OF THE REPUBLIC ) 
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Introduced by Senator Ralph G. Recto 
Explanatory Note 
The last major overhaul of the income taxation of corporations and self- 
employed yas via Republic Act No. 8424, otherwise known.as the "Tax Reform 
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which became effective on January 1, 1998. RA 8424 was the third 
of the Comprehensive Tax Reform Package (CTRP) of the 
Among others, RA 8424 lowered the income tax rates, instituted a 
income tax, introduced controls on certain business 
the net operating loss carry-over and accelerated 
law was meant to be "pro-poor and pro-progress'' 
business environment that will eventually result in 
implementing the income tax reform component of the 
beset the income tax system. Corporate income tax revenues 
8.84% in post-CTRP years versus 16.54% in pre-CTRP years. 
from the self-employed grew by only 6.77% versus 
domestic social and infrastructure needs. 
19.86% ptor to the CTRP 
declined frbm 1.3 to 0.82. 
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Buoyancy estimates for the corporate income tax 
individual and corporate income tax effort, or the ratio of revenues to 
The Philippine corporate 
been under-petforming compared to other Asian countries. The 
income tax effort of 2.59 percent in 2000 lags behind 
8.58 percent, Malaysia's at 5.99 percent, Indonesia at 8.39 
almost constant from 1996 to 1999. 
at 6.88 percent. 
The e are structural weaknesses in the taxation of business income. One 
of these p oblems is the narrow tax base. Many business expenses are being 
overstated Even non-business related expenditures or expenditures which have 
a personal element to them are being claimed as deductible expenses for income 
tax purpo es. In 2003, the BIR data on large taxpayers show that the total 
deduction (both direct and indirect costs) across all industries reduced gross 
revenues 
I y 98%, hence, leaving merely 2% as taxable income. There was no 
improvem nt from the pre-CTRP years. 
Hence, despite limitations on certain 
business eductions, the income tax base remains constricted. This gives rise to 
the issue f inequity between compensation and business income earners. The 
compensaion income earner pays the full income tax because of the final 
withholdin i 
tax system while the business income earner can harness the 
allowance for business expenses and deductions to reduce his income tax 
liability. 
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net income tax 'system for business also gives rise to inherent 
tax administration. 
The BIR needs to ascertain not only the 
gross revenues declared by taxpayers but the validity of each and 


every item80f expense claimed as a deduction. This has given a wide latitude of 
discretion Ito the tax examiners, which result in under-the-table deals and 
taxpayer harassment. 
This has also undermined tax collection efforts and 
contributed, to a large extent, to the low quality of tax ethics among our 
taxpayers. 
There are also so-called hard-to-tax groups that do not report items of 
income, do not issue receipts or do not file income returns at all. The non-filing 
of income jtax returns is common to small and medium-sized businesses which 
find it burdensome to keep formal accounting and business records. 
Recent research also reveals that the Philippines, compared with other 
countries in the region, has the second highest rate of corporate tax at 32%. It is 
next to Labs which imposes a 35% corporate tax. Developed countries in the 
ASEAN rebion are at the lower end of the scale, e.g., Singapore has 22% and 
Malaysia imposes a 28% tax. Indonesia’s top rate is 30% while Thailand, Brunei 
and Myanmar levy a 30% tax. Yet, the Philippines tax effort has been the lowest. 
To address these weaknesses, this bill seeks to introduce the concept of 
simplified  net income taxation of business income. 
The tax treatment of 
corporations and the self-employed individuals shall be aligned, and both shall be 
subject to the simplified net income tax structure. Only direct costs incurred in 
the production of go3ds and services shall be allowed as deductions from gross 
revenues  in order to arrive at the tax base which is simplified net income. 
Certain items of expense that are currently allowed as business deductions 
under the !net income tax system shall be disallowed. These expenses are the 
commonly~abused’expenses. 
enhance tax revenues of government. 
The‘ simplified net income tax system will expand the income tax base and 
I n  view of the foregoing, early approval of this bill is earnestly requested. 


THIRTEENTH CONGRESS OF THE 
) 
REPUBLIC OF THE PHILIPPINES ) 
g 
FEfl 20 p4. 
