The Department of Finance (DOF) on Thursday pushed for the passage of House Bill (HB) 8645, or the Passive Income and Financial Intermediary Taxation Act under Package 4 of the Comprehensive Tax Reform Program (CTRP), saying the proposed law will simplify the country’s income taxation system and benefit small savers.
Finance Undersecretary Karl Kendrick T. Chua said unifying and lowering the tax rates on interest and other forms of passive income will benefit 75 percent of deposit account holders who are mostly small savers, Bangko Sentral ng Pilipinas
(BSP) data show.
It was explained that under the current setup, those with more funds to invest and more time to park these funds in banks are taxed lower than those who can only afford to invest for a shorter period.
Chua said that HB 8645, if passed into law, will simplify the 80 tax base and rate combinations in the financial sector that are dependent on various conditions, such as type of product, type of lending, issuer, currency, maturity, taxpayer, residency, business status, and various special laws resulting in the multiple rates, even among comparable financial instruments and transactions.
Other key features of the bill include: reducing the number of rates of withholding taxes; harmonizing business taxes at a single rate of 5 percent; removing or minimizing barriers to capital market development, such as the tax on initial public offering; rationalizing the documentary stamp tax of the financial sector to promote capital mobility; and adopting a regionally competitive tax system to make tax rates on passive income, which is the highest in Asean, at par with other economies in the region.
“These variations in the tax rates and the unequal tax treatment of equivalent or comparable financial instruments, between financial institutions and nonfinancial institutions offering the same service or product, or between interest and dividend, give rise to arbitrage and leveraging. This means that investment decisions are made not because of the competitiveness of the product or service, but because of tax considerations,” Chua said.