LAST July 11, 2024, I was one of the panelists at the 11th PICPA-Cebu Summit, where I discussed the pending House Bill 4339 or the Passive Income and Financial Intermediary Taxation Act Bill (PIFITA), which seeks to reform the taxation of capital income and financial services. Approved on third and final reading by the House of Representatives on Nov. 14, 2022, the PIFITA was a welcome development that recently, hearings on the PIFITA Bill at the Senate Ways and Means Committee have resumed.
In terms of capital markets, the Philippines lags behind its neighbors. Among the factors identified to be the reason for this are our high taxes and complicated tax structure. Studies have shown that Philippine taxes on transactions are high and are almost certainly restricting volume and liquidity.
Albay 2nd District Rep. Joey Salceda was quoted to have said that “[t]he Philippine Stock Exchange has the fewest listed companies of all Asean-6 economies, with just 275 listed companies, with the second lowest already being Singapore, with some 640 listed companies. Since the stock transaction tax was increased from 0.5 percent to 0.6 percent of transaction value in 2019, the PSEi has declined by 29.83 percent.”
Aside from higher taxes, the present structure of taxing interest and capital income in the Philippines is complicated. We have numerous tax bases and numerous tax rates, with combinations of income that depend on many factors, such as terms of the instrument (long-term and short-term), currency involved (pesos versus dollars, and residency of income recipient (resident or non-resident).
The PIFITA seeks to make taxation of the financial sector simpler, fairer, and more efficient. It proposes to impose almost a uniform rate of 15 percent on capital gains income and interest, a 5 percent gross receipts tax on banks, and a 2 percent premium tax. It also seeks to reduce the stock transaction tax from the present 0.6 percent to 0.1 percent over a period of five years. In recent discussions, though, it has been suggested that there is no need to reduce the 20 percent final withholding tax on deposits and deposit substitute and foreign loan instruments to 15 percent; likewise, there is resistance to increasing the tax on dividends received by individuals from the current 10 percent to 15 percent.
Aside from making rates more or less uniform, the PIFITA also seeks to eliminate variations in tax treatment among sectors or between financial and non-financial institutions offering the same products. For instance, HMOs and pre-need companies will be subject to the two percent premium tax, instead of the 12 percent VAT to harmonize with instruments issued by life and health insurance to even the playing field.
Because the amendments introduced by the PIFITA affect several provisions of the Tax Code, the bill is admittedly long.
As an alternative and “to enhance the efficiency and dynamism of the Philippine capital markets,” Salceda filed House Bill 9277, or the “Capital Markets Efficiency Promotion Act” (CMEPA Bill). The CMEPA Bill, which has passed third reading at the House of Representatives, proposes to reduce immediately the stock transaction tax from 0.6 percent to 0.1 percent and reduce the tax on dividends received by non-resident individuals from 25 percent to 10 percent. The reduction in the dividend tax is to harmonize the cash and property dividend rate on dividends received by resident and non-resident individuals.
CMEPA Bill also proposes to revise the definition of “shares of stock” in the Tax Code to include instruments issued by “collective investments schemes,” as well as commodity instruments. “Collective investment schemes” are proposed to be defined as “any arrangement whereby funds are solicited from the investing public and pooled together for the purpose of investing, reinvesting, or trading in securities or other assets or different classes thereof as allowed by law.”
The amendments sought to be introduced by the PIFITA or the CMEPA will immediately have a significant impact on our capital markets. We urge our lawmakers to pass them.
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