To deepen capital markets in the Philippines and widen the potential sources of funding for the massive infrastructure needs of the government as well as other private-sector initiatives, this is what the fourth package of the Comprehensive Tax Reform Program (CTRP) envisions.

Known as the passive income and financial intermediary taxes act (PIFITA), the bill, once passed into law, will greatly simplify the taxation of passive income, financial services, and transactions as it will reduce the number of widely varying tax rates from 80 to around 40.

The fourth package of the CTRP also harmonizes the tax rates on interest, dividends, and capital gains, and the business taxes imposed on financial intermediaries as well as streamlines the documentary stamp tax (DST) on financial transactions.

For these reasons, Package 4 provides an opportunity for the country to achieve much-needed tax reform in the financial sector, which is an ingredient that could fuel and direct the movement of capital to where it is most needed.

The measure will also lessen friction cost and enhance taxpayer compliance. This is in line with the Bangko Sentral ng Pilipinas’ efforts to better protect Filipinos, especially the most vulnerable, from abusive informal financial services such as the 5-6 lending system and other informal lending with high interest rates.

Below are the reforms under PIFITA:

For final withholding tax rates, a single, final tax rate of 15 percent will be imposed regardless of currency, maturity, issuer, and other differentiating factors. Further, in general, a uniform tax rate of 15 percent will be collected from passive income, such as interest income, dividends and capital gains.

Business taxes on financial intermediaries (FIs), such as banks, quasi banks, and certain non-bank financial intermediaries, will also be harmonized to a single gross receipts tax of 5 percent.

Likewise, the distinction between lending and non-lending income for FIs, as well as the maturity of the instrument, will be removed by PIFITA. Instead, all types of income will be taxed at 5 percent except dividends, equity shares, and net income of subsidiaries, which will remain exempt.

Pre-need, pension, life, and HMO insurance, meanwhile, will be taxed uniformly at 2 percent of the premium, but non-life insurance will remain subject to value-added tax (VAT), while crop insurance will remain exempt from consumption levies. Income other than the premium will be subject to VAT.

PIFITA also removes the initial public offering (IPO) tax that has become detrimental to capital market development.

Promotion of capital mobility is also among the goals of PIFITA.

The bill will equalize tax treatment of debt and equity by gradually reducing the 0.6 percent Securities Transaction Tax (STT) by one-tenth of a percentage point every year until it reaches 0%. A 0.1 percent transaction tax will be introduced on listed and traded debt instruments at the Philippine Dealing Exchange (PDEx), but this will eventually be removed in line with the STT.

PIFITA, a measure being initiated by the Department of Finance (DOF), has not only gained support from the government, but also the private sector.

Upon learning about the DOF’s plan to cut the stock transaction tax under PIFITA, Juanis Barredo, Col Financial Group Inc. Chief Technical Analyst immediately applauded the plan because it will ease the tax burden on investors.

The Capital Market Development Council is also backing PIFITA for capital market development.

The Council pointed out that PIFITA is geared towards simplification of tax rates and harmonization of taxes from an overly complex taxation system of interest income.

“Financial tax neutrality and simplification has been one of the key advocacies of the Council. PIFITA will not only make taxation fairer and simpler but it will also discourage tax arbitrage opportunities,” the Capital Market Development Council said in a statement.

“The future implementation of this reform will benefit the financial sector by making it more efficient and more inclusive to all,” it added.

With the Package 4 reform, the Philippines can be more competitive in attracting capital and investments that are urgently needed to finance large-scale infrastructure, including the Build, Build, Build program, create more and better jobs, and boost economic growth.

This article was published in Manila Bulletin on December 25, 2019.