SECTION 1.       Scope - Pursuant to Section 245 of the National Internal Revenue Code (NIRC), as amended, in relation to Section 6 of Republic Act No. 7496, the following regulations are hereby promulgated to implement the provisions of said Act.  These regulations shall govern the income taxation of resident citizens and aliens who are self employed and/or professionals engaged in the practice of their profession; non-resident aliens; estates and trusts engaged in trade or business; general professional partnerships as defined under Section 20 (b) of the NIRC, as amended, and their individual partners.

SECTION 2. Definitions - For purposes of these regulations, the following terms and phrases shall be construed to have the following meanings:

(1) Accredited Financial Institutions - shall refer to institutions duly accredited as such by the Central Bank.

(2) Accredited Relief Organizations - shall refer to associations and/or organizations duly accredited as such by the Department of Social Welfare and Development (DSWD) and the Bureau of Internal Revenue (BIR).

(3) Business Rental - compensation for use or profession, for the purpose of the trade, profession or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.

(4) Cost of Goods Sold/Cost of Sales - refers to the amount which a manufacture, trader or service concern deducts from his gross sales/revenue representing his cost of capital.

(5)     Direct Costs - shall include ordinary and necessary expenses which are incurred in connections with the taxpayer's trade or business and practice of profession during a taxable year.  These are the deductions enumerated in Section 3 (B) hereof.

(6)     Fuel - is a substance used to produce light, heat or power such as charcoal, gas, gasoline, coal and the like.

(7)     Direct Labor - the compensation for all labor that is traceable to the finished goods.

(8)     Professionals - refer to persons who derive their income from the practice of their profession.  This includes lawyers and other persons who are registered with the Professional Regulations Commission (PRC) such as doctors, dentists, certified public accountants and others 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.

(9)     Raw Materials - goods purchased for use as an ingredient or component part of a finished product.  They range from goods in their natural/original state requiring further processing or fabrication, to intermediate and finished parts that may be assembled without further processing.  The cost of raw materials shall include freight and insurance paid or incurred by the buyer.

(10)   Salary - the compensation paid for personal services actually rendered in connection with the taxpayer's trade or business and practice of profession.

(11)   Supplies - refer to something used directly in carrying on work.  They include articles necessary for enabling an existing entity to function properly.

(12)   Self-employed - means a person engaged in trade or business or performs services for others for a fee and who derives personal income from such trade or business or from the performance of such services.  The term includes but is not limited to single proprietorships engaged in trade or business as manufacturers, traders, market vendors, owners of eateries, and farmers as well as owners of service shops, brokers, agents, and other persons similarly situated.

(13)   Telecommunications Cost - the cost of all communications done at a distance such as telephone, radiogram, "fax," telegram, cable and other telecommunication devices.

SECTION 3. Computation of Income Tax Under SNITS - (A) Coverage and Rates - A tax is hereby imposed on the taxable income as determined in Section 27 of the NIRC, received during each taxable year from all sources, other than from the following:

1) compensation income [Sec. 21 (a), NIRC];

2) foreign source income derived by a non-resident citizen [Sec. 21 (b)];

3) certain passive incomes, i.e., interest income/yield from Philippine currency bank deposits and deposit substitute instruments; royalties; prizes exceeding P3,000 and winnings; dividends received from domestic corporation and share of the individual partner in a partnership subject to income tax under Section 24 (a), NIRC [Sec. 21 (c)];

4) capital gains from sales of shares of stock [Sec. 21 (d)]; and

5) capital gains from sales of real property [Sec. 21 (e)].

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, computed 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

B. Allowable deductions - In computing the taxable income subject to income tax under Section 21 (f), NIRC, only the following direct costs shall be allowed as deductions:

1. Raw Materials, supplies and direct labor;
   
   
2. Salaries of employees directly performing services for the taxpayer in the course or pursuant to his business or practice of his profession.  This includes salaries and wages paid for janitorial, security, bookkeeping, administrative and sales personnel, by a self-employed taxpayer or a professional in the exercise of his profession.
   
   
3. Telecommunication, electricity, fuel, light and water;
   
   
4. Business rental;
   
   
5. Depreciation;
   
   
6. Contribution made to the Government and accredited relief organizations for the rehabilitation of calamity-stricken areas declared by the President.
   
