On Jan. 27, the Senate passed on third reading the Capital Market Efficiency Promotion Act (CMEPA), sending the bill along the path to eventual signing. Senate Bill No. 2865 was filed by senators Sherwin Gatchalian and Joel Villanueva to encourage more capital-market investment. “CMEPA will not only make investments more affordable, but it will also empower our countrymen to take control of their financial futures,” Mr. Gatchalian said following the Senate’s third-reading approval of the measure. It and its counterpart, House Bill No. 2977, were designed to align the Philippines’ capital tax rate more closely with the rates charged by ASEAN neighbors. CMEPA was approved by the Bicameral Conference Committee on Feb. 5.
CMEPA’s basic objectives are to promote a fairer and simpler passive income tax system that will encourage savings and capital investment; to increase capital mobility; and to incentivize investment in the trade of securities. The bill defines passive income as income earned from sources that do not require a taxpayer’s active pursuit and performance of trade or business and is not subject to value-added tax imposed in the Tax Code.
CMEPA proposes lowering the stock transaction tax, lowering the documentary stamp tax, and removing the preferential tax rates for various types of passive income, as follows:
• For interest, there will a single 20% tax rate, applicable to all kinds of interest, instead of four tax rates depending on the source of interest income. Previously, interest income on bank deposits was taxed at 20%, from FCDU banks of individual residents 15%, from long-term investment based on remaining maturity 5-20%, and from FCDU banks on non-residents, which is exempt.
• Gains from the sale of bonds, debentures or other certificates of indebtedness have been made taxable.
• The distinction between royalties from books and literary works and other royalties in general have been done away with under the CMEPA as the proposed law now imposes a uniform tax rate of 20%.
• Sales of unlisted shares of stock issued by foreign corporations previously taxed at progressive income tax rates for individuals and the corporate income tax rate for corporations are now taxed at the same rate as those issued by domestic corporations — 15%.
• Reduction of the stock transaction tax from 0.6% of shares traded on the Philippine stock exchange to 0.1% of shares traded in all stock exchanges.
• One documentary stamp is taxed at 0.75% on the following:
• Original issuance of shares of stock, previously taxed at 1% of par value
• Issuance of bonds, debentures, and certificates of stock or indebtedness issued overseas, which were previously charged the same rate as the DST imposed on similar instruments issued, sold or transferred in the Philippines.
The proposed lower tax rates are expected to encourage investors to try their hand at earning passive income and allow them to pay more definite taxes based on the type of passive income they earned.
After the third reading of the bill, and after the midterm elections in May, the succeeding Congress will present the final bill for the President’s approval or veto. Once the bill is signed into law, and after the issuance of its implementing rules and regulations, the proposed rates can be imposed by the BIR.
Let’s Talk Tax, a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Valentin Eduardo Miguel M. Prieto III is an associate from the Tax Advisory & Compliance Practice Area of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.
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