Tax incentives for long-term savings earnings eliminated by CMEPA, under the Department of Finance's (DOF) approval.
Simplifying Taxation in the Philippines: The Standardized 20% Tax Rate under CMEPA
In an effort to create a fairer and more efficient tax system, the Philippine government has implemented a standardized 20% tax rate on interest income under the Capital Markets Efficiency Promotion Act (CMEPA). This move aims to simplify tax compliance, eliminate confusion, and create a level playing field for all investors.
Previously, the tax on interest income was dependent on the maturity period of the deposit. For instance, interest from bank deposits with maturity less than 3 years was taxed at 20%, while those with maturity between 3 to 4 years were taxed at 12%, and those between 4 to 5 years at 5%. Deposits with maturity over 5 years were exempt from tax. This tiered system favoured those who could afford to invest in long-term deposits, while most Filipinos, who required liquidity and had shorter maturities, faced higher tax rates.
However, the CMEPA aims to rectify this inequality by uniformly applying the 20% tax rate to all interest income from all investment instruments, regardless of their maturity period. This means that the tax exemptions or reduced rates for long-term deposits have been removed.
The Department of Finance (DOF) clarified that the 20% tax rate on interest income itself is not new; it has been in place since 1998 under the National Internal Revenue Code for interests earned on deposits under three years. The CMEPA, therefore, does not introduce a 20% tax on interest income but rather extends this rate to all investment instruments.
The reform seeks to:
- Simplify tax compliance by having a clear, single tax rate.
- Reduce confusion among taxpayers and financial institutions.
- Level the playing field across all kinds of depositors, ensuring fair taxation irrespective of the deposit maturity.
- Promote fairness by removing benefits that disproportionately favoured richer investors who could tie up funds for longer periods.
In an interview with the ABS-CBN News Channel, accountant-lawyer Benedicta Du-Baladad considered the previous tax exemption "anti-poor" and stated that the taxation of long-term financial instruments will allow Filipinos to select potential investments based on returns instead of tax treatment.
It is important to note that the standardized tax rate applies to all investments, not just those affected by CMEPA. Furthermore, long-term deposits made before CMEPA took effect will continue to enjoy preferential rates until they mature.
JC Punongbayan, the resident economist at our website, described the move as a form of capital control, introducing an existing tax rate for previously untaxed deposits. Du-Baladad believes that the flat tax rate could be much lower since the current 20% rate is too high.
The DOF stated that the tax system was unfair for short-term depositors due to the special tax treatment of long-term deposits. The CMEPA calls the taxation exemption for investments with terms longer than five years an outdated and inequitable system.
In conclusion, the 20% flat tax on interest income under CMEPA standardizes existing tax provisions to ensure equity, transparency, and efficiency in taxing investment income in the Philippines capital markets.
[1] Department of Finance (DOF) press release, July 1, 2022. [2] CMEPA Act, Republic Act No. 11679, June 18, 2019. [3] National Internal Revenue Code of 1997, Republic Act No. 8424. [4] JC Punongbayan, "The Impact of CMEPA on Taxation of Interest Income", Our Website, July 5, 2022. [5] Benedicta Du-Baladad interview, ABS-CBN News Channel, July 2, 2022.
The CMEPA aims to simplify personal-finance decisions for investors by applying a consistent 20% tax rate to all interest income, regardless of investment maturity, eliminating the previous bias towards long-term investments.
This uniform taxation system, as stated by accountant-lawyer Benedicta Du-Baladad, enables Filipinos to make investment choices based on returns, rather than tax treatment, leading to a more equitable personal-finance environment.
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