   The deductibility of the contributions is based on two criteria, to wit:
   

   i)          The donee or recipient must be the government or accredited relief organization; and
   
   ii)         The contribution must be utilized for the rehabilitation of calamity-stricken areas declared by the President.

   The term Government as used in the law refers to the Government of the Philippines or any of its agencies or political subdivisions and includes:
   
   i)          Departments, agencies, bureaus, commissions and authorities, including state colleges and universities;
   
   ii)         Autonomous regions, provincial, city of municipal governments;
   
   
7. Interest paid or accrued within a taxable year on loans contracted from accredited financial institutions which must be proven to have been paid or incurred in connection with the conduct of a taxpayer's profession, trade or business.

(C) Forty Per Cent (40%) Maximum Deduction Rule - In determining the allowable deductions from gross income, Section 29, NIRC, as amended by R.A. No. 7496 provides:

"For individuals whose cost of goods sold and directs costs are difficult to determine, a maximum of forty per cent (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 this Act, the term Gross receipts shall mean gross sales, in the case of seller of goods, or gross revenue in the case of seller of services.  When the cost of goods sold and deductions are difficult to determine, a 40% maximum deductions based on gross receipts shall be allowed and deducted from gross sales/revenue.

The taxpayer shall determine whether his cost of goods sold and direct cost are difficult to determine at the time he files his income tax return.  A taxpayer who elected to claim the itemized deduction under SNITS, but who upon subsequent audit by the BIR cannot substantiate any or all of the expenses with the proper receipts shall not be allowed to revert to and claim the 40% maximum deduction. Such selection when made in the return shall be irrevocable for the taxable year for which the return was made.

SECTION 4.       Personal and Additional Exemptions - Self-employed and professionals shall, in addition to the direct costs, be allowed to deduct from their gross income personal and additional exemptions as follows:


Provided, that in case only one of the spouses is deriving taxable income, only said spouse shall be allowed to avail of the basic personal exemption of P18,000 for married individual.  A spouse who does not have any taxable income shall not be entitled to personal exemption of P18,000.

A married individual or a head of a family shall be allowed an additional exemption of five thousand pesos (P5,000) for each dependent; Provided, that the total number of dependents for which additional exemptions may be claimed shall not exceed four dependents; Provided, further, that the additional exemption for dependents shall be claimed by only one of the spouses in the case of married individuals.

The husband shall be deemed head of the family and proper claimant of the additional exemption in respect to any dependent children, unless he explicitly waives his right in favor of his wife in the withholding exemption certificate.

When the taxpayer receives mixed income (compensation and business/professional income) the personal and additional exemptions shall first be deducted from compensation income and any excess therefrom, from business or professional income.

SECTION 5. Other Income - Income received by taxpayers mentioned in Section 1 from all sources other than from sources (1) to (5) enumerated in Section 3 (A) hereof, shall be subject to income tax at the rates prescribed under Section 21 (f) of the NIRC and Sec. 3 of these regulations.  On the other hand, if the recipient of other income like gain from sale of motor vehicle is a compensation earner, such gain or income shall be subject to tax under Section 21(a) of the NIRC, i.e. 0 to 35% X taxable compensation income and other income less personal and additional exemptions.

SECTION 6.       General Professional Partnership - The general professional partnership (GPP) and the partners comprising the GPP are covered by R.A. No. 7496.  Thus, in determining the net profit of the partnership, only the direct costs mentioned in said law are to be deducted from partnership income.  Also, the expenses paid or incurred by partners in their individual capacities in the practice of their profession which are not reimbursed or paid by the partnership but are not considered as direct cost, are not deductible from his gross income.

SECTION 7.       Estates and Trust -Taxable income as determined in Section 27 of the NIRC of estates and trusts engaged in trade or business shall be subject to income tax at the rates prescribed by Section 21 (f) of the NIRC and also Section 3 of these regulations.

SECTION 8.       Repealing Clause - All regulations, orders, and other issuances, or portions thereof, inconsistent with the provisions of these regulations are hereby revoked or modified accordingly.

SECTION 9.       Effectivity - These regulations shall take effect fifteen (15) days after publication in a newspaper of general circulation and shall apply to income covering the entire calendar year 1992, and with respect to deductions, this Act shall apply only to direct costs paid or incurred on or after July 28, 1992.

Adopted: 20 Jan. 1993

(Sgd.) RAMON R. DEL ROSARIO, JR.
Secretary of Finance