Publishing the Full Text of Republic Act No. 7496 which Provides for a Simplified Net Income Taxation Scheme (SNITS) for the Self-Employed and Professionals Engaged in the Practice of Their Profession, Amending Further for This Purpose, Sections 21 and 29 of the National Internal Revenue Code, as Amended

May 27, 1992 REVENUE MEMORANDUM CIRCULAR NO. 25-92 SUBJECT : Publishing the Full Text of Republic ActNo.7496 which Provides for a Simplified NetIncomeTaxation Scheme (SNITS) for the Self-Employed and Professionals Engaged in the Practice of Their Profession, Amending Further for This Purpose, Sections 21 and 29 of the National InternalRevenueCode, as Amended TO : All Internal Revenue Officers and Others Concerned For the information and guidance of all concerned, quoted hereunder is the full text of Republic Act No. 7496: "REPUBLIC ACTNO.7496 "AN ACT ADOPTING THE SIMPLIFIED NET INCOMETAXATION SCHEME FOR THE SELF-EMPLOYED AND PROFESSIONALS ENGAGED IN THE PRACTICE OF THEIR PROFESSION, AMENDING SECTIONS 21 AND 29 OF THE NATIONAL INTERNALREVENUECODE, AS AMENDED. "Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled: "Sec. 1. It is hereby declared the policy of the State to have a uniform and equitable tax system as mandated by the Constitution. The tax structure must be such that all tax groups shall pay their fair share of taxes. The higher income groups shall bear a higher tax burden than the low income groups. "Sec. 2. As used herein, the term: "(a) 'Self-employed' means persons engaged in business and who derive their personal income from such business. This includes single proprietorships, i.e., manufacturers, traders, market vendors, owners of eateries, farmers and service shops; and "(b) 'Professionals' means persons who derived 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 and other similarly situated. The term 'professionals' also refers to one who pursues an art and makes his living therefrom such as artists, athletes and others similarly situated. "Sec. 3. The first sub-paragraph of Section 21(a) of the National InternalRevenueCode, as amended, is hereby further amended to read as follows: "(a) Taxable compensation income. A tax is hereby imposed upon the taxable compensation income as defined in Section 27, other than the incomes subject to tax under paragraphs (b), (c), (d), (e) and (f) of this section, received during each taxable year from all sources determined in accordance with the following schedule: Not over P2,500 0% "Over P2,500 but not over P5,000 1% "Over P5,000 but not over P10,000 P25 + 3% of excess over P5,000 "Over P10,000 but not over P20,000 P175 + 7% of excess over P10,000 "Over P20,000 but not over P40,000 P875 + 11% of excess over P20,000 "Over P40,000 but not over P60,000 P3,075 + 15% of excess over P40,000 "Over P60,000 but not over P100,000 P6,075 + 19% of excess over P60,000 "Over P100,000 but not over P250,000 P13,675 + 24% of excess over P100,000 "Over P250,000 but not over P500,000 P49,675 + 29% of excess over P250,000 "Over P500,000 P122,175 + 35% of excess over P500,000 "Sec. 4. A new paragraph to be known as paragraph (f) is hereby inserted at the end of Section 21 of the National InternalRevenueCode, as amended, which shall read as follows: "(f) Simplified Net Income Tax for the Self-employed and for Professionals Engaged in the Practice of Profession . A tax is hereby imposed upon the taxable net income as determined in Section 27 received during each taxable year from all sources, other than income covered by paragraphs (b), (c), (d) and (e) of this section by every individual whether a citizen of the Philippines or an alien residing in the Philippines who is self-employed or practices his profession therein, determined in accordance with the following schedule: "Not over P10,000 3% "Over P10,000 but not over P30,000 P300 + 9% of excess over P10,000 "Over P30,000 but not over P120,000 P2,100 + 15% of excess over P30,000 "Over P120,000 but not over P350,000 P15,600 + 20% of excess over P120,000 "Over P350,000 P61,600 + 30% of excess over P350,000 "Sec. 5. The opening paragraph of Section 29 of the National InternalRevenueCode, as amended, is hereby further amended to read as follows: "In computing taxable income subject to tax under Sections 21(a); 24(a), (b), and (c); and 25(a)(1), there shall be allowed as deductions the items specified in paragraphs (a) to (i) of this section: Provided, however , That in computing taxable income subject to tax under Section 21(f) in the case of individuals engaged in business or practice of profession, only the following direct costs shall be allowed as deductions: "(a) Raw materials, supplies and direct labor; casia "(b) Salaries of employees directly engaged in activities in the course of or pursuant to the business or practice of their profession; "(c) Telecommunications, electricity, fuel, light and water; "(d) Business