A measure that seeks to simplify the tax system in the financial sector rounds up the Duterte administration’s gamechanging comprehensive tax reform program.
This financial reform package (Package 4), which is also called the Passive Income and Financial Intermediary Taxation Act (PIFITA), is seen as instrumental in developing the country’s capital markets to attract more investors in its infrastructure program, in helping lower insurance costs, and in encouraging more Filipinos to avail themselves of financial protection from loss of life, property and damages incurred from natural disasters.
“Through Package 4, the country can be more competitive in attracting capital and investments, which are urgently needed to finance large-scale infrastructure, projects including those under the Build, Build, Build (BBB) program, create more and better jobs, and boost the growth of the economy,” the Department of Finance said. PIFITA seeks to redesign the financial sector taxation to be simpler, fairer, more efficient, regionally more competitive, and revenue neutral. The goal is to also increase and direct the movement of capital to where it is most needed, so that higher, sustainable, and more inclusive growth can be achieved. Ten ways show how the DOF is targeting to achieve its goals.
- Reduce the number of unique rates and bases to around 40 from the existing 80. This will address the multiple tax rates and bases that currently make the country’s tax structure complicated, causing arbitrage and unfairness.
- Harmonize and lower the tax rates on interest income, dividends, equity and debt instruments, insurance, financial institutions, and other financial transactions. The Philippines currently has among the highest passive income tax rates in the ASEAN.
- Harmonize and lower the tax rates on interest income for small savers to 15 percent from the current 20 percent to address inequitable distribution of the tax burden. In the existing system, the rich pays lower taxes than the poor.
- Lower the tax on passive income and harmonize the tax treatment between equity and debt to address shallow equity and debt capital markets. The proposal under Package 4 is to lower the withholding tax rates on all debt instrument to better align with the region; remove the stock transaction tax by 2026; and remove taxes on listed debt instruments by 2026.
- Equalize the tax treatment for all financial institutions to level the playing field. The target is to simplify the gross receipt tax (GRT) for banks, non-banks and financial intermediaries by imposing a harmonized rate of 5 percent on gross receipts.
- Harmonize the rates for life and health insurance, and non-life insurance. To encourage participation in insurance products, a 2 percent premium tax will be applied on HMO, pre-
need and pension plans, which will make it similar to life and health insurance. Premium tax is appropriate since these products are more investment than consumption.
- Harmonize, rationalize or lower the rates on documentary stamp taxes (DST). The goal under PIFITA is to have all DST rates expressed in ad valorem; to equate DST on debt and equity; to unify all non-life insurance rates and lower them gradually; to remove DST on domestic money transfer fees to support financial inclusion; and to remove “nuisance” provisions with low revenue take.
- Gradually lower the DST on non-life insurance to 7.5 percent by 2025 from the current 12.5 percent to help promote this financial product. A high DST increases the cost of non-life insurance, which results in more Filipinos being underinsured from disaster.
- Reduce administrative and compliance cost by simplifying tax policy. An equal tax treatment—regardless of maturity, currency, and/or instrument—will ease tax compliance, curb tax calculation errors, and will likewise reduce opportunities for tax arbitrage, avoidance, and evasion.
- Repeal 33 laws out of the existing 43 that grant exemptions and special rates in order to widen the tax base. These 43 laws on passive income are outside the National Internal Revenue Code.
This article was published in the Philippine Daily Inquirer on December 15, 2019.
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