NINETEENTH CONGRESS OF THE )
REPUBLIC OF THE PHILIPPINES )
First Regular Session )

HOUSE OF REPRESENTATIVES

House Bill No._2178

Introduced by Representative Ralph G. Recto

AN ACT
LOWERING THE COST OF DOING BUSINESS BY ESTABLISHING A
SIMPLIFIED TAX SYSTEM FOR MICRO, SMALL AND MEDIUM ENTERPRISES

EXPLANATORY NOTE

This proposed measure seeks to establish a simplified tax system for micro,
small and medium enterprises (MSMEs) for the purpose of lowering the cost of doing
business.

The contribution of MSMEs to the country’s economic development cannot be
overemphasized. They account for 99.51% of the total registered business enterprises
operating in the country.! In terms of employment, MSMEs generate a total of 5.38
million jobs or 62.66% of the country’s total employment.? Moreover, industries falling
under these categories propel economic growth by promoting development in the rural
areas, thereby bringing in employment opportunities, decentralizing economic
activities and redistributing wealth throughout the country.

The bill seeks to impose a tax of 5% based on gross sales or receipts for self-
employed and professionals, in lieu of the graduated income tax rates and 3%
percentage tax; establish a simplified creditable withholding tax system on the
purchase of goods and services; and reduce the frequency of filing the return for
percentage tax from quarterly to semi-annually.

+ 2020 MSME Statistics, Department of Trade and Industry
2 2020 MSME Statistics, Department of Trade and Industry

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Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion
(TRAIN) Law, introduced an optional 8% tax on gross sales or receipts for self-
employed and professionals, in lieu of the graduated income tax rates and 3%
percentage tax. However, this option may not be attractive to many MSMEs because
of a relatively high tax rate of 8% based on gross sales or receipts.

MSMEs also find it difficult to comply with the complicated requirements of
existing tax laws and regulations for the payment of taxes, such as the implementation
of creditable withholding tax system using multiple rates. Under the existing system,
the complexity of tax compliance forces small businessmen and entrepreneurs to hire
accountants and bookkeepers. This would entail additional cost of doing business.

Moreover, this bill seeks to grant a 3-year tax relief for self-employed and
professionals with a lower tax rate of 1% based on gross sales or receipts, and 3-year
incentive equivalent to 25% additional deduction on labor expense incurred for every
employee hired by small and medium enterprises. These tax incentives would help the
MSMEs in mitigating the adverse effects of rising commodity prices and soaring
inflation.

‘The purpose and intent of this proposed measure is to lessen the burden of
MSMEs in paying the tax and in complying with the requirements of the law for its
payment. The objective is to help these industries recover from the crisis brought
about by the COVID-19 pandemic, and maximize their time, effort and resources in
expanding business operations, thereby stimulating economic growth and generating
more jobs throughout the country.

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

RALDA G.

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NINETEENTH CONGRESS OF THE )
REPUBLIC OF THE PHILIPPINES )
First Regular Session )

HOUSE OF REPRESENTATIVES

House Bill No.__2178

Introduced by Representative Ralph G. Recto

AN ACT
LOWERING THE COST OF DOING BUSINESS BY ESTABLISHING A
SIMPLIFIED TAX SYSTEM FOR MICRO, SMALL AND MEDIUM ENTERPRISES

Be it enacted by the Senate and House of Representatives of the Philippines in
Congress assembled:
Section 1. 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. —
(A) Rates of Income Tax on Individual Citizen and Individual Resident
Alien of the Philigpines. —
(1) 00
(2) Rates of Tax on Taxable Income of Individuals. - The tax shall be
computed in accordance with and at the rates established in the following
schedule:
(a) 0x
*(b) Rate of Tax on Income of Purely Self-employed Individuals and/or
Professionals Whose Gross Sales or Gross Receipts and Other Non-Operating
Income Does Not Exceed the Value-added Tax(VAT) Threshold as Provided in
Section 104 ¢88)\(CC). — Self-employed individuals and/or professionals shall
[have-the-option to avail of an-eight percent {8%)}] BE SUBJECT TO A FIVE
PERCENT (5%) tax on gross sales or gross receipts and other non-operating
income in excess of Two hundred fifty thousand pesos (P250,000) in lieu of the
graduated income tax rates under Subsection (A)(2)(a) of this Section and the


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percentage tax under Section 116 of this Code[:]: PROVIDED, THAT
EFFECTIVE JULY 1, 2022 UNTIL JUNE 30, 2025, THE TAX RATE
HEREIN IMPOSED SHALL BE ONE PERCENT (1%).

