On 14 February 2024, the Philippines Department of Finance declared a refined proposal for a bill for simplifying passive income taxes. The bill entitled ‘Package 4 of the Comprehensive Tax Reform Program (CTRP)’ is a measure recalibrated by Finance Secretary Ralph Recto during his first week in office to the Senate Committee on Ways and Means on February 12, 2024.
A priority measure of the Marcos, Jr. administration, Package 4 seeks to encourage growth in key financial markets by simplifying the tax structure on passive income and specific instruments and other financial products.
Assistant Secretary Karlo S. Adriano of the DOF’s Fiscal Policy and Monitoring Group (FPMG) presented to the Senate the salient features of the refined proposal, which aims to maintain the structure of some products and instruments while deferring the implementation of certain provisions by 2028 or when the government will have been in a better fiscal position.
Under Package 4, the interest income tax will be harmonized at 20%, while royalties will be maintained according to the existing tax code until 2027, subsequently harmonized and decreased to 15% in 2028. Similarly, the dividend income tax will remain unchanged until 2027, with a proposed harmonization of 10% in 2028.
On the other hand, the stock transaction tax will gradually be reduced annually by 0.1%, from 0.6 % to 0.1% in 2028. Current taxes on financial transactions, including sales, agreements to sell, memoranda of sales, deliveries, or transfer of shares or certificates of stocks, will be maintained until 2027 and removed in 2028. The same timeline applies to taxes on all bills of exchange or drafts.
Tax rates on bank checks, drafts, certificates of deposit not bearing interest, and other instruments will remain unchanged, while those of life insurance policies will also see no adjustments.
On the other hand, rates on insurance policies upon property, fidelity bonds, and other insurance policies will gradually decrease annually by 1%, from 12.5% to 7.5% in 2028. Furthermore, taxes on Philippine Charity Sweepstakes Office (PCSO) tickets, prizes, and other winnings will have no changes.
Lastly, taxes on mortgages, pledges, and deeds of trust will stay as is until 2027, after which they will be lowered to a 0.3% rate in 2028.
The proposed changes to taxes on passive income, financial intermediaries, financial transactions, and excise tax on pick-up trucks are expected to yield P12.2 billion in revenues from the third quarter of 2024 to 2028, versus the PHP 83 billion foregone revenue from the original version of the bill and the PHP 19.3 billion revenue loss from the House version.
Support from the private sector
Various financial groups supported the passage of the refined Package 4 bill during the Senate hearing. Mr. Steven C. Te, President of the Trust Officers Association of the Philippines (TOAP), said they welcome the proposal to reform taxes on passive income, further noting the bill’s objectives to simplify taxation and harmonize interest rates, dividends and other passive income.
The DOF is currently working on finalizing the exemptions, repeal list, and tax administration of the proposed bill. The Senate is set to form a technical working group (TWG) to discuss the proposed bill beginning next week.
Secretary Recto stated that the DOF has no new tax proposals but is recalibrating its existing priority tax measures to guarantee that these are fairer, easier to collect, and more practical while ensuring that these reforms will not translate to unnecessary burden to Filipino consumers and taxpayers.
