Philippine taxation has undergone significant changes with the enactment of several tax reforms in 2024. These reforms include the Ease of Paying Taxes Act (R.A. No. 11976), the Real Property Valuation Act (R.A. No. 12001), VAT on Digital Services (R.A. 12023), and the most recent CREATE MORE Act (R.A. No. 12066), which generally aims to modernize the current tax system, making it simpler, fairer, and more efficient.
Following the signed bicameral conference report by the Congress, another significant tax reform is on its way: the Capital Market Efficiency Promotion Act (CMEPA), which consolidated Senate Bill No. 2865 and House Bill No. 9277. The CMEPA is designed to simplify the complex taxation of passive income in the Philippines. It also seeks to align and promote our capital market within the context of financial globalization, increased international mobility, and financial inclusion.
Here, we summarize the key proposed amendments under the CMEPA Bill:
Standardized the Final Withholding Tax (FWT) Rate on Interest Income
One of the major shifts in the CMEPA Bill is the standardization of the FWT on interest income at 20%, except for non-resident aliens not engaged in trade or business (NRA-NETB) and non-resident foreign corporations (NRFC), whose interest income will still be subject to 25% FWT. This change effectively removes the preferential final tax rates for:
Capital gains tax (CGT) on the sale of shares issued by foreign corporations
Currently, capital gains on sales of unlisted local shares of individuals and corporations are subject to 15% CGT, while gains on sales of foreign shares are subject to the progressive income tax rate for individuals and the corporate income tax rate for corporations. The CMEPA Bill seeks to remedy the disparity by imposing the same tax rate of 15% CGT on the sale of shares issued by foreign corporations not traded on a stock exchange.
While the change might be beneficial for high net-worth individuals (HNWI) and corporations as it lowers the tax rate imposed on the gains on sales of unlisted foreign shares, this might have an unfavorable effect on our capital market as the shift might make investing in local companies less attractive. Further, it is worth noting that CGT must be paid first before transferring ownership of the unlisted local shares, whereas there are still no clear regulations on how the transfer of unlisted foreign shares will be monitored.
Lowering the stock transaction tax (STT)
To align the Philippines' Stock Transaction Tax (STT) with the prevailing rates in other ASEAN-6 economies, the CMEPA Bill proposes reducing the STT on the sale or other disposition of shares of stock listed and traded through the local stock exchange from 0.6% to 0.1% of the gross selling price or gross value in money of the shares. The proposed amendment also applies to shares of stock of domestic corporations listed and traded through a foreign stock exchange. The reduction aims to lower transaction costs in trading, making it more attractive for both local and foreign investors.
Lowering the documentary stamp tax (DST) on the original issuance of shares
Existing rules provide that there shall be DST on debt instruments and bonds at P1.50 of P200 (0.0075%), while the DST imposed on the original issuance of shares is P2.00 of 200 (0.01%). To equalize the cost of investing in bonds and equity shares and encourage the companies to raise capital through the stock market, the CMEPA Bill reduced the DST on the original issuance of shares from 0.01% to 0.0075%.
Incentives on mutual funds and Unit Investment Trust Funds (UITFs)
To promote investing in several collective investment schemes (CIS), the CMEPA Bill grants income tax exemption for gains from redemption of a unit of participation in a mutual fund and UITF. It also removes DST on the original issuance, redemption, or other disposition of shares in mutual funds and the issuance of certificates or other evidence of participation in mutual funds and UITFs. However, these tax incentives do not extend to VUL products, despite being part of CIS.
Additional Deduction of 50% on employer’s contribution to PERA
The Personal Equity and Retirement Account (PERA) Act, which was introduced in 2008 to strengthen our capital market, has faced several challenges that have hindered its widespread utilization in the Philippines despite its several tax incentives. To address the issue, the CMEPA Bill encourages private employers to increase their contribution by providing an additional 50% deduction on the employer’s contribution, provided that such contribution is at least equal to the contribution of their employees.
The CMEPA Bill represents a pivotal moment for the Philippine capital market. By simplifying the tax rates on certain passive income and significantly reducing the transaction costs on investments, the enactment of the CMEPA Bill is expected to increase participation in the Philippine stock market, boost our country’s trading activity, increase market liquidity, and enhance the country’s competitiveness in the global financial market.
However, the success of these reforms will still depend on how well these resonate with the investors and how effectively the government implements the tax reforms. Will the CMEPA Bill become the breakthrough the Philippine market needs, or will it take time for both the government and investors to adapt to the changes?
While the full impact of the CMEPA Bill remains to be seen, one thing is certain—the future of the Philippine capital market is on the cusp of a major transformation, and this is just the beginning.
As published in BusinessWorld, dated 18 March 2025
