Unformatted text preview: REPUBLIKA NG PILIPINAS
KAGAWARAN NG PANANALAPI KAWANIHAN NG RENTAS INTERNAS
November 26, 2008 REVENUE REGULATIONS NO. 16 - 2008
SUBJECT : IMPLEMENTING THE PROVISIONS OF SECTION 34(L) OF THE
TAX CODE OF 1997, AS AMENDED BY SECTION 3 OF REPUBLIC
ACT NO. 9504, DEALING ON THE OPTIONAL STANDARD
DEDUCTION (OSD) ALLOWED TO INDIVIDUALS AND
CORPORATIONS IN COMPUTING THEIR TAXABLE INCOME TO : ALL REVENUE OFFICERS AND OTHERS CONCERNED SECTION 1. SCOPE. - Pursuant to Sec. 244, in relation to Sec. 3 of Republic Act
No. 9504 (RA 9504) amending Sec. 34(L) of the Tax Code of 1997 (Code), as amended, these
Regulations are hereby promulgated in order to implement the provisions on Optional
Standard Deduction (OSD) for individuals and corporations.
SEC. 2. PERSONS COVERED. - The following may be allowed to claim OSD
in lieu of the itemized deductions (i.e. items of ordinary and necessary expenses allowed
under Sections 34 (A) to (J) and (M), Section 37, other special laws, if applicable):
Taxable estates and trusts
Resident foreign corporation
SEC. 3. DETERMINATION OF THE AMOUNT OF OPTIONAL STANDARD
DEDUCTION FOR INDIVIDUALS. - The OSD allowed to individual taxpayers shall be a
maximum of forty percent (40%) of gross sales or gross receipts during the taxable year. If
the individual is on the accrual basis of accounting for his income and deductions, the OSD
shall be based on the gross sales during the taxable year. On the other hand, if the individual
employs the cash basis of accounting for his income and deductions, the OSD shall be based
on his gross receipts during the taxable year.
It should be emphasized that the “cost of sales” in case of individual seller of
goods, or the “cost of services” in the case of individual seller of services, are not
allowed to be deducted for purposes of determining the basis of the OSD pursuant to this
Section inasmuch as the law (RA 9504) is specific as to the basis thereof which states
Page 1 of 8 that for individuals, the basis of the 40% OSD shall be the “gross sales” or “gross receipts”
and not the “gross income” .
For other individual taxpayers allowed by law to report their income and
deductions under a different method of accounting (e.g. percentage of completion
basis, etc.) other than cash and accrual method of accounting , the “gross sales” or
“gross receipts” pursuant to this Section shall be determined in accordance with said
acceptable method of accounting.
SEC. 4. DETERMINATION OF THE AMOUNT OF OPTIONAL STANDARD
DEDUCTION FOR CORPORATIONS. - In the case of corporate taxpayers subject to
tax under Sections 27(A) and 28(A)(1) of the Code, as amended, the OSD allowed shall
be in an amount not exceeding forty percent (40 %) of their gross income.
For purposes of these Regulations, “Gross Income” shall mean the gross sales less
sales returns, discounts and allowances and cost of goods sold. “Gross sales” shall include
only sales contributory to income taxable under Sec. 27(A) of the Code. “Cost of goods sold”
shall include the purchase price or cost to produce the merchandise and all expenses directly
incurred in bringing them to their present location and use.
For trading or merchandising concern, “cost of goods sold” means the invoice cost of
goods sold, plus import duties, freight in transporting the goods to the place where the goods
are actually sold, including insurance while the goods are in transit.
For manufacturing concern, “cost of goods sold” means all costs incurred in the
production of the finished goods such as raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials
to the factory or warehouse. The term may be used interchangeably with “cost of goods
manufactured and sold”.
In the case of sellers of services, the term “gross income” means the “gross receipts”
less sales returns, allowances, discounts and cost of services. “Cost of services” means all
direct costs and expenses necessarily incurred to provide the services required by the
customers and clients including (a) salaries and employee benefits of personnel, consultants
and specialists directly rendering the service, and (b) cost of facilities directly utilized in
providing the service such as depreciation or rental of equipment used and cost of supplies:
Provided, however, that “cost of services” shall not include interest expense except in the
case of banks and other financial institutions. The term “gross receipts” as used herein means
amounts actually or constructively received during the taxable year. However, for taxpayers
engaged as sellers of services but employing the accrual basis of accounting for their income,
the term “gross receipts” shall mean amounts earned as gross revenue during the taxable year.
