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

Eighteenth Congress
First Regular Session

House Bill No. 4425

Introduced by Representative Jose “Jun” L. Ong, Jr.

EXPLANATORY NOTE

Optional Standard Deduction (OSD) was originally introduced in Presidential
Decree No. 1158, or the “National Internal Revenue Code of 1977.” as an option for
individual taxpayers, except those who receive purely compensation income and non-
resident aliens, in lieu of availing itemized expenses or deductions from their gross income,
Section 34(L) of Republic Act (RA) No. 8424, or the “Tax Reform Act of 1997,” provided
a slight modification on OSD by exempting those who avail of the OSD option from
attaching the required financial statements to their inome tax returns. Both laws pegged
the rate for OSD at 10% of the individual’s gross income.

1m 2008, RA 9504 amended Section 34(L) by increasing the rate from 10% to 40%
and allowing corporations to avail of the OSD. However, the amended Section 34(L)
provided that the OSD for individuals shall be pegged at 40% of their gross receipts or
gross sales, and for corporations at 40% of gross income. In 2017, RA 10963, or the “Tax
Reform for Acceleration and Inclusion (TRAIN),” further amended Section 34(L) by
allowing OSD to be availed altematively either by general partnerships or its individual

partners.

‘The introduction of a different basis for claiming OSD (i.¢., gross receipts or gross
sales for individuals vs. gross income for corporations) tended to put individuals at great
disadvantage because this actually assumes that individuals or sole proprietors do not incur
cost of goods sold, when in actuality, many sole proprietors do incur cost of goods sold
just the same way as corporations do.


“

Single proprietors and corporations are similarly situated when it comes to the
determination of taxable income as both of them deduct from their gross receipts or gross
sales their cost of goods sold to arrive at their gross income, and thereafter their operating
expenses are deducted from their gross income to arrive at their taxable income. However,
the amended Section 34(L) gave an unreasonable disadvantage to sole proprietors because
their income tax base is higher compared to corporations. ‘The corresponding cost of goods
sold is not allowed to be deducted from a single proprietor's gross receipts or gross sales
to arrive at his gross income, hence the single proprietor may be paying income tax that
includes as tax base, portion of the cost of goods sold.

It is unreasonable if not outright confiscatory to disallow cost of goods sold as
deductible to gross receipts or gross sales inthe ease of single proprietors. There is no tax
Scheme in the world that does not consider cost of goods sold as being deductible to gross
receipts or gross sales. The OSD replaces itemized expenses and not cost of goods sold
cause cost of goods sold should be based on actual cost and cannot be subject to a
standardized rate that cuts across all industries.

tll, there is a need to amend Section 34(L) because the present scheme actually
put into a disadvantageous position, single proprietors whose tax base is higher due 10 the
ron-deduetible cost of goods sold as a precondition to its allowable rate for optional
standard deduction of 40% of gross receipts oF Bross sales and not 40% of gross income
Tike that of a corporation. It is noteworthy that a simple and standardized OSD rate of 40%
of gross income is equitable for all types of taxpayers.

Hence, the approval of this proposed measure is ceamestly urged.

J me ONG, JR.


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Republic of the Philippines
Rouse of Representatives
Quezon City, Mates Manila

Eighteenth Congress
First Regular Session

House BILL No. 4425

Introduced by Representative'Jose “Jun” L. Ong, Jr.
.

AN ACT
PRESCRIBING A STANDARDIZED RATE FOR OPTIONAL STANDARD
DEDUCTION AT FORTY PERCENT (40%) OF GROSS INCOME FORALL
TAXPAYERS, AMEN DING FOR THE PU! RPOSE SECTION 34(L) OF
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. Section 34(L) 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, in computing taxable income subject to
income tax under Sections 24(A); 25(A); 26; 27(A), (B), and (C); and
28(A)(1), there shall be allowed the following deductions from gross

income:

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1

2

“

15

16

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18

19

20

“(A) Expenses. —

“(1) Ordinary and Necessary Trade, Business or

Professional Expenses. —

“(a) In General —x xx

XXX
.

“(L,) Optional StandarchDeduction (OSD). ~ in liew of the
deductions allowed under the preceding Subsections, an
individual subject to tax under Section 24, other than a
nonresident alien, may elect a standard deduction in an amount
not exceeding forty percent (40%) of his gross [sales-or-gross
receipts,—asthe-case-may—be] INCOME. In the case of a
corporation subject to tax under Sections 27(A) and 28(A)(1), it
may elect a standard deduction in an amount not exceeding forty
percent (40%) of its gross income as defined in Section 32 of | ‘this
Code. xxx
Sx inex a

SEC. 2. This Act shall take effect fifteen (15) days after its publication in the

Official Gazette or in a newspaper of general circulation.

Approved,