:j& 
Second Regular Session 
1 
SENATE 
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_I_x 
Introduced by Senator Ralph G. Recto 
AN ACT 
ADOPTING THE SIMPLIFIED NET INCOME TAXATION SCHEME FOR AN 
INDIVIDUAL ENGAGED IN TRADElBUSlNESS AND/OR PRACTICE OF 
(L) OF SECTION 34, AND AMENDING SECTIONS 22 AND 24, ALL UNDER THE 
NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED 
PROFESSION, CREATING A NEW SECTION SEC. 34-A, REPEALING SUBSECTION 
Be if enacted by the Senate and House of Representatives of the Philippines in 
Congress assembled: 
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SECTION 1. Short Title. -This Act shall be known as the "Simplified Net Income 
Tax Reform Act of 2006 
SEC. 2. Section 22 of the National Internal Revenue Code (NIRC) of 1997, as 
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amended, is hereby further amended by adding the following definitions after subsection 
(FF), to read as follows: 
"Sec. 22. Definitions. -When used in this Title: 
"(FF) The term 'long-term deposit or investment certificates' shall refer to 
certificate of time deposit or investment in the form of savings, common or 
individual trust funds, deposit subsitutes, investment management accounts 
and other investments with a maturity period of not less than (5) years, the 
form of which shall be prescribed by the Bangko Sentral ng Pilipinas (BSP) 
and issued by banks only (not by non-bank financial intermediaries and 
finance companies) to individuals in denominations of Ten thousand pesos 
(P10,OOO) and other denominations as may be prescribed by the BSP. 
"(GG) "SELF-EMPLOYED" MEANS PERSONS ENGAGED IN TRADE OR 
BUSINESS AND WHO DERIVE THEIR PERSONAL INCOME FROM SUCH 
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TRADE OR BUSINESS. THIS INCLUDES SINGLE PROPRIETORSHIPS, 


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SUCH AS BUT NOT LIMITED TO MANUFACTURERS, TRADERS, MARKET 
VENDORS, OWNERS OF EATERIES, FARMERS AND SERVICE SHOPS; 
AND 
"(HH) 
"PROFESIONALS" 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, 
ARCHITECTS AND OTHERS SIMILARLY SITUATED. 
THE TERM 
"PROFESSIONAL" ALSO REFERS TO ONE WHO PURSUES AN ART OR 
SPORTS AND MAKES HIS LIVING THEREFROM SUCH AS ARTISTS, 
ATHLETES AND OTHERS SIMILARLY SITUATED." 
SEC. 3. Subsection (A) of Section 24 of the National Internal Revenue Code of 
1997 as amended, on income tax on individuals, is hereby amended, to read as follows: 
"Sec. 24. lncome Tax Rates. - 
"(A) Rates of lncome Tax on lndividual Citizen and lndividual Resident 
Alien of the Philippines. - 
"(1) An income tax is hereby imposed: 
"(a) On the taxable income defined in Section 31 of this Code, other than 
income subject to tax under Subsections (B), (C) and (D) of this Section, 
derived for each taxable year from all sources within and without the 
Philippines by every individual citizen of the Philippines residing therein; 
"(b) On the taxable income defined in Section 31 of this Code, other than 
income subject to tax under Subsections (B), (C) and (D) of this Section, 
derived for each taxable year from all sources within the Philippines by an 
individual citizen of the Philippines who is residing outside of the Philippines 
including overseas contract workers referred to in Subsection (C) of Section 
23 hereof; and 
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"(c) On the taxable income defined in Section 31 of this Code, other than 
income subject to tax under Subsections (B), (C) and (D) of this Section, 
derived for each taxable year from all sources within the Philippines by an 
individual alien who is a resident of the Philippines. 
"(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: 
Not over Pl0,OOO.. . . . . . . . . . . . . . .  .5% 
Over P10,OOO but not over. . . . . . . . . .  P500+10% ofthe excess over 
P30,OOO 
P10,OOO 
Over P30,OOO but not over. . . . . . . . . .  P2,500+15% of the excess over 
. P70,OOO 
P30,OOO 
Over P70,OOO but not over. . . . . . . . . .  P8,500+20% of the excess over 
P140,OOO 
P70,OOO 
Over PT40,OOO but not over. . . . . . . . .  P22,500+25% of the excess over 
P250,OOO 
P140,OOO 
Over P250,OOO but not over. . . . . . . . .  P50,000+30% of the excess over 
P500,OOO 
P250,OOO 
Over P500,OOO. . . . . . . . . . . . . . . . . .  .P125,000+[34%] 32% of the 
excess over P500,OOO [in 19981. 
