SIMPLIFYING and harmonizing the country’s tax structure on passive income and financial intermediary would cost the national government to lose P21 billion annually or a total of nearly P126 billion in six years, a finance official said.
In his presentation before senators, Finance Assistant Secretary Karlo Fermin S. Adriano discussed the proposed Passive Income and Financial Intermediary Taxation Act (PIFITA), including the projected revenue losses that the national government would experience.
Based on the Department of Finance’s (DOF) calculations, the state would lose a total of P125.9 billion in revenues from the third quarter of this year until 2029 because of PIFITA, Adriano explained. The amount translates to an annual average revenue loss of about P21 billion, Adriano added.
The estimated state revenue losses stem from the lowering of various tax rates across the capital markets and the financial sector of the country as proposed by PIFITA.
PIFITA seeks to redesign the financial sector by making taxation of the industry “simpler, fairer and more efficient” and “regionally more competitive,” Adriano said.
“[PIFITA] would make general tax compliance easier and taxation equitable to ensure progressivity to boost our tax effort and increase tax trust,” he said.
PIFITA aims to slash the number of combinations of tax rates and bases from 83 to 56. This, Adriano emphasized, would harmonize and lower the tax rates, making the tax system more equitable than before.
Adriano pointed out that in the Asean region, the Philippines has the highest passive income tax rates on interest income as well as royalties.
PIFITA aims to “harmonize” and lower tax rates on interest income from 20 percent to 15 percent by 2028 through gradual reductions starting this year.
The gradual reductions are aimed at “softening” the blow of revenue losses to the national government, Adriano said.
Likewise, PIFITA seeks to slash the tax on royalties from 20 percent to 15 percent while it plans to increase tax rate on dividend income from 10 percent to 15 percent.
With these, the tax rate on all passive income would be at a uniform 15 percent.
The DOF estimates that the national government would lose P143.4 billion from the third quarter until 2029 with the proposed tax adjustments on passive income.
Meanwhile, PIFITA seeks to simplify the taxes in the capital markets by imposing a stock transaction tax that would start at 0.5 percent this year and eventually go down to 0.1 percent by 2028, replacing the current regime of 15 percent capital tax gain. This measure, Adriano pointed out, would allow companies to expand their sources of capital and liquidity.
Under the proposed law, all financial institutions would be slapped with a gross receipts tax at a uniform 5 percent rate in lieu of the current mechanism of varying rates of 1 percent to 7 percent depending on the nature of the financial institution.
“To simplify the business tax for banks and quasi banks a harmonized flat rate of 5 percent on gross receipts will be levied on lending income and other income,” Adriano said.
The PIFITA would also simplify the tax system in the insurance industry by implementing a uniform 2-percent premium tax across life insurance, health insurance, preneed and healthcare maintenance organization (HMO) industries.
Adriano explained that the imposition of a premium tax is more appropriate in these industries as their products are “more of an investment than consumption.”
PIFITA also pushes reforms in the documentary stamp tax (DST) system by slashing the DST on original shares of stock to 0.75 percent from 1 percent.
Adriano’s presentation showed that the state stands to gain P49.4 billion in revenues until 2029 from the tax reform on financial intermediaries but it will lose some P80.3 billion due to adjustments in taxes on transactions like DST.
Furthermore, Adriano disclosed that the DOF is now pushing for the removal of the exemption on pick-up trucks from excise tax, a privilege extended by the TRAIN law. Lifting the exemption would generate a total of P42.6 billion in revenues for the national government until 2029.
Adriano explained that removing the excise tax exemption on pick-up tricks would eradicate the “inequity” and “counter the adverse impact of such exemption in the automobile industry.” The move would also support the state’s carbon reduction goals in line with its commitments to the Paris agreement, he added.
The state would also post a net gain of P5.8 billion until 2029 due to prospectivity, which involves the application of the tax changes on new transactions or contracts.
“The [annual average revenue losses of] P21 billion did not include any assumptions on behavioral changes. These are just based on reducing rates. We are still in the process of inputting the changes in behavior in our computations,” Adriano explained.
Sen. Sherwin T. Gatchalian, who chairs the Senate Committee on Ways and Means, recognized the benefits of the PIFITA but cautioned regarding the projected revenue losses that the state would suffer in exchange.
Gatchalian argued that PIFITA would simplify the tax structure of the country which is helpful in enticing more investors in the country.
“We are very happy there is this effort to simplify everything. However, I am quite concerned with the revenue impact. Like I said the context here is we are just getting out of the pandemic,” he said.
“We may not feel the health effects of the pandemic but we can feel the fiscal effects of the pandemic because our debt is very high. [There are no longer sick people but we are still paying for the debts] contracted during Covid time. Tax proposals more or less are a timing issue. I am looking at whether this is a good time to reduce revenues or not,” he added.
Nonetheless, Gatchalian pointed out that the harmonization and reduction in tax rates that PIFITA is pushing for would translate “in change of behavior and growth in sectors.”
National Tax Research Center Executive Director Marlene A. Lucero-Calubag argued that PIFITA is “ripe for passage” as it would help the government achieve its “much needed” tax reforms in the capital market and financial sector.
Lucero-Calubag explained that PIFITA was not designed to generate revenues for the state but to “fix the tax system” by simplifying the taxation on passive income, financial intermediaries and financial transactions.
“To achieve this objective there is a need to reduce and repeal certain taxes in order to directly benefit the majority or target the poor but in the long term would create additional revenue streams for the government,” she said.
Lucero-Calubag argued that PIFITA would create a “better” financial structure that would pave the way for “more efficient and diversified financial system that supports economic development.”