Package 4 or the proposed Passive Income and Financial Intermediary Taxation Act (PIFITA) 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, which is 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 36. 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 remove the documentary stamp tax (DST) imposed on nonmonetary transactions.
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.
- House of Representatives: Passed and approved on third reading – House Bill No. 304
- Senate: Transmitted to Senate
Reforms under package 4
Reduction in the number of final withholding tax rates on interest income
A single rate of 15% final tax on interest income, in general, will be imposed regardless of currency, maturity, issuer, and other differentiating factors.
Unification of tax rates on passive income
A single rate of 15%, in general, will be imposed on interest income, dividends and capital gains.
Harmonization of business taxes on financial intermediaries
A single gross receipt tax (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, will be 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 initial public offering (IPO) tax which is found to be detrimental to capital market development
The IPO tax will be removed as it is seen as a tax on capital, and is detrimental to the capital markets. Collections from IPO tax are minimal, only averaging PHP 273 million annually from 2000-2016 annually. Removing the IPO tax will also 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. Income tax on listed shares of stock and debt securities will also be gradually removed to further promote capital market development.
Rationalization of DST to promote capital mobility
Equalize tax treatment of debt and equity by: (a) a gradual reduction of the 0.6% stock transaction tax (STT) by 0.1 percentage point every year until it reaches 0 by 2026 and (b) a temporary imposition of a 0.1% transaction tax on listed and traded debt instruments at the Philippine Dealing Exchange (PDEx), which will also be removed by 2026. Finally, documents which are non-monetary in nature will also be exempted from DST.
CTRP Package 4: Passive Income and Financial Intermediary Tax Reform 1-page briefer Download File
Date Posted: August 1, 2019
House Bill No. 8645 (Package 4: Passive income and financial taxes) Download File
Date Posted: July 26, 2019