Proposed financial tax overhaul seen to raise revenues

MANILA, Philippines — A House bill which seeks to overhaul the tax system on the country’s financial sector is estimated to bring in additional government revenues in the first two years of its implementation, before gradually tapering off to become a revenue-neutral measure by the third year, the Department of Finance (DOF) said yesterday.

In a statement, Finance Undersecretary Karl Kendrick Chua said House Bill 8645, which was recently approved by the House of Representatives on third and final reading, is projected to increase government revenues by P5.6 billion in 2019.

He said this would decline to P3.1 billion in 2020, before tapering off in 2021 as more of its provisions become effective.

“Revenue collections will start to taper off in 2021 as the unified and lower tax rates are set fully in place,” Chua said.

HB 8645 or the Passive Income and Financial Intermediary Taxation Act contains package four of the Duterte administration’s Comprehensive Tax Reform Program (CTRP). It was approved on final reading by 190 lawmakers on Dec. 3.

Finance Secretary Carlos Dominguez welcomed the House of Representatives’ approval of the bill, citing the measure’s impact on the growth of the capital market in the Philippines.

“We welcome the approval by the House of Representatives of Package 4, which not only redesigns the financial sector to ensure the competitiveness of our economy, but also complements the Tax Reform for Acceleration and Inclusion (TRAIN) Law by making the tax treatment on income derived from investments favorable to all and not just a few,” Dominguez said.

According to Dominguez, HB 8645 would help fuel the growth of the Philippines’ capital markets and heighten investor confidence in the economy.

The finance chief noted that the measure seeks to unify the tax rates for interests, dividends and capital gains to 15 percent regardless of currency, maturity issuer, which makes the system fairer for short-term bank depositors or investors.

Under the current setup, those with more funds to invest at longer tenors are taxed lower than those who can only afford to invest for a shorter period, he said.

Citing data from the Bangko Sentral ng Pilipinas (BSP), Chua said unifying the tax rates would benefit 75 percent of deposit account holders who are mostly small savers.

He said the bill also seeks to reduce the number of rates for withholding taxes, harmonize business taxes at a single rate of five percent, and rationalize the documentary stamp tax on financial products.

It would remove barriers to capital market development, including the tax on initial public offering (IPO), and adopt a regionally competitive tax system.

If passed into law, Chua said the bill would reduce the 80 tax rates currently in the financial sector to only 41.

“These variations in the tax rates and the unequal tax treatment of equivalent or comparable financial instruments, between financial institutions and non-financial institutions offering the same service or product, or between interest and dividend, give rise to arbitrage and leveraging,” Chua said.

“This means that investment decisions are made not because of the competitiveness of the product or service, but because of tax considerations,” he said.