The items of gross income under Section 32(A) of the Code, as amended, which are
required to be declared in the income tax return of the taxpayer for the taxable year are part of
the gross income against which the OSD may be deducted in arriving at taxable income.
Passive incomes which have been subjected to a final tax at source shall not form part of the
gross income for purposes of computing the forty percent (40%) optional standard deduction.
For other taxpayers allowed by law to report their income and deductions
under a different method of accounting (e.g. percentage of completion basis, etc.)
Page 2 of 8 other than cash and accrual method of accounting , the “gross income” pursuant to
this Section shall be determined in accordance with said acceptable method of
SEC. 5. ILLUSTRATIVE EXAMPLES IN DETERMINING THE BASIS
OF THE 40% OSD FOR INDIVIDUALS AND CORPORATIONS. – Suppose
a retailer of goods, whose accounting method is under the accrual basis, has a
gross sales of P1,000,000.00 with a cost of sales amounting to P800,000. The
computation of the OSD for individuals and corporations shall be determined as
If Individual P 1,000,000 P 1,000,000 ___________ Gross Sales If Corporation 800,000
____________ Less: Cost of Goods Sold Basis of the OSD P1,000,000 P 200,000 X OSD Rate (maximum) .40
___________ OSD Amount P 400,000
========== If the taxpayer opts to use the OSD in lieu of the itemized deduction
allowed under Section 34 of the Code, as amended, his/ its net taxable income shall
be as follows :
Gross Sales If Corporation P 1,000,000 P 1,000,000 Less : Cost of Sales ___________ 800,000
___________ Gross Sales/Gross Income P 1,000,000 P 200,000 Less : OSD (maximum) 400,000
========== Net Income Page 3 of 8 SEC. 6. DETERMINATION OF THE OPTIONAL
DEDUCTION FOR GENERAL PROFESSIONAL PARTNERSHIPS (GPPs) AND
PARTNERS OF GPPs. – Pursuant to Sec. 26 of the Code, a GPP is not subject to
income tax imposed under Title II thereof. However, the partners shall be liable to
pay income tax on their separate and individual capacities for their respective
distributive share in the net income of the GPP.
Sec. 26 of the Code likewise provides that- “For purposes of computing the
distributive share of the partners, the net income of the GPP shall be computed in the
same manner as a corporation.” As such, a GPP may claim either the itemized
deductions allowed under Section 34 of the Code or in lieu thereof, it can opt to avail
of the OSD allowed to corporations in claiming the deductions in an amount not
exceeding forty percent (40 %) of its gross income. The net income determined by
either claiming the itemized deduction or OSD from the GPP’s gross income is the
distributable net income from which the share of each partner is to be determined. Each
partner shall report as gross income his distributive share, actually or constructively
received, in the net income of the partnership.
The GPP is not a taxable entity for income tax purposes since it is only acting as a
“pass-through” entity where its income is ultimately taxed to the partners comprising it.
In computing taxable income defined under Section 31 of the Code, the individual partner
can still claim either itemized deductions or optional standard deduction from his share in
the net income of the GPP because said share is considered as gross income in the hands
of the partner (Section 32(A)(11) and Section 26, NIRC). If the GPP availed of the
itemized deduction in computing its net income, the partners may still either claim
itemized deduction or OSD from said share, provided, that, in claiming itemized
deductions, the partner is precluded from claiming expenses already claimed by the GPP.
