As the Greek philosopher and naturalist Theophrastus said, “Time is the most valuable thing a man can spend.” With everything moving at a fast pace, time becomes one of the most important resources anyone can have. This is why our government continues to invest in infrastructure, implement policies like the Non-Contact Apprehension Policy (NCAP), and introduce traffic management schemes — efforts aimed at helping us reclaim even just a few more minutes of our day. Whether that extra hour is spent being productive at work or enjoying moments with loved ones, its value is undeniable.
In the realm of investment, the principle is just as clear: time is money. And where there is money, tax naturally follows. Amidst the constant hustle of life, we can channel our resources into various passive income streams — be it through bank savings accounts or by investing in company stock — with the expectation that their value will appreciate over time. These channels allow us to generate extra wealth, offering a path for better financial comfort and security than if we simply held onto idle cash.
With the introduction of the Republic Act (RA) No. 12214, otherwise known as the Capital Markets Efficiency Promotion Act (CMEPA), signed into law on May 29, taxpayers can expect an improved, simpler, and more equitable tax system as regards their passive income. The goal of the new law is to promote and develop the competitiveness of our capital markets. The reforms are designed to encourage investors, be they small or large, to invest more. The law highlighted amendments to the Tax Code, as follows:
SIMPLER, STANDARDIZED TAX ON INTEREST INCOME AND ROYALTIES
Previously, interest income was subject to various tax rates, ranging from exempt to 20%. This created confusion for some taxpayers. With the implementation of CMEPA, the tax system has been simplified. All interest income from any currency bank deposit, deposit substitutes, trust funds, and similar financial instruments is now uniformly taxed at a 20% final rate. This change simplifies compliance and promotes fairness.
The above includes interest income from foreign currency deposits, which is now subject to a higher final tax rate of 20%, up from the previous 15%. This change aims to support Philippine banks and eliminate the preferential tax treatment granted to foreign currency deposit accounts.
The updated tax rules apply to resident individuals, citizens, nonresident aliens engaged in business in the Philippines, and domestic corporations, while nonresident aliens not engaged in business and nonresident corporations remain subject to a 25% final tax on all Philippine-sourced income.
Last, royalty payments, which were previously included under the same category as interest, are now a separate category and subject to 20% as well, with the exception of royalty payments on books, other literary works, and musical compositions, which are charged 10%.
REDUCTION OF STOCK TRANSACTIONS TAX
The stock transaction tax (STT) on the sale or exchange of listed shares of domestic corporations has been significantly reduced from 0.6% to 0.1% of the gross selling price or gross money in value. In addition, the STT now clearly applies to transactions in both Philippine and foreign stock exchanges. These reforms aim to enhance market liquidity, reduce transaction costs, and make the Philippine capital markets more competitive regionally.
CAPITAL GAINS TAX ON THE SALE OR DISPOSITION OF SHARES OF STOCK OF FOREIGN CORPORATIONS
Under CMEPA, a 15% final capital gains tax is now imposed on net gains from the sale, exchange, or transfer of shares in foreign corporations — aligning them with the current tax treatment of domestic shares. This reform eliminates the previous tax advantage for foreign investments, creating a level playing field and encouraging greater investment in Philippine companies.
REDUCED DST ON ORIGINAL SHARE ISSUES
Under the same law, the Documentary Stamp Tax (DST) on the original share issues by corporations has been reduced from 1% to 0.75% of par value, lowering the cost of capital formation.
ENHANCED DEDUCTIONS FROM GROSS INCOME IN RELATION TO THE PERA ACT
Under CMEPA, employers who contribute an amount equal to or greater than their employees’ contributions to a Personal Equity and Retirement Account (PERA), as established under RA No. 9505, are entitled to an additional tax deduction equal to 50% of their actual contributions. This is still subject to the maximum allowable contribution of P100,000, or its equivalent in any convertible foreign currency, for local employees. This incentive encourages private employers to actively support their employees’ retirement savings while benefiting from reduced taxable income.
KEY TAKEAWAYS
CMEPA takes effect on transactions starting July 1. It marks a significant advance, enhancing both the ease of investment and their value while contributing positively to the growth of the capital markets. As we await the law’s effectivity and the subsequent release of the Bureau of Internal Revenue’s (BIR) Implementing Rules and Regulations, it is my hope that taxpayers seize these beneficial changes to optimize their earnings and support market development. We are often so focused on our daily duties and responsibilities that we sometimes overlook the fact that we can simply use time to generate a bit of passive income on the side. In a world where every second counts, remember: time is the one resource we can never get back. Let’s make the most of it.
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.
John Alexis S.B. Sumulong is a manager of the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.
