The House of Representatives passed on Monday night the fourth package of the Duterte administration’s Comprehensive Tax Reform Program known as Passive Income and Financial Intermediary Taxation Act by a 186-6-2 vote.
Also on Monday, House approved the proposed bill allowing foreign professionals to get employed.
Voting 201-6-7, the House approved the bill allowing the exclusion of the “practice of profession” from the Foreign Investment Negative List, allowing more foreign professionals can be employed in the country.
The House in plenary session presided by Deputy Speaker Neptali Gonzales III approved amendments to the Foreign Investments Act or Republic Act 7042 that sets regulations of imported labor among others in companies granted incentives by the government.
The bill excludes the “practice of professions” from FINL coverage to attract foreign professionals to the country.
The bill also lowers to 15 the minimum number of direct local hires required of foreign investors, from 50.
The House passed the tax measure contained in House Bill 307, with the bill’s authors saying the measure complemented Republic Act 10963 or the “Tax Reform for Acceleration and Inclusion (TRAIN) Act” by making passive income and financial intermediary taxes simpler, fairer, more efficient, and more regionally competitive.
Albay Rep. Joey Salceda, the main proponent of the bill and chairman of the House committee on ways and means, cited numerous deficiencies as compelling reasons to undertake tax reform in the financial sector.
These deficiencies include complicated tax structure, susceptibility to arbitrage, and inequitable distribution of tax burden.
“The inclusion of the capital income and financial services in the current administration’s Comprehensive Tax Reform Program provides a window of opportunity to achieve the much-needed reform in the financial sector,” Salceda said in his explanatory note of the bill.
The PIFITA particularly aims to: a) provide neutrality in the tax treatment across financial institutions and financial instruments; b) simplify what has become a complex tax system; c) improve equity across investors and savers; d) minimize arbitrage opportunities; and e) promote capital market development and tax competitiveness within the context of financial globalization, increased mobility, and financial inclusion.
According to Department of Finance Undersecretary Karl Kendrick Chua, the PIFITA would make the country more competitive within the Southeast Asian region.
He added the changes would be revenue neutral in the short term, as some tax rates will be lowered while others are raised.
“This is the priority mentioned by the President in the SONA and also a priority of Finance Secretary Dominguez because we need to address the issues in the Tax Code,” Chua said.
Among the proposals of the PIFITA is the decrease of tax rates on interest income from regular savings and short-term deposits from the current 20 percent to 15 percent—15 percent being the lowest tax on labor income and within the range relative to other states in the region.
Tax rates on interest income from foreign currency deposits and long-term deposits shall both likewise dip to 15 percent. Dividend income shall be fixed at 15 percent except for inter-corporate bonds.
Tax rates on proceeds from the sale of listed shares shall be lowered by 0.1 percentage point each year beginning 2020 until 2025, from the current 0.6 percent to 0.1 percent.
This is to decrease tax on listed stocks and be regionally competitive.
Tax rates from sale of unlisted shares of stock shall remain the same at 15 percent. Initial tax offering tax shall be removed altogether to reduce friction cost.
Tax rates on proceeds from the sale of listed debt instruments shall be at 0.1 percent to equalize tax of listed debt and equity instruments.
Tax rates on gains from sale of unlisted debt instruments shall be fixed at 15 percent.
Income from interest, commissions, and discounts from lending activities as well as income from financial leasing and other income shall be taxed five percent to harmonize gross receipts tax. Dividends and equity shares in net income of subsidiaries shall remain exempt from tax.
Tax rates for life and health insurance will remain at two percent premium. For HMO, pension, and pre-need insurance, the tax rates shall be slashed to two percent premium tax from 12 percent value-added tax (VAT).
The principle behind both is that the tax for insurance shall be the same as that used for savings to level the playing field and simplify compliance.
The 12 percent VAT for non-life shall be retained since non-life insurance is a consumption product by nature. Crop insurance shall remain exempt from tax.
The PIFITA further proposes the reform of documentary stamp taxes, which Chua reported are high and not uniformly expressed in ad valorem.
Under PIFITA, all DSTs shall be lower and expressed in ad valorem in general. This shall decrease friction cost of financial instruments.
The DST reform seeks to express all DST rates in ad valorem; equate DST on debt and equity; unify all non-life insurance rates; remove DST on domestic money transfers to support financial inclusion; and remove “nuisance” provisions with low revenue take.
The Professional Regulation Commission opposed the amendments to the Foreign Investments Act or Republic Act 7042, saying the practice of professions regulated by the agency should be limited to Filipino citizens.
These professions include doctors, nurses, teachers, accountants, etc.
Albay Rep. Joey Salceda, Deputy Speaker Luis Raymund Villafuerte and Tarlac Rep. Victor Yap were the principal authors of the bill.
Villafuerte said the amendments to the Foreign Investments Act “show the country’s openness to change and willingness to live up to our economic potential by reeling in more foreign investments.”
He said the bill also “hopes to facilitate the transfer of technologies by attracting FDIs and further hopes to make the Philippines more accessible to foreign investors and generate more employment opportunities in the country.”