In fine, if the GPP claimed itemized deductions and a partner is also claiming itemized
deductions, the deductions allowed to the partner must be the ordinary and necessary
expenses for the practice of profession which were not yet claimed by the GPP in
computing its net income. The GPP and each of the partners are entitled to their own
election of deductions to claim during the taxable year thereby resulting to four
possibilities, namely: (1) the GPP may claim itemized deductions in computing net
income and a partner may also claim itemized deductions in computing his taxable
income; or (2) the GPP may claim OSD in computing net income while a partner may
claim itemized deductions in computing his taxable income; or (3) the GPP may claim
itemized deductions in computing net income while a partner may claim OSD in
computing his taxable income; or (4) the GPP may claim OSD in computing net income
and a partner may also claim OSD in computing his taxable income. SEC.7. OTHER IMPLICATIONS OF THE OPTIONAL STANDARD
DEDUCTION. – A taxpayer who elected to avail of the OSD not exceeding forty percent
(40%) of gross sales or gross receipts, in case of an individual taxable under Secs. 24(A)
and 25(A)(1) of the Tax Code, or forty percent (40%) of gross income, in case of a
corporation subject to tax under Sec. 27(A) or 28(A)(1) of the same Code shall signify in
his/its return such intention, otherwise he/it shall be considered as having availed
himself of the itemized deductions allowed under Sec. 34 of the Code. Once the election
to avail the OSD is signified in the return, it shall be irrevocable for the taxable year for
which the return is made. This means that a taxpayer who initially filed a return availing
Page 4 of 8 OSD is precluded from amending said return in order to shift to the itemized deductions.
An individual taxpayer who is entitled to and claimed the OSD shall not be required to
submit with his tax return such financial statements otherwise required under the Code.
Provided, that, except when the Commissioner otherwise permits, the said individual
shall keep such records pertaining to his gross sales or gross receipts. In the case of a
corporation, however, said corporation is still required to submit its financial
statements when it files its annual income tax return and to
keep such records
pertaining to its gross income as herein defined.
In the filing of the quarterly income tax returns, the taxpayer may opt to use
either the itemized deduction or OSD. However, in filing the final adjustment income
tax return, the taxpayer must make a choice as to what method of deduction it or
he shall employ for the purpose of determining its/his taxable net income for the
entire year. The taxpayer is, thus, not allowed to use a hybrid method of claiming
its/his deduction for one taxable year.
SEC. 8 . TRANSITORY PROVISIONS. - For taxable period 2008 which is
the initial year of the implementation of the 40% OSD under RA 9504 which
modified the OSD for individuals from 10% of gross income to 40% of gross sales/
gross receipts and introduced the OSD as an alternative deduction for corporations,
the 40% maximum deduction shall only cover the period beginning the effectivity
of RA 9504. RA9504 became effective July 06, 2008. However, in order to simplify
and provide ease of administration during the transition period, July 1, 2008 shall
be considered as the start of the period when the 40% OSD may be allowed.
In the case of an individual taxpayer, he is given the option to either use the
itemized method of deduction or the 40% OSD in the filing of his quarterly
income tax return covering the third quarter ending September 30, 2008. However, if
in the filing of his annual income tax return and he chooses OSD to be his method
of deduction, the rate of OSD to be applied for the period covering January 2008
to June 30, 2008 shall only be 10% of gross income (i.e., where gross income is
determined by deducting cost of sales from the gross sales or gross receipts ) while
the rate of OSD for the period covering July 01, 2008 to December 31, 2008 shall
be 40% of gross sales/gross receipts.
Example. - Mr. ERA, a retailer of goods, uses the accrual method of
accounting in reporting his income and expenses.
