CMEPA law standardizes tax on interest income--DOF

The Department of Finance (DOF) on Thursday clarified that the Capital Markets Efficiency Promotion Act (CMEPA) does not impose a new tax but standardizes the tax rate on interest income to correct an unfair system that favored the wealthy.

In a statement, the DOF said under CMEPA, the tax on interest income was set at 20 percent to simplify compliance, eliminate confusion, and level the playing field for all Filipinos.

Prior to the law’s passage, the National Internal Revenue Code of 1997 imposes a 20 percent final tax on interest earned from bank deposits with a maturity of less than three years.

The DOF, citing data from the Bangko Sentral ng Pilipinas (BSP), said more than 99.6 percent of total deposits were already subject to the 20 percent tax rate, while only 0.4 percent enjoyed preferential rates.

"More specifically, the deposits that benefited from favorable rates are those with a maturity period of more than five years, which are tax exempt, while deposits that mature in 4 to 5 years and 3 to 4 years are subject to just 5% and 12% tax, respectively," said the DOF.

It noted that the special tax treatment favored those who can afford to park their savings in long-term deposits, making the tax system unfair for short-term depositors who face liquidity issues and need immediate access to their funds.

"The CMEPA merely corrects this outdated and inequitable system that placed a heavier burden on ordinary Filipinos who do not have the extra cash to put in banks for longer periods. With the new law, interest income is now taxed uniformly with a flat rate of 20%, regardless of the maturity period," the DOF said.

The DOF also clarified that the standardized tax rate is not retroactive and does not apply to financial instruments that were issued or transacted before July 1, 2025.

Existing long-term deposits made prior to the effectivity of the law will continue to enjoy the preferential rate until their maturity.

The unified rate also does not apply to provident savings programs under the Social Security System (SSS), Government Service Insurance System (GSIS), and Pag-IBIG such as MP2.

These savings programs remain exempt from tax.

Apart from leveling the playing field, the DOF said CMEPA empowers ordinary Filipinos to invest and diversify their sources of income by reducing the stock transaction tax (STT) rate from 0.6 percent to 0.1 percent, reducing the documentary stamp taxes (DST) on original issuance of shares from 1 percent to 0.75 percent, and removing the DST on collective investment schemes.

CMEPA removed the DST on the original issuance, redemption, or transfer of mutual fund shares, as well as certificates or proof of participation in mutual funds or investment trust funds.

"These measures are seen to cut transaction costs, encourage market participation and financial planning, boost market liquidity, make the country’s equities market regionally competitive, and increase capital market growth," the DOF said.

The DOF said CMEPA also imposes a uniform 0.75 percent DST on bonds, debentures, and certificates of stock or indebtedness issued in foreign countries, regardless of jurisdiction.

"The DOF will continue to exercise prudence in formulating sound fiscal policies to eliminate inconsistencies in the system and ensure a more equitable tax environment for the people," the DOF said.

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