ie) Senate
SIXTEENTH CONGRESS OF THE +) LEY ine ofthe Seestary

REPUBLIC OF THE PHILIPPINES)

Third Regular Session )
15 SEP 29 P2:24
SENATE
s.No. 2974 RECEIVED B

Introduced by Senator Ralph G. Recto

AN ACT

INSTITUTING INCOME TAX REFORM FOR INDIVIDUAL AND CORPORATE
TAXPAYERS, AMENDING FOR THIS PURPOSE SECTIONS 24(A)(2), 27(A) AND
35(A) OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED,
AND FOR OTHER PURPOSES

Explanatory Note

One of the inherent powers of the State is the power of taxation. However, there are
limitations on the exercise of such power. Section 28, Article VI of the 1987 Philippine
Constitution provides that the rule of taxation shall be uniform and equitable and that Congress
shall evolve a progressive system of taxation.

Jurisprudence is replete with cases explaining that uniformity of taxation and the equal
protection clause require that all subjects or objects of taxation similarly situated are to be treated
alike both in privileges and liabilities. A progressive system of taxation as well as the concept of
equity in taxation suggest that the tax rates should be based on the taxpayer’s ability to pay.
‘Therefore, a tax system is progressive when the tax rate increases as the tax base increases,

‘The steady increase in the prices of consumer goods and services in the country over the
years hinders most Filipinos in meeting the demands of daily living. The rise in commodity
prices has undoubtedly weakened the purchasing power of our people’s hard-earned money.

Individuals eaming compensation income not only have to deal with the weakening
effects of inflation but also with the huge deductions in their salaries, one of which is due to
income tax.

This bill secks to amend Section 24(A)(2) of the National Internal Revenue Code of 1997
(NIRC), as amended, by adjusting the levels of net taxable income and the nominal tax rates for
purposes of computing the individual income tax. It also seeks to amend Section 35(A) of the
NIRC, as amended, by adjusting the basic personal exemption for cach individual taxpayers from
50,000 to P150,000 to counter the steady increase of prices of consumer goods and services and
to help our hardworking middle class in meeting the demands of daily living.

Furthermore, in the case of married individuals, under the bill, the taxpayer spouse may
claim an exemption for his or her spouse even though the latter did not earn any gross income for
the taxable year and did not file a return for as long as the said spouse is living exclusively with
the taxpayer spouse. This, however, does not categorize the said spouse as a dependent, but
merely as a recognition of his or her efforts in the care and maintenance of the family and of the
houschold which is akin to the recognition accorded by the Family Code in cases contemplated
under Article 147 thereof. In short, all married individuals may claim a maximum amount of
allowable personal exemption up to P300,000 whether the other spouse is employed or not.

The adjustments come almost two decades after the amendments were last introduced in
1997 and with the Consumer Price Index moving upward in steady fashion. Without a CPI-

“


adjusted tax levels and rates, the increases in income enjoyed by salaried individuals to keep
them in step with inflation every year push these taxpayers into higher tax brackets, leading them
to pay more taxes. This “bracket creep” is a result of income taxes growing faster than income
does despite the fact that Congress has not legislated laws increasing income taxes, and despite
the fact that Congress has even enacted a law in favor of minimum wage eamers.

With the passage of this bill, a government employee occupying a Salary Grade 11
position or its equivalent (Teacher 1, Police Officer IH, etc.) earning a basic salary of P18,549,00
per month or an annual income of P222,588.00 will have to pay annual income tax of P7,258.80
only as compared to P30,647.00 under the existing income tax bracket as provided under the
NIRC, as amended.

Also, this bill seeks to amend Section 27(A) of the NIRC, as amended, to replace the
unitary or single income tax rate with a graduated income tax rates for corporate taxpayers
similar to those provided for the individual taxpayers and exempt from income tax the taxable
income not exceeding P150,000.00. The basis for adopting this tax system is to align income
taxation for corporation with the constitutional mandate of a progressive system of taxation and
the rule on uniform and equitable taxation.

