Progress in reforming the Philippines’ tax policies

Taxes are a crucial part of our society and economy as they are the main source of revenue for the government. Without taxes, the country would not have the necessary funds to provide services such as education, healthcare, and public safety.

While the government always relies on taxation as a means to generate revenue and fund public services, tax policies are not static and must adapt to changing economic conditions and societal needs.

Aside from the Ease of Paying Taxes (EOPT) Act, which has been signed to law earlier last January, the Philippines has recently amended and developed other tax policies to enhance fiscal sustainability and modernize tax administration.

Proposed Comprehensive Tax Reform Program

On Feb. 12, the Department of Finance (DoF) has presented a refined proposal for a bill simplifying passive income taxes, known as Package 4 of the Comprehensive Tax Reform Program (CTRP 2024).

The CTRP 2024, a priority measure of the Marcos, Jr. administration, seeks to revamp the tax system in the Philippines to stimulate growth in key financial markets by simplifying the tax structure on passive income and various financial products.

Under Package 4 of the CTRP 2024, several amendments and adjustments to tax rates across different sectors have been proposed. These changes are poised to reshape the taxation framework, impacting both individuals and businesses.

One notable change is the harmonization of the interest income tax at a flat rate of 20%. This move aims to simplify tax compliance and create a more uniform tax structure. Royalties, on the other hand, will adhere to the existing tax code until 2027, after which they will be harmonized and reduced to 15% in 2028.

The dividend income tax will remain unchanged until 2027, with a proposed harmonization at a rate of 10% in 2028. Additionally, the stock transaction tax is set to undergo gradual reduction, decreasing annually by 0.1% from 0.6% to 0.1% by 2028.

Current taxes on financial transactions, including sales, agreements, deliveries, or transfer of shares, will be maintained until 2027 and subsequently removed in 2028.

Tax rates on various insurance policies will undergo changes, with some seeing gradual reductions annually. Policies such as insurance upon property and fidelity bonds will experience a decrease in rates, aimed at promoting insurance penetration and mitigating risks. Furthermore, excise taxes on pickup trucks are proposed to be adjusted, contributing to revenue generation.

The proposed changes to taxes on passive income, financial intermediaries, financial transactions, and excise tax on pickup trucks are projected to yield significant revenues. According to the DoF, these reforms are estimated to generate approximately P12.2 billion in revenues from the third quarter of 2024 to 2028.

CTRP 2024 was approved on the third and final reading by the House of Representatives on Nov. 14, 2022, and is currently taken up in the Senate Committee on Ways and Means.

Extension of Tax Amnesty Program

In 2023, the Congress approved Republic Act (RA) 11956, which extends the Estate Tax Amnesty in the Philippines until June 14, 2025. This extension gives beneficiaries more time to settle any unpaid estate taxes without penalties and interests. The amendment also broadens the coverage of the estate tax amnesty to include estate taxes that have remained unpaid or accrued as of May 31, 2022.

The Estate Tax Amnesty Act aims to provide reasonable tax relief to estates with outstanding tax liabilities. It also encourages compliance by offering immunities and privileges to those who fully comply with the conditions set forth in the Act.

Tax collection on digital services

On the other hand, a proposal taxing digital services, called the House Bill No. 7425, also known as the Digital Services Tax Bill or the Digital Economy Taxation Act of 2020 (DETA 2020 Bill), was initiated to capture the value created through digital transactions.

The bill seeks to impose a 12% value-added tax (VAT) on digital goods, services rendered electronically, digital advertising services, internet-based subscription services, and transactions on e-commerce platforms.

Nonresidents providing digital services would be required to establish representative offices or appoint resident agents in the Philippines. The bill also designates network orchestrators and e-commerce platforms as withholding agents for income tax and VAT purposes.

The House Bill 7425 was approved by the House of Representatives in September 2021, and is currently pending at the Senate. — Mhicole A. Moral