Package 4 : Passive Income and Financial Taxes

Package 4 of the Comprehensive Tax Reform Program (CTRP) complements the recently-passed Tax Reform for Acceleration and Inclusion Act or TRAIN by making passive income and financial intermediary taxes simpler, fairer, more efficient and regionally more competitive. It provides a window of opportunity to achieve the much-needed tax reform in the financial sector, an ingredient that could fuel and direct the movement of capital rightly to where they are most needed, so that higher, sustainable, and more inclusive growth can be achieved.

Package 4 will greatly simplify the taxation of passive income, financial services and transactions. It will reduce the number of tax rates from 80 to 41.  It will harmonize the tax rates on interest, dividends and capital gains, and the business taxes imposed on financial intermediaries. It will likewise rationalize the documentary stamp tax on financial transactions to lessen friction cost and enhance taxpayer compliance.

With Package 4 reform, the country can compete better in attracting capital and investments which are urgently needed to finance large-scale infrastructure including the Build, Build, Build program, create more and better jobs and boost the growth of the economy.

Legislative status

  • House of Representatives: Passed approved on third reading (3 Dec 2018)
  • Senate: Not yet filed

Reforms under package 4

Reduction in the number of withholding tax rates

Due to the difficulties posed by various tax rates on interest income, distinctions are removed.  A single rate of 15% final tax (FT) is imposed regardless of currency, maturity, issuer and other differentiating factors.

Unification of tax rates on passive income

A single rate of 15% is imposed on interest income, dividends and capital gains.

Harmonization of business taxes on FIs

A single GRT rate of 5% is imposed on banks, quasi banks and certain non-bank FIs.  The distinction between lending and non-lending income as well as the maturity of the instrument is removed.  All types of income will be taxed at 5% except dividends, equity shares and net income of subsidiaries, which will remain exempt.Pre-need, pension, life and HMO insurance will uniformly be taxed at 2% of the premium.  Non-life insurance will remain to be subject to VAT while crop insurance will remain to be exempted from VAT. Incomes other than the premium will be subject to the VAT.

Removal of the IPO tax which is found to be detrimental to capital market development

The IPO tax has become a nuisance tax over the years. The tax was introduced through RA 7717 in 1994, and was amended in 1997 through RA 8424. Collections from IPO tax are minimal, averaging PHP 273 million from 2000-2016 annually. Due to these reasons, the country may let go of the IPO tax. Removing the IPO tax will simplify the taxes imposed in the country’s stock exchange and will allow the BIR to concentrate its collection effort on more significant sources of revenue.

Rationalization of DST to promote capital mobility

Equalize tax treatment of debt and equity by: (a) gradual reduction of the 0.6% STT by one percentage point every year until it reaches 0.1%, and (b) imposition of a 0.1% transaction tax on listed and traded debt instruments at the Philippine Dealing Exchange (PDEx).

Adoption of a regional competitive tax system

Considering that the Philippines has the highest passive income taxes in the ASEAN region, measures are taken towards the adoption of tax rates comparable to those of ASEAN neighbors and their best practices.

Summary of changes in tax structure under package 4

Type of income/financial intermediaries/transactions Number of
unique rates/bases
(current)
Number of
unique rates/bases
(proposed)
Total 80 41
A.    Tax on passive income 52 23
        i. Interest 22 9
        ii. Dividends 13 9
        iii. Capital gains / transfers 17 5
B.   Tax on financial intermediaries 8 5
          i. Banks and non-banks subject to GRT 5 2
ii.   FIs subject to premium tax 1 1
iii.  Other FIs subject to VAT 2 2
C.   DST on financial transactions 20 13

Publications

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