Capital Markets Act Highlights: Outlining Essential Points of the Efficiency Promotion Act
Simplifying Capital Market Taxation: The Capital Markets Efficiency Promotion Act (CMEPA)
Effective July 1, 2025, the Capital Markets Efficiency Promotion Act (CMEPA) will bring significant changes to the taxation of passive income related to capital market transactions in the Philippines.
The key amendments aim to standardize tax rates, promote equity, clarify terms, and support the growth of the Philippine capital markets.
Standardization of Tax Rates
Interest income from Philippine-sourced deposits, trust funds, and similar financial instruments will now be subject to a flat 20% final withholding tax. This uniform tax rate also applies to interest from foreign currency deposits, aligning with domestic rates. Winnings and prizes exceeding PHP 10,000 are also taxed at 20%.
Modification to the Taxation of Shares
The law simplifies and clarifies taxation on the original issuance and subsequent sale or transfer of shares, aiming for fairness and efficiency in the tax treatment of capital gains, dividends, and other passive incomes linked to stock ownership.
Enhanced Tax Clarity and Definitions
CMEPA clarifies important terms like “shares of stock,” “securities,” and “passive income” to ensure consistent tax administration across capital market transactions.
Promotion of Equitable Taxation
By removing preferential and tiered tax rates, the law removes distortion and arbitrage opportunities in tax treatment. For instance, the exemption from final withholding tax on long-term deposits has been repealed, making interest income from such deposits and investments subject to a 20% final withholding tax.
Support for Capital Market Development
The reforms aim to reduce transaction costs and simplify compliance, thereby encouraging investments and helping the Philippine capital markets become more competitive in the region by adopting internationally aligned tax standards.
Other Key Amendments
- For domestic shares traded through a foreign stock exchange, a Stock Transaction Tax (STT) shall be levied, assessed, and collected on every sale, exchange, or other disposition of shares of stock. For the sale by a dealer in securities in a foreign stock exchange, STT is not applicable, and capital gains tax is imposed instead.
- Equity-based compensation, such as stock options, restricted stock units, stock appreciation rights, and similar items, will be included in the gross income at the time of exercise.
- DST at a rate of 75% of one percent shall be imposed on the original issuance of shares on the par value or actual consideration for no-par shares, bonds, debentures, certificates of stocks or indebtedness issued in a foreign country, and debt instruments on the issue price.
- An additional 50% deduction of the employer's actual contributions made to the Personal Equity and Retirement Account (Pera) of employees will be granted to private employers that contribute at least equal as the contributions of the employees, subject to the maximum allowable contribution under RA 9505.
- Only one DST shall be imposed on the loan agreement and promissory notes, mortgage, security interest over personal property, and other contracts issued to secure such loan. Deposit substitutes, such as reverse repurchase agreements, certificates of assignment or participation, and similar instruments with recourse, will be excluded from the definition of deposit substitutes under CMEPA.
In conclusion, the Capital Markets Efficiency Promotion Act aims to bring clarity, uniformity, and fairness to the taxation of passive income related to capital market transactions. The changes will take effect on July 1, 2025, and are expected to support the growth of the Philippine capital markets.
The Capital Markets Efficiency Promotion Act (CMEPA) targets government regulation of the Philippines' capital markets, particularly in taxation. This act aims to standardize tax rates on financial instruments, such as deposits, trust funds, and foreign currency deposits, under a flat 20% final withholding tax. Moreover, the law encourages investments by simplifying and clarifying taxes on the original issuance and subsequent sale or transfer of shares, as well as enhancing definitions of key terms like "shares of stock" and "passive income." Furthermore, CMEPA aims to support the growth of the Philippine capital markets by adopting internationally aligned tax standards, reducing transaction costs, and simplifying compliance.
