

The gain in terms of improved tax compliance and collection will definitely
contribute to the country’s economic stability.

Hence, approval of this bill is earnestly recommended.

|. HERMILANDO |. MANDANAS
Second District of Batangas


Republic of the Philippines
HOUSE OF REPRESENTATIVES
Quezon City
FIFTEENTH CONGRESS

First Regular Session

8927
House ein, 29°"

Introduced by Representative Hermilando |, Mandanas

AN ACT
SIMPLIFYING THE AVAILMENT OF THE GROSS INCOME TAX FOR
CORPORATIONS AMENDING FOR THE PURPOSE SECTION 27 (A) OF THE
NATIONAL INTERNAL REVENUE CODE (NIRC) OF 1997, AS AMENDED

Be_it enacted by the Senate and House of Representatives of the

Philippines in Congress assembled:

SECTION 1. Section 27 (A) 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. - x x x
XXX
XXX
["Provided, further, That the President, upon the recommendation
of the Secretary of Finance, may, effective January 1, 2000, allow
corporations the option to be taxed at fifteen percent (15%) of gross

income as defined herein, after the following conditions have been
satisfied:


"(1) A tax effort ratio of twenty percent (20%) of Gross National
Product (GNP);

"(2) A ratio of forty percent (40%) of income tax collection to total
tax revenues;

"(3) A VAT tax effort of four percent (4%) of GNP; and

"(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector
Financial Position (CPSFP) to GNP.]

PROVIDED FURTHER, THAT CORPORATIONS HAVE THE
OPTION TO BE TAXED AT EIGHTEEN PERCENT (18%) OF
GROSS INCOME.

"The option to be taxed based on gross income shall be available
only to firms whose ratio of cost of sales to gross sales or receipts
from all sources does not exceed fifty-five percent (55%).

"The election of the gross income tax option by the corporation
shall be irrevocable for three (3) consecutive taxable years during
which the corporation is qualified under the scheme.

"For purposes of this Section, the term ‘gross income! derived
from business shall be equivalent to gross sales less sales returns,
discounts and allowances and ‘cost of goods sold.’ Cost of good
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
faw 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, [and]
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; PROVIDED, HOWEVER, THAT IN THE CASE OF
BANKS, ‘COST OF SERVICES' SHALL INCLUDE INTEREST
EXPENSE.

SEC. 2. Implementing Rules and Regulations. — The Secretary of
Finance shall, upon the recommendation of the Commissioner of the Bureau of
Intemal Revenue, promulgate the necessary rules and regulations for the
effective implementation of this Act.

SEC. 3. Repealing Clause. — All laws, decrees, executive orders, rules
and regulations or parts thereof which are contrary to or inconsistent with this Act
are hereby repealed, amended or modified accordingly.

SEC. 4. Effectivity. — This Act shall take effect fifteen (15) days after its
Publication in the Official Gazette or in any two newspapers of general
circulation.

Approved,