BIR REVENUE REGULATIONS NO. 16-2008, November 26, 2008
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…
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.
SECTION 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):
1. Individuals:
i. Resident Citizen
ii. Non-resident citizen
iii. Resident Alien
iv. Taxable estates and trusts2. Corporations:
i. Domestic corporation
ii. Resident foreign corporation
SECTION 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 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.
SECTION 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 ) (I) 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.) other than cash and accrual method of
accounting, the “gross income” pursuant to this Section shall be
determined in accordance with said acceptable met hod of accounting.
SECTION 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 follows:
x OSD Rate (maximum)
.40
.40
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
Less: Cost of Sales
—
800, 000Basis of the OSD
x OSD Rate (maximum)
400,000
80,000Net Income
SECTION 6. Determination of the Optional Standard 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 GP P. 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.
SECTION 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 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.
SECTION 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. RA 9504
became effective July 6, 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 of the same
last quarter amounted to P500,000. If M r. 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:
(a) To compute for OSD allowed for the various periods covering the Year 2008 –
Gross Sales Less: Cost of Sales ————- ————- ————- Gross Sales/ Gross Income X OSD rate (maximum) OSD
(b) To compute for the net income of MR. ERA under OSD the same shall be determined as follows:
(P1,000,000 plus P700,000 plus P900,000)
Cost of Sales (from January to June 30, 2008)
OSD (P40,000 plus P280,000) plus P360,000
As can be gleaned from the above illustration, an individual taxpayer
is not allowed to compute his net income for Year 2008 partly by
claiming itemized deduction and partly by using OSD. The choice of
deduction to be used shall only be for one method of deduction (i.e.,
either itemized or OSD) to be applied for the entire year of Year 2008.
The provisions of Sec. 6 above preventing the use of t he hybrid
method of deduction for the entire taxable year, notwithstanding, a
corporate taxpayer who opts 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 28, 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 costs of sales
amounting to P300,000 or P160,000 (i.e. P700,00 less P300,000 = P400,000
x 40%) in lieu of its actual operating expenses of 50,000. 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 31, 2008.
(b) To compute for the net income of GSV Corporation, the net income
for the period from January 1 to July 5, 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.
(P1,000,000 plus P700,000 plus P900,000)
________________________________________
SECTION 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.
SECTION 9. Effectivity Clause – These Regulations shall take effect on July 6, 2008, the effectivity date of R.A. No. 9504.
Adopted: 26 Nov. 2008
(SGD.) MARGARITO B. TEVES
Secretary of Finance
Recommending Approval:
(SGD.) SIXTO S. ESQUIVIAS IV
Commissioner of Internal Revenue