Under the Corporation Code, a duly organized corporation is clothed with a personality
separate and distinct from the persons composing it. Therefore, being a juridical person, a
corporation is recognized by law as a person similar to a natural person. Thus, a corporation can
sue and be sued in its corporate name, and it can also purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and otherwise deal with real and personal property.
‘Therefore, it is but proper that for purposes of taxation, a corporation should be treated like an
individual. Like an individual taxpayer, a corporate taxpayer should be afforded a system of
income taxation based on its ability to pay.

It is noteworthy that this proposed measure seeks to provide a uniform graduated income
tax bracket for individual and corporate taxpayers. ‘The intent is to simplify income taxation for
all taxpayers and to make the same easier to comprehend. A tax is a burden on the taxpayer, it
being an enforced proportional contribution to finance the operation of the government and other
public needs. To ease the burden, a simplified system for the payment of taxes should be
provided.

This bill also proposes to automatically index the taxable income levels and nominal tax
rates to inflation every six years without need for legislative action. This would perpetuate equity
in the tax system and help ensure that the tax system treats individual and corporate taxpayers the
same way from year to year.

The purpose and intent of this bill is to make taxation more equitable and uniform, and to
ease the burden of the taxpayers in complying with the requirements of the law for the payment
of taxes. The objective is to broaden the tax base and this can be done by encouraging more
businessmen, self-employed individuals, professionals, enterprises, corporations and other
income earners to voluntarily file their income tax retus (ITRs) and pay the corresponding
correct taxes thereon,

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



er annrone

SIXTEENTH CONGRESS OFTHE) Srant
REPUBLIC OF THE PHILIPPINES — ) BY nae of tye

Third Regular Session )
SENATE 5 SEP 29 P

s.No, 2974

Introduced by Senator Ralph G. Recto

AN ACT
INSTITUTING INCOME TAX REFORM FOR INDIVIDUAL AND CORPORATE
TAXPAYERS, AMENDING FOR THIS PURPOSE SECTIONS 24(A)(2), 27(A) AND
35(A) OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED,
AND FOR OTHER PURPOSES

Be it enacted by the Senate and the House of Representatives of the Philippines in
Congress assembled:
SECTION 1. Section 24(A)(2) of the National Intemal Revenue Code of 1997, as
amended, is hereby further amended to read as follows:
“Sec. 24. Income Tax Rates. ~
(A) xxx
“(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 P10,000] s+ [5%]
“[Over P10,000 but ve» [P500 + 10% of the
not over P30,000] excess over 10,000]
“[Over P30,000 but «+. [P2,500 + 15% of the
not over P70,000] excess over P30,000]
“[Over P70,000 but --- [P8,500 + 20% of the
not over P140,000] excess over 70,000]
“[Over P140,000 but ++» [P22,500 + 25% of the
not over 250,000} excess over 140,000]
“[Over P250,000 but «++ [P50,000 + 30% of the
not over 500,000] excess over P250,000]
“[Over P500,000] s+. [P125,000 + 32% of the
excess over P500,000)
“NOT OVER P1,000,000 we 10%
“OVER P1,000,000 BUT +++ P100,000 + 15% OF THE
NOT OVER P2,000,000 EXCESS OVER P1,000,000
“OVER P2,000,000 BUT s+ P250,000 + 20% OF THE
NOT OVER P3,000,000 EXCESS OVER P2,000,000
“OVER P3,000,000 +++ P450,000 + 25% OF THE

EXCESS OVER P3,000,000

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“xxx
“xxx
“PROVIDED, FINALLY, THAT NOT LATER THAN SIX (6) YEARS AFTER
‘THE EFFECTIVITY OF THIS ACT AND EVERY SIX (6) YEARS THEREAFTER, THE
PRESIDENT OF THE PHILIPPINES SHALL ADJUST THE TAXABLE INCOME
LEVELS AND NOMINAL TAX RATES HEREIN STATED TO ITS PRESENT VALUE
USING THE CONSUMER PRICE INDEX, AS PUBLISHED BY THE PHILIPPINE
STATISTICS AUTHORITY (PSA).”
SEC. 2. 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. ~ Except as otherwise provided in this Code, an income tax [of
thirty-five percent (35%)] is hereby imposed upon the taxable income derived cach 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 effective January 1, 2009, the rate of income tax
shall be thirty percent (30%)]. THE TAX SHALL BE COMPUTED IN ACCORDANCE
WITH AND AT THE RATES ESTABLISHED IN THE FOLLOWING SCHEDULE:

“NOT OVER P1,000,000 we 10%
“OVER P1,000,000 BUT s+ P100,000 + 15% OF THE
NOT OVER P2,000,000 EXCESS OVER P1,000,000
“OVER P2,000,000 BUT «+. P250,000 + 20% OF THE
NOT OVER P3,000,000 EXCESS OVER P2,000,000
“OVER P3,000,000 +++ P450,000 + 25% OF THE

EXCESS OVER P3,000,000

“PROVIDED, THAT A CORPORATE TAXABLE INCOME NOT EXCEEDING
ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00) SHALL BE EXEMPT
FROM INCOME TAX.”

“PROVIDED, FURTHER, THAT NOT LATER THAN SIX (6) YEARS AFTER
‘THE EFFECTIVITY OF THIS ACT AND EVERY SIX (6) YEARS THEREAFTER, THE
PRESIDENT OF THE PHILIPPINES SHALL ADJUST THE TAXABLE INCOME
LEVELS AND NOMINAL TAX RATES HEREIN STATED TO ITS PRESENT VALUE
USING THE CONSUMER PRICE INDEX, AS PUBLISHED BY THE PHILIPPINE
STATISTICS AUTHORITY (PSA).”

“KXX

SEC. 3. Section 35(A) of the National Intemal Revenue Code of 1997, as amended, is
hereby further amended to read as follows:

“SEC. 35, Allowance of Personal Exemption for Individual Taxpayer. —


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“(A) In General. — For purposes of determining the tax provided in Section 24 (A) of this
title, there shall be allowed a basic personal exemption amounting to [Fifty thousand pesos
(P50,000) for each individual taxpayer.) ONE HUNDRED FIFTY THOUSAND PESOS
(P150,000) FOR EACH INDIVIDUAL TAXPAYER.

[In the case of married individual where only one of the spouses is deriving gross income,
only such spouse shall be allowed the personal exemption] “MARRIED INDIVIDUALS
MAY FILE THEIR INCOME TAXES EITHER JOINTLY OR SEPARATELY. IN CASE
OF JOINT FILING, THE BASIC PERSONAL EXEMPTION MAY BE CLAIMED BY
BOTH SPOUSES. IN CASE OF SEPARATE FILING, A TAXPAYER MAY STILL
CLAIM THE PERSONAL EXEMPTION FOR THE SPOUSE NOTWITHSTANDING
THE FACT THAT THE LATTER IS NOT GAINFULLY EMPLOYED, HAD NO GROSS
INCOME AND DID NOT FILE A RETURN: PROVIDED, THAT THE SAID SPOUSE IS
LIVING EXCLUSIVELY WITH THE TAXPAYER.”

“PROVIDED, FURTHER, THAT NOT LATER THAN SIX (6) YEARS AFTER
‘THE EFFECTIVITY OF THIS ACT AND EVERY SIX (6) YEARS THEREAFTER, THE
PRESIDENT OF THE PHILIPPINES SHALL ADJUST THE AMOUNT HEREIN
STATED TO ITS PRESENT VALUE USING THE CONSUMER PRICE INDEX, AS
PUBLISHED BY THE PHILIPPINE STATISTICS AUTHORITY (PSA).”

SEC. 4, Implementing Rules and Regulations. - The Secretary of Finance, shall, upon the

recommendation of the Commissioner of Internal Revenue, promulgate not later than thirty (30)
days upon the effectivity of this Act the necessary rules and regulations for its proper and
effective implementation,

Sxc. 5. Separability Clause. - If any provision of this Act is declared unconstitutional or
invalid, other parts or provisions hereof not affected thereby shall continue to be in full force and
effect.

SEC. 6. Repealing Clause. - All laws, orders, issuances, circulars, rules and regulations or
parts thereof, which are inconsistent with the provisions of this Act are hereby repealed or
modified accordingly.

SEC. 7. Effectivity, - This Act shall take effect fifteen (15) days after its publication in the
Official Gazette or in at least two (2) newspapers of general circulation.

Approved,