“(©) Rate of Tax for Mixed Income Earners. — Taxpayers earning both
compensation income and income from business or practice of profession shall
be subject to the following taxes:

‘(1) All Income from Compensation. ~ The rate prescribed under
Subsection (A)(2)(a) of this Section.

*(2) All Income from Business or Practice of Profession. ~

“(a) If Total Gross Sales and/or Gross Receipts and Other Non-Operating
Income Do Not Exceed the VAT Threshold as Provided in Section
10K BBN (CC) of this Code. — [Fre—rates—preseribed—tnder—Subsection
AB of this-Seetion: taxable-ineome;er eight percent {8%}} FIVE
PERCENT (5%) income tax based on gross sales or gross receipts and other
non-operating income in lieu of the graduated income tax rates under
Subsection (A)(2)(a) of this Section and the percentage tax under Section 116
of this Code[=]: PROVIDED, THAT EFFECTIVE JULY 1, 2022 UNTIL JUNE
30, 2025, THE TAX RATE HEREIN IMPOSED SHALL BE ONE PERCENT
(1%).

“(b) If Total Gross Sales and/or Gross Receipts and Other Non-operating
Income Exceeds the VAT Threshold Provided in Section 109[¢88)](CC) of this
Code. — The rates prescribed under Subsection (A)(2)(a) of this Section.

Sec. 2. 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, 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:

"(A) Expenses. —


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“(1) Ordinary and Necessary Trade, Business or Professional Expenses.~

“(a) In General. - There shall be allowed as deduction from gross income
all the ordinary and necessary expenses paid or incurred during the taxable
year in carrying on or which are directly attributable to, the development,
management, operation and/or conduct of the trade, business or exercise of a
profession, including:

“(i) A reasonable allowance for salaries, wages, and other forms of
compensation for personal services actually rendered, including the grossed-up
monetary value of fringe benefit furnished or granted by the employer to the
employee: Provided, That the final tax imposed under Section 33 hereof has
been paid: PROVIDED, FURTHER, THAT EFFECTIVE JULY 1, 2022 UNTIL
JUNE 30, 2025, THERE SHALL BE ALLOWED A TWENTY-FIVE PERCENT
(25%) ADDITIONAL DEDUCTION ON THE LABOR EXPENSE
INCURRED FOR EACH NEW EMPLOYEE HIRED BY MICRO, SMALL AND
MEDIUM ENTERPRISES;

00K
Sec. 3. Section 57 of the National Internal Revenue Code of 1997, as amended

is hereby further amended to read as follows:

“SEC. 57. Withholding of Tax at Source. -

(A) 20

“(B) Withholding of Creditable Tax at Source. — The Secretary of Finance
may, upon the recommendation of the Commissioner, require the withholding
of a tax on the items of income payable to natural or juridical persons, residing

in the Philippines, by payor-corporation/persons as provided for by law, at the

rate of [pet4ess-than-one-peree Ye) pitt net than-thirty-two-percent

=] ONE PERCENT (1%) FOR
THE PURCHASE OF GOODS OR PROPERTIES, AND TWO PERCENT
(2%) FOR THE PURCHASE OF SERVICES INCLUDING THE EXERCISE
OF PROFESSION AND LEASE OF PROPERTIES, WHICH SHALL BE


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CREDITED AGAINST THE INCOME TAX LIABILITY OF THE TAXPAYER
FOR THE TAXABLE YEAR.
Sec. 4. Section 128 (A)(1) of the National Internal Revenue Code of 1997, as
amended is hereby further amended to read as follows:
“SEC. 128. Returns and Payment of Percentage Taxes. —
“(A) Returns of Gross Sales, Receipts or Earnings and Payment of Tax.—
“(1) Persons Liable to Pay Percentage Taxes. - Every person subject to
the percentage taxes imposed under this Title shall file a [quarterly]SEMI-

ANNUAL return of the amount of his gross sales, receipts or earnings and pay

the tax due thereon within twenty-five (25) days after the end of each taxable

[quarter] SEMI-ANNUAL PERIOD: Provided, That in the case of a person

whose VAT registration is cancelled and who becomes liable to the tax imposed

in Section 116 of this Code, the tax shall accrue from the date of cancellation
and shall be paid in accordance with the provisions of this Section.

Sec. 5. 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. 6. 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. 7. 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. 8. 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,