rental; "(e) Depreciation; "(f) Contributions made to the Government and accredited relief organizations for the rehabilitation of calamity-stricken areas declared by the President; and "(g) 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. "For individuals whose cost of goods sold and direct costs are difficult to determined, including professionals as herein defined, a maximum of forty percent (40%) of their gross receipts shall be allowed as deductions to answer for business or professional expenses as the case may be. "Sec. 6. The Secretary of Finance, upon the recommendation of the Commissioner of Internal Revenue, shall promulgate and publish the necessary rules and regulations for the effective implementation of the provisions of this Act. "Sec. 7. If any provision of this Act is declared unconstitutional or the application thereof to any person, circumstance or transaction is held invalid, the validity of the remaining provisions of this Act or the applicability of such provision to other persons, circumstances or transactions shall not be affected thereby. "Sec. 8. The provisions of Sections 21 and 29 of the National InternalRevenueCode, as amended, and all other laws, decrees, orders, rules and regulations, or parts thereof, inconsistent with this Act are hereby repealed or amended accordingly. "Sec. 9. After three (3) years from the effectivity of this Act, the Commissioner of Internal Revenue may implement a withholding tax scheme to further enhance the taxation of the self-employed and professionals as defined under this Act. "In furtherance of this section the Secretary of Finance, upon the recommendation of the Commissioner of Internal Revenue, shall issue and publish the implementing rules and regulations to implement this mandate. "Sec. 10. This Act shall take effect upon its approval. "Approved, xxx xxx xxx "Approved: May 15, 1992 (SGD) CORAZON C. AQUINO President of the Philippines" SALIENT FEATURES (1) Section 21(f) of the National Internal Revenue Code, as amended by Republic Act No. 7496, now subjects to a Simplified Net Income Taxation (SNIT), the taxable income received during each taxable year from all sources, exclusive of the following, viz: (a) foreign source gross income derived by a non-resident citizen; (b) certain passive incomes, i.e., interest income/yield from Philippine currency bank deposits and deposit substitute instruments; royalties; prizes exceeding P3,000 and winnings (except Philippine Charity Sweepstakes winnings); dividends received from domestic corporation and share of the individual partner in a partnership subject to income tax under Section 24(a), NIRC; aisa dc (c) capital gains from sales of shares of stock; and (d) capital gains from sales of real property by every individual, whether a citizen of the Philippines or an alien residing in the Philippines who is self-employed or a professional engaged in the practice of his profession therein, at a new schedular income tax rates of 3% to 30%. (2) Individuals, whether citizens or residents, who are pure compensation income earners shall as usual be subject to the schedular income tax rates of 0% to 35% imposed under Section 21(a) of the NIRC as amended on their taxable compensation income (exclusive of the incomes covered by items (1)(a) to (d) above-enumerated and SNIT) received during each taxable year from all sources, and consequently to the withholding tax on wages prescribed by Section 72 in relation to Section 21(a), both of the NIRC as amended and implemented by Revenue Regulations No. 6-82 as amended. (3) The SNIT of professionals and self-employed may also be subject to a withholding tax scheme after three (3) years from effectivity of R.A. No. 7496. (4) Only the following direct costs shall be allowed as deductions for purposes of computing the taxable income subject to the SNIT, viz: (a) Raw materials, supplies and direct labor; (b) Salaries of employees directly engaged in activities in the course of or pursuant to the business or practice of their profession; (c) Telecommunications, electricity, fuel, light, and water; (d) Business rental; (e) Depreciation; (f) Contributions made to the Government and accredited relief organizations for the rehabilitation of calamity-stricken areas declared by the President; and (g) 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. For individuals whose cost of goods sold and direct costs are difficult to determine, including professionals as herein defined, a maximum of forty percent (40%) of their gross receipts shall be allowed as deductions to answer for business or professional expenses as the case may be. For purposes of the SNIT, R.A. No. 7496 amending Sections 21 and 29 of the NIRC defines the terms "Self-employed" and "Professionals". It is desired that this Circular be given as wide a publicity as possible. (SGD.) JOSE U. ONG Commissioner of Internal Revenue