The Capital Markets Efficiency Promotion Act (“CMEPA”), currently known as Senate Bill No. 2865, has been approved on Third Reading by the 19th Congress. The objective of our lawmakers in passing the CMEPA is to introduce reforms that may help boost trading in the Philippine Capital Markets by providing a simpler, fairer, more efficient, and regionally competitive passive income tax system.
Based on the current version, the following key amendments are expected to boost and stimulate market activity and attract investment:
Lowering the Stock Transaction Tax (“STT”)
Lowering the Documentary Stamp Tax (“DST”)
Exclusions from Gross Income
Removal of Preferential Tax Rates
The CMEPA will also introduce more precise definitions that will clarify terms, such as “Share of Stock,” and “Securities.” Particularly, the changes to the definition of “shares” represent a shift from an illustrative definition to a descriptive one, leaving less room for interpretation. The CMEPA also defines the term “passive income” found in the Tax Code for the first time. These refinements are expected to facilitate proper tax interpretation and simplify compliance for taxpayers.
With these proposed reforms, the CMEPA is estimated to cost the government around Php40 billion from 2025 to 2028 (SEPO Policy Brief, 2024). Nonetheless, the CMEPA seeks to offset this loss by removing the excise tax exemption for pick-ups which was previously granted under Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion (“TRAIN”) Law. The exemption was premised on the assumption that pick-ups are predominantly used by small business owners and professionals. The proposed removal of this excise tax exemption, as previously explained by the Department of Finance, addresses the observation from the Department of Trade and Industry that manufacturers would modify pick-up trucks to become passenger, leisure, or sport utility vehicles.
The CMEPA represents a strategic shift from the broader Passive Income and Financial Intermediary Taxation Act (“PIFITA”), which aimed to provide reforms across all CIS. The challenges faced by PIFITA necessitated the introduction of House Bill No. 9277 or CMEPA, and its Senate version, Senate Bill No. 2865. The Senate version envisions a more targeted approach.
While the CMEPA represents significant reforms, it is said that there are certain proposals from the original PIFITA bill, such as the reduced dividend tax for non-resident aliens and the graduated DST rate for non-life insurance products, which were not included in the CMEPA. The proposed DST exemption for mutual funds and UITFs was also not extended to Variable Unit-Linked (“VUL”) insurance products, another form of CIS. The inclusion of which will be more consistent with its goal to ensure a level playing field among the CIS. More particularly, the CMEPA stops short of fully rationalizing passive income and financial intermediary tax rate. The adoption of a single rate for passive income could have further streamlined the tax treatment of various financial instruments.
If the proposed reforms in the Tax Code are enacted, the coming years will be crucial for observing how these changes translate to tangible benefits for investors/taxpayers and the economy. For now, we have yet to see if the CMEPA will indeed boost the trading.
This article is for informational and educational purposes only. It is not offered and does not constitute legal advice or legal opinion.
Princess Rexille V. Liboon is a Senior Associate of the Tax Department of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW).
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