The Passive Income and Financial Intermediary Taxation Act (PIFITA) or House Bill No. 304 hurdled the scrutiny of the House Ways and Means Committee a few days ago. If passed into law, PIFITA will amend certain provisions of the National Internal Revenue Code of 1997 (Tax Code) on the taxation of passive income and income of financial intermediaries. PIFITA will be the fourth package of the government’s comprehensive tax reform program.
According to the explanatory note of Representative Joey Salceda, the aim of the PIFITA is to make capital income taxes and financial intermediary taxes simpler, fairer, and more efficient. Representative Salceda added that the financial sector has a sizable contribution to the economy and it plays a crucial role in financing large-scale investment, including the Build, Build, Build (BBB) programs. The reforms proposed by House Bill No. 304 seek to address several deficiencies in the taxation of these financial sectors. These deficiencies include complicated tax structure, susceptibility to arbitrage, uneven playing field, inequitable distribution of tax burden, an uncompetitive tax system, and high administrative and compliance costs.
Let us take a look at certain reforms of the proposed PIFITA and evaluate if these changes will actually benefit target taxpayers.
* In the proposed bill, interest income shall be subject to a final tax rate of 15% from 20%. On the other hand, exemption from income tax of income derived by offshore banking units and income derived by a depositary bank under the expanded foreign currency deposit system were removed.
Royalties, prizes, and other winnings remain at 20%.
* Cash and/or property dividends received by an individual and nonresident foreign corporations are subject to a final tax of 15%. Tax treaty provisions will apply in appropriate cases. Intercorporate dividends between domestic corporations remain to be exempted.
An addition to those subject to dividend tax are the distribution of profits from collective investment schemes (CISs). Under House Bill No. 304, a CIS shall mean any arrangement whereby funds are solicited from the investing public and pooled together for the purpose of investing, reinvesting, and/or trading in securities or other assets or different classes as allowed under the law, which may either have a corporate (investment company) or contractual structure (unit investment trust fund or similar structures).
Branch profit remittance tax remains at 15 percent. However, exemption from branch profit remittance tax of Philippine Export Zone Authority (PEZA)-registered entities was removed.
* The tax rate of capital gains derived by nonresident corporations from sale, exchange, transfer, barter, and disposition of non-listed of shares of stock not traded in the stock exchange or organized marketplace is aligned to the capital gains derived by individuals and domestic corporations (included amendment from Package 1 or the Tax Reform for Acceleration and Inclusion Law) at 15%. A similar tax rate is imposed on gains derived from debt instruments and other securities not traded in the stock exchange or organized marketplace.
* Previously, the sale, exchange, barter, and disposition of shares of stock traded in the stock exchange or organized marketplace is subject to a stock transfer tax (STT) of 6/10 of 1% of the gross selling price or gross value in money. In recent rulings by the Bureau of Internal Revenue, STT is a transfer tax.
In the proposed bill, however, gain from the sale, exchange, barter and disposition will be is now treated as an income tax. The tax shall be based on the presumptive gain of such sale, exchange, barter, and disposition of the shares of stock. Moreover, PIFITA proposes a scheduled reduction of rate until 2024, diminishing 1/10 year-on-year. As proposed under House Bill No. 304, the tax rate shall be 1/10 of 1% of the gross selling price or gross value in money by 2024.
* A single rate of 5% gross receipts tax (GRT) shall be imposed for all financial intermediaries for income from interest, commissions, and discounts from lending activities, as well as income from financial leasing, royalties, rentals of property whether real or personal, profits from sale or exchange including gains derived from sale or transfer of real properties, net trading gains within the taxable year of foreign currency, debt instruments, and all other items treated as gross income under Section 32 of the Tax Code.
* House Bill No. 304 also removed the distinction on tax rate based on the length of maturity period of the instrument. Dividends and equity shares and net income of subsidiaries of such financial intermediaries remains at 0%.
Financial intermediaries include banks, non-banks performing quasi-banking functions, and other non-bank financial intermediaries.
* The bill proposes to reduce the premium tax rate of pre-need, life, and HMO insurance from 5% to 2%.
Nonlife insurance transactions are currently subject to value-added tax (VAT). Under PIFITA, a 5% premium tax rate shall be imposed on nonlife insurance transactions. Nonlife reinsurance companies, however, are still subject to VAT, except for the direct premium, which was already subjected to premium tax by the direct insurer.
PIFITA also provides that, in variable insurance contracts, the amount in excess of the insurance costs is not subject to premium tax, gross receipts tax, or VAT.
* Under PIFITA, the percentage tax imposed on shares of stock sold or exchanged through initial public offering was removed.
* There is also the rationalization of documentary stamp taxes. In Package 1 of the tax reform (TRAIN Law), the stamp tax on the original issuance of shares of stocks was increased. In PIFITA, it was proposed to be pegged at 0.75% of the par value, a slight decrease from the current rate of P2.00 per P200.00 of the par value. Surprisingly, the stamp tax on sales, agreements to sell, memoranda of sales, deliveries, or transfer of shares or certificates of stock was removed.
* The stamp tax on life and health insurance is still subject to a graduated rate; while the stamp tax on property insurance and fidelity bonds and other similar insurance policies will be reduced gradually until 2024 to 7.5% from 12.5%.
Are the above reforms good enough? The advantages of PIFITA outweigh probable disadvantages. Uniformity reduces the misapplication of tax rates. Simplification makes tax compliance easier. Finally, who would not want lower tax rates?
Changes in the PIFITA are expected, as it will still be reviewed and passed by both houses of Congress and the President. Our hopes are high that the final version of PIFITA brings us closer to a simpler, fairer, and more efficient tax system.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Eliezer P. Ambatali is a tax manager of Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.