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 (TRAIN) by making passive income and financial intermediary taxes simpler, fairer, more efficient, and more competitive regionally. It provides a window of opportunity to achieve much-needed tax reform in the financial sector, an ingredient that could fuel and direct the movement of capital 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 also harmonize the tax rates on interest, dividends, and capital gains, and the business taxes imposed on financial intermediaries. Package 4 will likewise rationalize the documentary stamp tax (DST) on financial transactions to lessen friction cost and enhance taxpayer compliance.

With 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.

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 final withholding tax rates

A single rate of 15% final tax will be imposed regardless of currency, maturity, issuer, and other differentiating factors.

Unification of tax rates on passive income

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

Harmonization of business taxes on financial intermediaries

A single GRT rate of 5% will be imposed on banks, quasi banks, and certain non-bank financial intermediaries (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 be taxed uniformly at 2% of the premium. Non-life insurance will remain subject to VAT, while crop insurance will remain exempt from VAT. Income other than the premium will be subject to 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, Package 4 proposes that the IPO tax be removed. Removing the IPO tax will simplify the taxes imposed in the country’s stock exchange and will allow the BIR to concentrate its collection efforts 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).