Under the advent of Republic Act No. 8424 otherwise known as “The Tax Reform Act of 1997” (RA 8424), OSD is applicable only to individual taxpayers engaged in trade or business, or engaged in the practice of profession. It is computed at ten percent (10%) based on the gross profit after deducting the cost of sales or cost of service like the illustration below based on assumed figures:
Gross sales/receipts P220,000
Less: Sales returns, discounts & allowances 20,000
Net Sales P200,000
Less: Cost of sales/service 70,000
Gross profit P130,000
OSD rate 10%
Allowable deduction – OSD P 13,000
Based on the amendment of Republic Act No. 8424 introduced by Republic Act No. 9337 (RA 9337), OSD is now applied at forty percent (40%) of net sales without deducting cost of sales or service for individuals, or forty percent (40%) based on gross profit after deducting cost of sales or service for corporations. In short, the amendment made the following changes:
Applying the above figures, OSD for INDIVIDUAL will now be as follows:
OSD rate 40%
Allowable deduction – OSD P 80,000
On the other hand, OSD for CORPORATE taxpayer will be computed like individual taxpayer under RA 8424, except that the rate is 40% and not 10% illustrated below:
OSD rate 40%
Allowable deduction – OSD P 52 ,000
You may try to work on other figures to master the above OSD formulas. I likewise suggest that you consult a professional to ensure correct application of OSD on your quarterly and annual income tax returns.
Note: Article published before TRAIN or R.A. No. 10963 effective January 2018.
Tax Savings under OSD.
Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may also please send mail at info(@)taxacctgcenter.ph, or you may post a question at Tax and Accounting Center Forum and participate therein.
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