For the period January to June
30, 2008, he reported his net income using the itemized method of deduction where
his gross sales for the period amounted to P1,000,000 and his cost of sales for same
period amounted to P600,000. With the effectivity of RA 9504, he decided to use the
40% OSD in claiming his business expenses for the third quarter covering July
01 to September 30, 2008. His gross sales for said period amounted to P700,000
where he claimed a 40% OSD (P700,000 x 40%) or P280,000 in lieu of his actual
business expenses of P250,000 consisting of cost of sales of P200,000 and P50,000
operating expenses. For the last quarter of Year 2008, his gross sales amounted to
P900,000 while his cost of sales for the same last quarter amounted to P500,000. If
Mr. ERA decides to use the OSD method of deduction when he files his annual
income tax return, his net income under the OSD method of determining deduction
shall be as follows: Page 5 of 8 (a) To compute for OSD allowed for the various periods covering the Year 2008 Jan. to June 30
Gross Sales July 01 to Sept. P 1,000,000 Less : Cost of Sales P 700,000 600,000
____________ Gross Sales / Gross Income P - P 900,000
- ____________ ___________ 400,000 P 700,000 P 900,000 .10 .40 .40 X OSD rate (maximum) ____________ ____________ P OSD Oct . to December P 40,000 ========== ____________ 280,000 P 360,000 =========== =========== (b) To compute for the net income of Mr. ERA under OSD the same shall be
determined as follows :
Gross Sales (January to December 2008) P2,600,000 (P1,000,000 plus P700,000 plus P900,000)
Less : Cost of Sales
(from January to June 30, 2008) 600,000 Less : OSD
(P 40,000 plus P280,00 plus P 360,000) 680,000
---------------- Net Income for Year 2008 P 1,320,000
========= As can be gleaned from the above illustration,
allowed to compute his net income for Year 2008
deduction and partly by using OSD. The choice of
only be for one method of deduction (i.e., either
applied for the entire year of Year 2008. an individual taxpayer is not
partly by claiming itemized
deduction to be used shall
itemized or OSD) to be The provisions of Sec. 6 above preventing the use of the hybrid method of
deduction for the entire taxable year, notwithstanding, a corporate taxpayer who opts Page 6 of 8 to use the OSD method in claiming its deductions when filing its annual income tax
return for Year 2008 shall be allowed to use the 40% OSD only in respect to the
period beginning July 01, 2008 while the method of deduction to be used prior
thereof shall remain to be under the itemized deduction method.
Example. - GSV Corporation, a retailer of goods, uses the accrual method
of accounting in declaring its income and expenses under calendar year basis. For
the period January to June 30, 2008, it reported its net income using the itemized
method of deduction where its gross sales for the period amounted to P1,000,000
and its cost of sales for same period amounted to P600,000 as well as operating
expenses of P100,000. With the effectivity of RA 9504, it decided to use the 40%
OSD in claiming its business expenses for the third quarter covering July 01 to
September 30, 2008. Its gross sales for said period amounted to P700,000 where it
claimed a 40% OSD of gross income with cost of sales amounting to P 300,000 or
P160,000 (i.e, P700,000 less P300,000 = P400,000 x 40% ) in lieu of its actual
operating expenses of P50,000. For the last quarter of Year 2008, its gross sales
amounted to P900,000 while its cost of sales for the same last quarter amounted to
P600,000 and operating expenses of P150,000. If GSV Corporation decides to use
the OSD method of deduction when it files its annual income tax return, its net
income for the year shall be computed as follows:
(a) To compute for OSD allowed for the period from July 06 to December
July 01 to Sept.
Gross Sales Oct. to December P 700,000 Less : Cost of Sales
Gross Sales / Gross Income 300,000
______________ P 400,000 P 300,000 .40 .40 X OSD rate (maximum) _____________
OSD P 900,000 P 160,000 ============ ______________
============ (b) To compute for the net income of GSV Corporation , the net income for the
period from January 1 to July 05, 2008 shall be computed using the itemized method
of deduction while the 40% OSD shall be applied for the period covering July 06,
2008 to December 31, 2008.
Gross Sales (January to December 2008) (P1,000,000 plus P700,000 plus P900,000)
Less : Cost of Sales
January to June 30 P 600,000 Page 7 of 8 P2,600,000 July 01 to September 30 300,000 October 1 to December 31 600,000 _ 1,500,000 Gross Income P 1,100,000 Less : Deductions
from January to June 30) 100,000 Optional Standard Deduction (OSD)
(July 01 to September 30) P160,000
(October 1 to December 31) 120,000 280,000 380,000
_________________ Net Income of GSV Corporation P 720,000
========== SEC. 8. REPEALING CLAUSE. - All regulations, rules, orders or portions
thereof which are inconsistent with the provisions of these Regulations are hereby
amended, modified or repealed accordingly.
SEC. 9. EFFECTIVITY CLAUSE. - These Regulations shall take effect on July
6, 2008, the effectivity date of R.A. No. 9504.
MARGARITO B. TEVES
Secretary of Finance Recommending Approval:
SIXTO S. ESQUIVIAS IV
Commissioner of Internal Revenue Page 8 of 8 ...
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