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House body turns to financial products as it presses on with tax reform

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THE HOUSE of Representatives Ways and Means Committee on Monday raced to tackle more of the Executive’s proposed tax reforms in a bid to approve as many of them as possible before lawmakers turn their attention to preparations for next year’s midterm elections, this time focusing on making capital income and financial intermediary taxes simpler, fairer and more efficient.

“The taxation of capital income and financial services has become overly complex,” according to House Bill No. 8252 — or the proposed “Capital Income and Financial Intermediary Taxation Act of 2019” — the measure supported by the Department of Finance (DoF) that was filed by committee chairman Rep. Estrellita B. Suansing of Nueva Ecija’s first district and Sultan Kudarat 2nd District Rep. Horacio P. Suansing, Jr.

“Based on the current tax system, there are 80 tax base and tax rate combinations applicable to financial income, financial intermediation services and financial transactions,” according to the bill’s explanatory note, which cited factors affecting financial income taxation as type of product, type of lending, issuer, currency involved, maturity, taxpayer, residency, business status and various special laws (among others, 41 in total outside Republic Act No. 8424, or the National Internal Revenue Code, covering capital income alone, 32 of which the bill proposes to repeal).

A DoF brief distributed during the hearing showed that, under the current system, capital income tax has 52 rates and bases, tax on financial intermediaries has eight while financial transactions’ documentary stamp tax (DST) has 20.

Such a complicated tax structure — involving varied tax rates and unequal treatment of equivalent or comparable financial instruments — gives rise to arbitrage that can distort investment decisions and entails high administrative and compliance costs.

Moreover, investments in equity and some long-term instruments favored by those who can afford them are subject to lower tax rates compared to taxes on short-term investments and savings deposits of “working-class individuals,” the bill noted further.

“What we proposed is that everyone — regardless of the type of taxpayer, instrument, currency and maturity — will pay a flat rate of 15%,” DoF Undersecretary Karl Kendrick T. Chua told committee members at the briefing on Monday.

“This I think is very pro-poor because regular Filipinos, instead of paying 20%, will now pay 15%.”

Among others, existing rates on dividend income now amount to 10%, 20% and 25% for individuals, against 10-11.7% for Indonesia, Malaysia, Singapore, Thailand and Vietnam. HB 8252 proposes to simplify this regime with a uniform 15%.

The rates for companies’ dividend income — now at 10%, 15% and 30% — will also be harmonized at 15%, matching the rate of the other five major Southeast Asian economies except Indonesia.

The same measure also initially keeps the 0.6% rate for stock transaction tax on listed equities, which will then be slashed by 0.1 percentage point annually until a final rate of 0.1%. In the other comparable major Southeast Asian economies, this item is “mostly exempt”, the DoF brief noted.

The tax on initial public offerings — now at one, two and four percent and which is not levied in most of the other major regional economies except Indonesia — will be removed.

The rates of capital gains tax on unlisted stocks — currently at five percent, 10% and 15% — will also be harmonized at 15%, against exemption for individuals and 17.5% for corporations in much of the Philippines’ major Southeast Asian peers.

The proposed reform also expresses all DST rates in ad valorem (% instead of peso terms), harmonizes all life and non-life insurance rates and removes the DST on domestic money transfers in order to lift the burden on the poor, among others.

HB 8252 also proposes changes to the tax on trading gains on debt instruments and the premium tax on insurance products (proposed at two percent for life insurance and five percent for non-life insurance from the current two and 12% for life and 12% for non-life, respectively), among others.

Financial sector representatives present at the hearing generally expressed support for the measure, save for a few concerns.

For one, Philippine Insurance and Reinsurers Association (PIRA) Executive Director Michael F. Rellosa said “PIRA requests the DST on non-life policy be similar to the current related tax rates imposed on life insurance policies.”

The bill proposes 0.2%, 0.5%, 7.5% and 12.5% ad valorem DST for non-life insurance products and 0.007-0.02% for the DST on life insurance instruments.

Mr. Rellosa said lawmakers should take into consideration that the Philippines is a disaster-prone country. “We would not like our countrymen to purchase insurance from our neighbors simply because it is cheaper,” he explained.

The DoF projects incremental revenues from this reform at P18.5 billion, P16.9 billion, P15.1 billion and P13.7 billion annually between 2019 and 2022, when President Rodrigo R. Duterte ends his six-year term.

Assuming 70% tax collection efficiency, these annual projections are slashed to P13 billion, P11.8 billion, P10.6 billion and P9.6 billion in the same corresponding years. — Charmaine A. Tadalan