[Provided,. That effective January 1, 1999, the top marginal rate shall be 
thirty-three percent (33%) and effective January 1, 2000, the said rate shall 
be thirty-two percent (32%).] 
"For married individuals, the husband and wife, subject to the provision of 
Section 51 (D) hereof, shall compute separately their individual income tax 
based on their respective total taxable income: Provided, That if any income 
cannot be definitely attributed to or identified as income exclusively earned or 
realized by either of the spouses, the same shall be divided equally between 
the spouses for the purpose of determining their respective taxable income. 
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"(3) 
SIMPLIFlED NET INCOME TAX FOR THE SELF-EMPLOYED 
ENGAGED IN TRADE/BUSINESS AND FOR PROFESSIONALS ENGAGED 
IN THE PRACTICE OF PROFESSION. - AN INCOME TAX FOLLOWING 
THE PRESCRIBED RATE FOR INDIVIDUALS UNDER THE PRECEDING 
PARAGRAPH IS HEREBY IMPOSED UPON THE TAXABLE INCOME 
DERIVED DURING EACH TAXABLE YEAR FROM ALL SOURCES WITHIN 
AND WITHOUT THE PHILIPPINES BY AN INDIVIDUAL CITIZEN AND 
INDIVIDUAL RESIDENT ALIEN OF THE PHILIPPINES ENGAGED IN 
TRADE, BUSINESS AND/OR PRACTICE OF PROFESSION." 
SEC. 4. Chapter VII, Title I I  of the National Internal Revenue Code of 1997, as 
amended, is hereby further amended by adding a new section to be known as Section 
34-A, to read as follows: 
"Sec. 34-A. DEDUCTIONS FROM THE GROSS REVENUES OF SELF- 
EMPLOYED AND/OR P,ROFESSIONALS. 7 IN COMPUTING THE TAXABLE 
INCOME SUBJECT TO TAX UNDER SUBSECTION 24(A)(3) IN THE CASE 
OF INDIVIDUALS ENGAGED IN TRADE/BUSINESS AND/OR PRACTICE 
OF PROFESSION, ONLY THE FOLLOWING EXPENSES/DEDUCTIONS 
INCURRED IN DOING BUSINESS SHALL BE ALLOWED TO BE 
SUBTRACTED FROM THE GROSS REVENUES OF SUCH INDIVIDUALS: 
"(A) SALES DISCOUNTS; 
"(8) SALES RETURNS AND ALLOWANCES; 
"(C) RAW MATERIALS, SUPPLIES, AND DIRECT LABOR; 
"(D) 
SALARIES 
OF 
EMPLOYEES 
DIRECTLY 
ENGAGED 
IN 
ACTIVITIES IN THE COURSE OF OR PURSUANT TO THE BUSINESS, 
TRADE OR PRACTICE OF THEIR PROFESSION; 
"(E) TELECOMMUNICATIONS, ELECTRICITY, FUEL AND WATER: 
PROV/D€D, THAT THE TOTAL AMOUNT OF THESE EXPENSES SHOULD 
NOT EXCEED TEN PERCENT,(IO%) OF GROSS INCOME OF SUCH 
INDIVIDUAL; 
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"(F) BUSINESS RENTALS; 
"(G) DEPRECIATION IN ACCORDANCE WITH SUBSECTION 34 (F) 
HEREOF; 
"(H) CONTRIBUTIONS MADE TO THE GOVERNMENT OR ANY OF 
ITS 
AGENCIES 
OR 
ANY 
POLITICAL 
SUBDIVISION 
THEREOF 
EXCLUSIVELY FOR 
PUBLIC PURPOSES, 
OR 
TO 
ACCREDITED 
DOMESTIC CORPORATIONS OR ASSOCIATIONS ORGANIZED AND 
OPERATED EXCLUSIVELY FOR RELIGIOUS, CHARITABLE, SCIENTIFIC, 
YOUTH AND SPORTS DEVELOPMENT, CULTURAL OR EDUCATIONAL 
