DOF lauds capital income tax reform’s passage

The Department of Finance (DOF) lauded the House of Representatives for passing the administration’s tax reform package aiming to make the complex taxation system covering capital income and financial intermediaries simpler, equitable and more efficient.

Finance Secretary Carlos G. Dominguez III said House Bill (HB) 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 was approved on final reading by 190 lawmakers last December 3, which consolidated 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,” Dominguez said in a statement, referring to the Passive Income and Financial Intermediary Taxation Act.

The finance chief said it will not only redesign the financial sector to ensure the competitiveness of the Philippine economy, but also complements the Tax Reform for Acceleration and Inclusion (TRAIN) law by making the tax treatment on income derived from investments favorable to all and not just a few.

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), the DOF 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.

If passed into law, it 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.

“These variations in the tax rates and the unequal tax treatment of equivalent or comparable financial instruments, between financial institutions and nonfinancial institutions offering the same service or product, or between interest and dividend, give rise to arbitrage and leveraging,” DOF said.

“This means that investment decisions are made not because of the competitiveness of the product or service, but because of tax considerations,” it added.

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 15.6 billion in revenues in 2019 and 13.1 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.