Definitions of Key Terms
- "Self-employed" refers to persons engaged in business deriving personal income from such business, including single proprietorships such as manufacturers, traders, market vendors, eatery owners, farmers, and service shops.
- "Professionals" are individuals who derive income from their professional practice, including registered professionals (lawyers, doctors, dentists, accountants) and those practicing a craft or art (artists, athletes).
Amendment on Taxable Compensation Income (Section 3)
- Revises tax schedule for taxable compensation income with graduated rates from 0% for incomes up to P2,500 to 35% for incomes exceeding P500,000.
- Specifies detailed graduated tax brackets applicable to taxable compensation income not covered under other enumerated paragraphs.
Introduction of Simplified Net Income Tax (Section 4)
- Imposes a simplified net income tax on self-employed individuals and professionals practicing their profession in the Philippines.
- Tax is computed on taxable net income, with a graduated rate starting at 3% for income up to P10,000, to 30% for income over P350,000.
- Applies regardless of citizenship status, covering Filipino citizens and resident aliens.
Deductions Allowed for Self-employed and Professionals (Section 5)
- Allows specific direct costs as deductions in computing taxable income under the simplified scheme:
- Raw materials, supplies, and direct labor
- Salaries of employees directly engaged in business or profession
- Utilities including telecommunications, electricity, fuel, light, and water
- Business rental expenses
- Depreciation
- Contributions for calamity rehabilitation to government-accredited organizations
- Interest on loans from accredited financial institutions incurred in business or profession
- For individuals with difficult-to-determine direct costs (including professionals), a maximum of 40% of gross receipts is allowed as deduction for business or professional expenses.
Rulemaking Authority (Section 6)
- Grants the Secretary of Finance, upon recommendation by the Commissioner of Internal Revenue, the authority to promulgate necessary rules and regulations for the effective implementation of the Act.
Severability Clause (Section 7)
- States that if any provision is declared unconstitutional or invalid, it will not affect the validity of the other provisions or their application to other persons or circumstances.
Repealing and Amending Clauses (Section 8)
- Repeals or amends inconsistent provisions of Sections 21 and 29 of the National Internal Revenue Code or other laws, decrees, orders, or rules.
Future Implementation of Withholding Tax Scheme (Section 9)
- Provides that after three years from the Act's effectivity, the Commissioner of Internal Revenue may implement a withholding tax scheme to improve taxation of self-employed and professionals.
- Mandates the issuance of implementing rules and regulations by the Secretary of Finance upon recommendation of the Commissioner.
Effectivity (Section 10)
- The Act takes effect immediately upon approval.