Philippine taxation has undergone significant changes with the enactment of several tax reforms in 2024. These reforms include the Ease of Paying Taxes Act (RA No. 11976), the Real Property Valuation Act (RA No. 12001), the VAT on Digital Services (RA No. 12023), and the CREATE MORE Act (RA No. 12066), which generally aims to modernize the current tax system, making it simpler, fairer, and more efficient.
Following the signing of the bicameral conference report by Congress, another significant tax reform is on its way: the Capital Market Efficiency Promotion Act (CMEPA), which consolidated Senate Bill No. 2865 and House Bill No. 9277. The CMEPA is designed to simplify the complex taxation of passive income in the Philippines. It also seeks to align and promote our capital markets within the context of financial globalization, increased international mobility, and financial inclusion.
Here, we summarize the key proposed amendments under the CMEPA Bill:
STANDARDIZED THE FINAL WITHHOLDING TAX (FWT) RATE ON INTEREST INCOME
One of the major shifts in CMEPA is the standardization of the FWT on interest income at 20%, except for non-resident aliens not engaged in trade or business (NRA-NETB) and non-resident foreign corporations (NRFC), whose interest income will still be subject to 25% FWT. This change effectively removes the preferential final tax rates for:
• 15% on interest income earned by Foreign Currency Deposit Units (FCDUs)
• Tax-exempt status on interest income of non-residents from FCDUs
• Tax-exempt status on long-term deposits and investments
While the proposed final tax rate aims to address the inequitable distribution of the tax burden between investors who can invest in long-term savings and individuals who can only put money into savings deposits, the removal of preferential rates of FCDUs could make the Philippines less appealing to foreign investors, potentially affecting sources of foreign currency and our capital markets.
CAPITAL GAINS TAX ON THE SALE OF SHARES ISSUED BY FOREIGN CORPORATIONS
Currently, capital gains on sales of unlisted local shares of individuals and corporations are subject to 15% capital gains tax (CGT), while gains on sales of foreign shares are subject to the progressive income tax rate for individuals and the corporate income tax rate for corporations. The CMEPA Bill seeks to remedy the disparity by imposing the same tax rate of 15% CGT on the sale of shares issued by foreign corporations not traded on a stock exchange.
While the change might be beneficial for high net-worth individuals (HNWI) and corporations as it lowers the tax rate imposed on the gains on sales of unlisted foreign shares, this might have an unfavorable effect on our capital markets as the shift might make investing in domestic companies less attractive. Further, it is worth noting that CGT must be paid first before transferring ownership of the unlisted domestic shares, whereas there are still no clear regulations on how the transfer of unlisted foreign shares will be monitored.
LOWERING THE STOCK TRANSACTION TAX (STT)
To align the Philippines’ Stock Transaction Tax (STT) with the prevailing rates in other ASEAN-6 economies, CMEPA proposes reducing the STT on the sale or other disposition of shares of stock listed and traded through the stock exchange from 0.6% to 0.1% of the gross selling price or gross value in money of the shares. The proposed amendment also applies to shares of stock of domestic corporations listed and traded through a foreign stock exchange. The reduction aims to lower transaction costs in trading, making it more attractive for both domestic and foreign investors.
LOWERING THE DOCUMENTARY STAMP TAX ON THE ORIGINAL ISSUANCE OF SHARES
Existing rules provide for a documentary stamp tax (DST) on debt instruments and bonds at P1.50 of P200 (0.0075%), while the DST imposed on the original issuance of shares is P2.00 of 200 (0.01%). To equalize the cost of investing in bonds and equity shares and encourage the companies to raise capital through the stock market, the CMEPA Bill reduced the DST on the original issuance of shares from 0.01% to 0.0075%.
INCENTIVES ON MUTUAL FUNDS AND UNIT INVESTMENT TRUST FUNDS
To promote investing in several collective investment schemes (CIS), CMEPA grants income tax exemption for gains from redemption of a unit of participation in a mutual fund and a Unit Investment Trust Fund (UITF). It also removes DST on the original issuance, redemption, or other disposition of shares in mutual funds and the issuance of certificates or other evidence of participation in mutual funds and UITFs. However, these tax incentives do not extend to VUL products, despite being part of CIS.
ADDITIONAL DEDUCTION OF 50% ON EMPLOYER’S CONTRIBUTION TO PERA
The Personal Equity and Retirement Account (PERA) Act, which was introduced in 2008 to strengthen our capital markets, has faced several challenges that have hindered its widespread utilization in the Philippines despite its several tax incentives. To address the issue, CMEPA encourages private employers to increase their contribution by providing an additional 50% deduction on the employer’s contribution, provided that such contribution is at least equal to the contribution of their employees.
CMEPA represents a pivotal moment for the Philippine capital markets. By simplifying the tax rates on certain passive income and significantly reducing the transaction costs on investments, CMEPA is expected to increase participation in the stock market, boost trading activity, increase market liquidity, and enhance the country’s competitiveness in the global financial markets.
However, the success of these reforms will still depend on how well they resonate with the investors and how effectively the government implements the tax reforms. Will CMEPA become the breakthrough the Philippine market needs, or will it take time for both the government and investors to adapt to the changes?
While the full impact of CMEPA remains to be seen, one thing is certain — the future of the Philippine capital market is on the cusp of a major transformation, and this is just the beginning.
Marielle C. Baldemor is a senior in-charge for the Tax Advisory & Compliance Practice Area of P&A Grant Thornton. Tweet us: @GrantThorntonPH, Facebook: P&A Grant Thornton