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”): The CMEPA will lower the STT from 0.6% to 0.1% of the gross selling price or gross value in money. This reduction aims to make trading more accessible and encourage wider participation. The lower rate is said to be at par with the tax rates imposed by our regional neighbors Malaysia, Singapore, and Thailand. It is expected that the lower transaction costs will boost trading, improve liquidity, and broaden the tax base.
· Lowering the Documentary Stamp Tax (“DST”): The CMEPA will also lower the DST due from the original issuance of shares from 1% to 0.75% of the par value. It also introduces DST exemption on the original issuance of certificate, redemption, and disposition of Unit Investment Trust Funds (“UITFs”) and mutual funds. This exemption is expected to make UITFs and mutual funds more appealing, particularly for those seeking diversified portfolios.
· Exclusions from Gross Income: The CMEPA adds “gains from the redemption of shares or units of participation in mutual funds and UITFs” to the list of items excluded from gross income and exempt from taxation. This amendment, aimed at creating parity with other Collective Investment Schemes (“CIS”), is expected to further incentivize these investment vehicles.
· Removal of Preferential Tax Rates: The CMEPA will also remove the preferential tax rates and exemptions on long-term deposits and investments. The removal will broaden the tax base and address the inequitable distribution of the tax burden between short-term and long-term investments. If approved, the interest income on long-term deposits and investments, like other types of deposits, will be subject to a final tax of 20%.
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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Ref.: https://accralaw.com/2025/02/05/boosting-stock-trade-a-closer-look-at-cmepa/