Revenue loss due to PIFITA may hit P126 B

The government may have to forgo P126 billion in revenues over the next five years from the remaining tax reform package that seeks to simplify the tax system.

During the Senate committee on ways and means hearing yesterday, the Department of Finance (DOF) said the Passive Income and Financial Intermediary Taxation Act (PIFITA) could result in revenue losses of up to P125.9 billion from 2025 to 2029.

“This is an annual average of P21 billion in losses, but we did not include any assumption on behavioral changes,” Finance Assistant Secretary Karlo Adriano said.

As the fourth and last tax reform package introduced by the Duterte administration, PIFITA aims to make financial sector taxation simpler, fairer, more efficient and regionally more competitive.

It also aims to make general tax compliance easier and taxation equitable to ensure progressivity, boost tax efforts and increase tax trust.

However, in the immediate future, there will be revenue losses such as from the tax on passive income of P5.4 billion by next year to as much as P49.1 billion by 2029, for a total of P143.4 billion.

Documentary stamp tax (DST) on financial transactions will also decline by P10.3 billion in 2025 and up to P19.9 billion in 2029 for a total of P80.3 billion.

It will be slightly offset by increases in the tax on financial intermediaries, from P6.9 billion in 2025 to P12.3 billion in 2029 for an aggregate additional of P49.4 billion.

The removal of tax exemption on pickup trucks could also provide up to P42.6 billion in additional revenues for the government.

Pickup trucks were granted special tax treatment for their utility as workhorses for small business owners and professionals.

But the Department of Trade and Industry has observed that manufacturers modify pickup trucks to look like passenger, leisure or sport utility vehicles. This scheme allows manufacturers to circumvent the provision of the law and purpose of the exemption.

Revenue losses from all subsectors may reach P3.9 billion in 2025 and increase to P14.2 billion by 2026. This will further rise to P26.1 billion in 2027, P40.4 billion in 2028 and P42.9 billion in 2029.

Committee on ways and means chairman Sherwin Gatchalian has expressed concern over the revenue impact especially as the economy is just getting out of the pandemic.

“We might not feel the health effects, but we can feel the fiscal effects of the pandemic because our debt is very high,” Gatchalian said.

“Tax proposals are all timing issues – we have to look whether it’s a good time to reduce revenues or not,” he said.

National Tax Research Center executive director Marlene Lucero-Calubag maintained that PIFITA was not primarily designed to generate revenue but to fix the tax system.

“In the long term, it will create an additional revenue stream for the government,” Lucero-Calubag said.

“What we wish to achieve is a better financial structure that will create a more efficient financial system that will support economic development,” she said.

Among the problems that PIFITA aims to solve are the multiple tax rates and bases that make the tax structure complicated, causing arbitrage and unfairness.

This means that a tax rate will depend on products, maturity, currency, issuer, taxpayer and residency, among others.

The DOF targets to reduce the number of combinations of tax rates and bases from 83 to 56 covering tax on passive income, financial intermediaries and DST on financial transactions.

The Philippines also has among the highest passive income tax rates in the region at 20 percent, which reduces competitiveness.

PIFITA aims to generally harmonize and lower the tax rates on interest income, dividends, equity and debt instruments, insurance, financial institutions, and other financial transactions.

There is also an inequitable distribution of the tax burden, with the rich enjoying lower rates than the poor. As such, the bill aims to gradually reduce the 20 percent tax rate on interest income to as low as 15 percent by 2028.

On the other hand, it will increase the tax rate on dividend income to 15 percent from the current 10 percent.

Adriano said the increase mainly affects the rich, but they can reduce the tax exposure by diversifying their investments.

The government also aims to reduce the DST to 0.75 percent from one percent for original shares of stock, while it will be retained at 0.75 percent for debt instruments.

Similarly, PIFITA aims to have a harmonized flat rate of five percent on gross receipts on lending income and other income for banks and quasi banks. Currently, this ranges from one percent to as much as seven percent.

Adriano also emphasized that there is unequal treatment for insurance products, with life insurance premiums subject to two percent premium tax while pre-need contribution is slapped with a 12 percent value-added tax.

Now, PIFITA will just impose a two percent premium tax on life, health, health maintenance organization and preneed insurance.

“Premium tax is appropriate since these products are more of investments, not consumption,” Adriano said.