On July 1, the Capital Markets Efficiency Promotion Act (CMEPA), or Republic Act No. 12214, took effect. As specifically provided in the law, the State recognizes the necessity of a simpler, fairer, more efficient, and regionally competitive passive income tax system to encourage savings, as well as develop and deepen capital markets. Thus, CMEPA was signed into law to encourage broader investment in the capital markets and promote inclusive growth.

While the intent of the law is clear, misinformation surfaced when the law took effect in July. Viral social media posts circulated claiming that bank deposits in the Philippines will be taxed at 20%. Though these claims are inaccurate and misleading, many were quick to believe the claims. Further posts even advocated just keeping money at home, or spending, instead of saving.

The Department of Finance (DoF) and Malacañang have refuted these posts, clarifying that taxation applies not to the savings themselves, but solely to the interest earned from those savings. Furthermore, the Bureau of Internal Revenue (BIR) released the necessary rules and revenue regulations for the implementation of CMEPA on Aug. 5.  Among these are Revenue Regulations (RR) No. 20-2025 and 21-2025.

RR Nos. 20-2025 and 21-2025 were issued to implement the amendments of CMEPA to the taxation of certain passive income.

INTEREST INCOME
Effective July 1, all interest income earned by Filipino citizens, resident foreigners, and non-resident foreigners engaged in trade or business, domestic and resident foreign corporations, from both peso and foreign-currency bank deposits or deposit substitutes, trust funds and other similar arrangements, regardless of their nature or tenure, are now subject to 20% final withholding tax. Interest income of nonresident foreigners not engaged in trade or business and nonresident foreign corporations will still be subject to a 25% final withholding tax or tax treaty rate. Income of non-residents, whether individuals or corporations, from transactions with depositary banks under the expanded system, remain exempt from income tax.

Interest income from project-specific bonds issued by the Republic of the Philippines or any of its instrumentalities to finance capital expenditures or programs covered by the Philippine Development Plan or its equivalent and other high-level priority programs of the National Government, as determined by the Secretary of Finance, are exempt from income tax.

GAINS FROM SALE, TRANSFER, OR DISPOSITION OF INVESTMENTS
Except in the case of non-resident foreign corporations, capital gains from the sale, exchange or other disposition of shares of stock in a domestic or foreign corporation not traded in a local or foreign stock exchange are subject to 15% capital gains tax, regardless of the classification and status of the seller (individual or corporation). For non-resident foreign corporations, only capital gains from the sale, exchange or other dispositions of shares of stock of a domestic corporation, not traded in a local or foreign stock exchange, are subject to 15% capital gains tax.

Shares in a domestic corporation sold or disposed of through a local or foreign stock exchange are subject to stock transaction tax (STT) of 1/10 of 1% effective July 1. Similarly, shares in a foreign corporation sold or disposed of through a local stock exchange are subject to the same STT. As specifically provided in RR No. 21-2025, STT is in lieu already of capital gains tax.

Since individuals, other than resident citizens and resident foreign corporations, are subject to Philippine income tax on their Philippine sourced income only, we hope the BIR issues further guidance on the treatment of sale of shares in a foreign corporation for these non-residents.

Gains realized from the sale, exchange, or retirement of bonds, debentures, or other certificates of indebtedness, including those with a maturity period of more than five years, are now subject to income tax effective July 1. If traded through a local or foreign stock exchange, the sale is subject to Stock Transaction Tax (STT).

Gains realized by the investor upon redemption of shares of stock in a mutual fund company, or units of participation in a Mutual Fund or Unit Investment Trust Fund are not subject to income tax provided, that prior to such redemption, final taxes due on realized gains were previously withheld at the level of the underlying assets.

INVESTMENTS PRIOR TO JULY 1
Since CMEPA took effect on July 1, any tax exemption and preferential rate on financial instruments issued or transacted prior to July 1 are subject to the prevailing tax rate at the time of its issuance for the remaining maturity of the relevant agreement.

As provided in the implementing rules and regulations, the following conditions must be complied with for the prevailing rate or tax exemption prior to July 1 to apply:

1. The financial instrument was issued or transacted prior to July 1, as evidenced by the instrument itself or any other relevant agreement either in written or electronic format;

2. The instrument itself or agreement provides for the maturity period of the financial instrument as agreed upon or stated in the instrument which is beyond July 1; and

3. There is no change in the maturity date or remaining period of coverage from that of the original document or agreement, and no renewal or issuance of new instrument to replace the old ones, starting July 1.

While the implementing rules and regulations outlined the conditions for exemptions or preferential rates to apply to financial instruments issued prior to July 1, further clarity from the BIR is needed regarding the tax treatment of gains from the sale of instruments that were previously exempt from income tax. For example, are gains realized from the sale of long-term instruments — originally exempt because they were issued before July 1, but sold on or after that date — still considered exempt?

Although initial confusion around the taxation of savings deposits has since been addressed, and the BIR has released the implementing rules and regulations, the early uncertainty caused by CMEPA’s amendments underscores the critical importance of clear and timely communication of the implementation of the changes brought about by new tax laws. Ensuring that the public is well-informed about tax changes is essential.

Ideally, the effective implementation of new laws relies on the availability of comprehensive rules and regulations before those laws come into force. At the end of the day, a law, no matter how well-crafted, is only as effective as its implementation. We laud the DoF and BIR effort in ensuring that the required implementing rules and regulations are issued within the deadline set by the law. However, the effectivity of the new tax laws must consider the time required of government agencies to frame, consult and issue the implementing regulations. This ensures that the intended objectives are achieved, and compliance from taxpayers is seamless.

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.

Ma. Lourdes Politado-Aclan is a director from the Tax Advisory & Compliance practice area of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.

pagrantthornton@ph.gt.com