DOF thanks House for approval of reforms in financial sector taxation

Finance Secretary Carlos Dominguez III has thanked the House of Representatives for passing on third and final reading the measure representing the Duterte administration’s tax reform package that aims to make the complex taxation system covering capital income and financial intermediaries simpler, equitable and more efficient.

Dominguez said House Bill No. 8645, which represents Package 4 of the Duterte administration’s comprehensive tax reform program (CTRP), will help fuel the growth of the Philippines’ capital markets and heighten investor confidence in the economy.

HB 8645 or the Passive Income and Financial Intermediary Taxation Act was approved on final reading by 190 lawmakers on Dec. 3. HB 8645 consolidates the versions of the measures filed by Representatives Estrellita Suansing, who chairs the House ways and means committee; Luis Raymund Villafuerte; and Horacio Suansing Jr.

“We welcome the approval by the House of Representatives of Package 4, which not only redesigns the financial sector to ensure the competitiveness of our economy, but also complements the Tax Reform for Acceleration and Inclusion law (TRAIN) by making the tax treatment on income derived from investments favorable to all and not just a few,” Dominguez said.

Dominguez noted that unifying and lowering the tax rates for interests, dividends and capital gains to 15 percent for most transactions regardless of currency, maturity issuer and other factors is among the key features of the bill, which makes the system fairer for short-term bank depositors or investors, which comprise low income and middle class families.

Under the current inequitable setup, those with more funds to invest and more time to park them in banks are taxed lower than those who can only afford to invest for a shorter period, Dominguez noted.

Citing data from the Bangko Sentral ng Pilipinas (BSP), Finance Undersecretary Karl Kendrick Chua, said unifying and lowering the tax rates on interest and other forms of passive income will benefit 75 percent of deposit account holders who are mostly small savers.

Chua said the other key features of the bill are the following; reducing the number of rates of withholding taxes; harmonizing business taxes at a single rate of 5 percent; removing or minimizing barriers to capital market development, such as the tax on initial public offering (IPO); rationalizing the documentary stamp tax of the financial sector to promote capital mobility; and adopting a regionally competitive tax system to make tax rates on passive income, which is the highest in ASEAN, at par with other economies in the region.

He said the bill, if passed into law, will simplify the 80 tax base and rate combinations in the financial sector that are dependent on various factors and conditions such as type of product, type of lending, issuer, currency, maturity, taxpayer, residency, business status, and various special laws resulting in the multiple rates, even among comparable financial instruments and transactions.

“These variations in the tax rates and the unequal tax treatment of equivalent or comparable financial instruments, between financial institutions and non-financial institutions offering the same service or product, or between interest and dividend, give rise to arbitrage and leveraging,” Chua said. ‘This means that investment decisions are made not because of the competitiveness of the product or service, but because of tax considerations.”

Chua said HB 8645, which cuts the 80 unique tax base and rates to only 41, is broadly revenue neutral and is projected to bring in an additional P5.6 billion in revenues in 2019 and P3.1 billion in 2020 based on a 70 percent tax efficiency rate. Revenue collections will start to taper off in 2021 as the unified and lower tax rates are set fully in place.

Revenues from passive income taxes and taxes on financial intermediaries (FIs) amounted to P214.3 billion in 2017. Of this amount, P107.2 billion or around 50 percent came from passive income taxes; P47.9 billion or 22 percent from taxes on FIs; and P59.2 billion or 28 percent from documentary stamp tax (DST) on financial products and transactions. These revenues accounted for 12.1 percent of the collections of the Bureau of Internal Revenue (BIR) and 1.4 percent of GDP.