House approves bill to enhance tax system for passive income and financial intermediaries

The House of Representatives approved on third reading a bill that seeks to simplify the taxation of passive income, and financial intermediaries and transactions on November 14, 2022.

“Passing this reform will enable the government to fund priority programs, create more and better jobs, and support the inclusive and sustainable growth of the economy in the long term,” said Finance Secretary Benjamin Diokno.

The approved version of the bill reduced the number of combinations of tax bases and rates applicable to passive income and financial intermediaries from 83 to 58.

“This will make our tax system more regionally competitive and the rates comparable to our Southeast Asian neighbors,” said Secretary Diokno.

The bill imposes a final tax of 20 percent on interest income earned from currency bank deposits, deposit substitutes, trust funds, or similar arrangements.

Certain passive income such as royalties, dividends, and capital gains on the sale of shares of stock not traded in the stock exchange will be subjected to a uniform rate of 15 percent.

Some exemptions and preferential tax treatment will also be removed to broaden the tax base.

Banks, quasi-banks, and other non-bank financial intermediaries will be subjected to a single gross receipts tax (GRT) rate of 5 percent.

The distinction between lending and non-lending income and the maturity of the instrument will be removed. All types of income, with the exemption of dividends, equity shares, and net income of subsidiaries, will be taxed at 5 percent.

Meanwhile, pre-need, pension, life insurance, and health maintenance organizations (HMOs) will be subjected to a uniform tax rate of 2 percent of premiums.

Generally, the provisions on documentary stamp tax (DST) will be amended to express the rates in ad valorem instead of the incomparable differentiated tax bases and rates; unify all non-life insurance rates; and remove minor DST with low revenue take to reduce friction cost.

Shareholders and participants of collective investment schemes (CIS) will be subjected to a single rate of DST on the original issuance of shares or units of participation with the exemption of redemption gains from income tax and from certain taxes subject to certain conditions.

In trading, shares of stock of a domestic corporation listed and traded in any foreign stock exchange will be subjected to the lower stock transactions tax (STT) instead of the 15 percent capital gains tax (CGT) to allow them to expand their sources of capital.

Excise tax exemption on pick-ups will be removed to enhance the efficiency of the tax system and avoid preferential treatment for certain vehicles.

The proposed reform provides the government with new tax administration powers to fully implement passed tax reforms and empower revenue administration.

“This will allow the country to adhere to international tax standards, such as providing for a legal cover to automatically exchange tax-related information with other jurisdictions,” Secretary Diokno explained.

The measure primarily intends to fix the tax system to deepen capital and financial markets. Nevertheless, the government expects to collect a total of PHP25.2 billion over the next six years through the implementation of this reform.