PURPOSES OR FOR THE REHABILITATION OF VETERANS, OR TO 
SOCIAL 
WELFARE 
INSTITUTIONS, 
OR 
TO 
NON-GOVERNMENT 
ORGANlZATiONS, IN ACCORDANCE WITH SUBSECTION 34(H) HEREOF; 
"(I) INTEREST PAID OR ACCRUED WITHIN A TAXABLE YEAR ON 
LOANS CONTRACTED FROM ACCREDITED FINANCIAL INSTITUTIONS 
WHICH MUST BE PROVEN TO HAVE BEEN INCURRED IN CONNECTION 
WITH THE CONDUCT OF A TAXPAYER'S PROFESSION, TRADE OR 
BUSINESS IN ACCORDANCE WITH SUBSECTION 34(B) HEREOF; 
"(J) FREIGHT, HANDLING AND TRUCKING; 
"(K) INSURANCE EXPENSE; 
"(L) PROFESSIONAL FEES; 
"(W 
SSS, 
GSIS, 
PHILHEALTH, 
AND 
HDMF 
(PAG-IBIG) 
CONTRIBUTIONS; AND 
"(N) TAXES AND LICENSES IN ACCORDANCE WITH SUBSECTION 
34(C) HEREOF. 
"FOR INDIVIDUALS ENGAGED IN TRADE/BUSINESS AND/OR 
PRACTICE OF THEIR PROFESSION WHOSE EXPENSES/DEDUCTIONS 
ENUMERATED IN THE PRECEDING PARAGRAPH ARE DIFFICULT TO 
DETERMINE, SAID INDIVIDUAL SHALL BE ALLOWED AN OPTIONAL 
STANDARD DEDUCTION EQUIVALENT TO FORTY PERCENT (40%) OF 
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HIS GROSS REVENUES IN LIEU OF THE SAID EXPENSES/DEDUCTIONS 
PROVIDED HEREIN. 
UNLESS THE TAXPAYER SIGNIFIES IN HIS 
RETURN HIS INTENTION TO ELECT THE OPTIONAL STANDARD 
DEDUCTION, HE SHALL BE CONSIDERED AS HAVING AVAILED 
HIMSELF OF THE EXPENSES/DEDUCTIONS PRESCRIBED UNDER THIS 
SECTION. SUCH ELECTION WHEN MADE IN THE RETURN SHALL BE 
IRREVOCABLE FOR THE TAXABLE YEAR FOR WHICH THE RETURN IS 
MADE: PROVIDED, THAT AN INDIVIDUAL WHO IS ENTITLED TO AND 
CLAIMED FOR THE OPTIONAL STANDARD DEDUCTION SHALL NOT BE 
REQUIRED TO SUBMIT WITH HIS TAX RETURN SUCH FINANCIAL 
STATEMENTS OTHERWISE REQUIRED UNDER THIS CODE; PROVlDED 
FURTHER, THAT EXCEPT WHEN THE COMMISSIONER OTHERWISE 
PERMITS, THE SAID INDIVIDUAL SHALL KEEP SUCH RECORDS 
PERTAINING TO HIS GROSS REVENUES DURING THE TAXABLE YEAR, 
AS 
MAY BE REQUIRED BY THE RULES AND 
REGULATIONS 
PROMULGATED 
BY 
THE 
SECRETARY 
OF 
FINANCE, 
UPON 
RECOMMENDATION OF THE COMMISSIONER." 
SEC. 5. Subsection (L) of Section 34 of the NlRC of 1997, as amended, is 
hereby repealed. 
SEC. 6. implementing Rules and Regulations. - The Secretary of Finance shall, 
upon recommendation of the Commissioner of Internal Revenue, promulgate the rules 
and regulations necessary for the effective implementation of this Act. 
SEC. 7. Repealing Clause. - All laws, executive orders, decrees, rules and 
regulations, and other issuances or parts thereof inconsistent with the provisions of this 
Act, are hereby repealed or modified accordingly. 
SEC. 8. Effectivity. - This Act shall take effect after fifteen (15) days from its 
publication in the Official Gazette or in at least two (2) national newspapers of general 
circulation. 
Approved. 
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