The habit of regularly saving money is an important step in securing a bright financial future. With a savings account at hand, there will be a safety net during emergencies. But saving alone is not enough if you intend to achieve long-term goals and complete financial security. To create wealth, one must channel funds from savings into viable investment vehicles. Investing aims for present and future long- term financial security by ensuring that the money generated from your investments can provide positive returns that outweigh inflation.
PIFITA for progress
To encourage more Filipinos to invest in the local bourse, the Package 4 (P4) of the Comprehensive Tax Reform Program (CTRP) complements the recently-passed Tax Reform for Acceleration and Inclusion Act (R.A. No. 10963) by making passive income and financial intermediary taxes simpler, fairer, more efficient, and more regionally competitive.
Known as the Passive Income and Financial Intermediary Taxes Act (PIFITA), the measure aims to reform taxation in the financial sector — specifically harmonizing and generally lowering the tax rates on interest income, dividends, equity and debt instruments, insurance, financial institutions, and other financial transactions. By having a simpler and fairer taxation on passive income and financial intermediaries, more Filipinos will have access to the formal financial institutions and services. By doing so, PIFITA will make financial services more inclusive to Filipinos.
How it works
By lowering the taxes of investment instruments and securities, P4 aims to encourage more Filipinos to enter the formal financial system and participate in a vibrant Philippine capital market. Package 4 will simplify a complex tax system on passive income andfinancial intermediaries by reducing the number of bases and rates from 80 to 40, equalizing the variations in the tax rates and eliminating the imbalanced tax treatment of comparable financial instruments.
By making the taxes on passive income more equitable among different instruments, Package 4 harmonizes and lowers tax rates for interest income, dividends and capital gains to 15 percent. Unifying and lowering the tax rates on interest income will benefit 75 percent of deposit account holders who are mostly small savers. PIFITA also reduces the stock transactions tax (STT) to 0.1 percent every year until it reaches zero by 2026. PIFITA also removes the IPO tax to encourage more business enterprises to go public and expand the stock market.
To promote a healthier and insured Filipino community, there will be reduced rates for non-life insurance, and harmonizing the taxation of pre-need, pension, life and HMO insurance. PIFITA also makes the taxation on financial intermediaries more equitable by removing exemptions and special treatment to those who do not need them anymore. A single five-percent gross receipts tax will be levied on banks, quasi-banks, and certain non-bank financial institutions to simplify the tax system of the industry. Documentary stamp taxes (DST) will be rationalized as well.
Encouraging support from investors
increase available financial resources for both individual Filipinos and domestic firms, an increasing number of individuals have expressed their support for the PIFITA.
“This reform is crucial in the capital market development as it 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 future implementation of this reform will benefit the financial sector by making it more efficient and more inclusive to all,” says the Capital Market Development Council.
“(When the assistant secretary announced that they were reducing the stock transaction tax) that they’re going to reduce it from (about) half a percent down to 0.1 percent, I was about to stand up and applaud him. [The reduction of stock transaction tax would be]
very helpful to the investor community, ” explains COL chief financial analyst Juanis Barredo.
This article was published in the Philippine Star on December 15, 2019.
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