Package 4 COMPREHENSIVE TAX REFORM PROGRAM Passive income and - PDF document

Draft for discussion. Preliminary and 8/27/2019 subject to change. Draft for discussion. Subject to change. CTRP – Package 4: Top 10 (as of August 27, 2019) Package 4 COMPREHENSIVE TAX REFORM PROGRAM Passive income and financial intermediary tax reform (PIFITA) Why reform is needed As of August 27, 2019 http://taxreform.dof.gov.ph/publication/recent-presentations/ 1 Draft for discussion. Subject to change. CTRP – Package 4: Top 10 (as of August 27, 2019) Table of contents 1. Goal of reform 2. Ten reasons why we need to reform the passive income and financial intermediary tax system A. Problems B. Solutions 3. Summary of reform 4. Annex table on summary of changes in rates 2

Draft for discussion. Preliminary and 8/27/2019 subject to change. Draft for discussion. Subject to change. CTRP – Package 4: Top 10 (as of August 27, 2019) Goal of the reform Redesign financial sector taxation to be simpler, fairer, more efficient, regionally more competitive, and revenue neutral within Package 4 in the short-term. 3 Draft for discussion. Subject to change. CTRP – Package 4: Top 10 (as of August 27, 2019) Ten reasons why we need to reform the passive income and financial intermediary tax system: Problems and solutions 4

Draft for discussion. Preliminary and 8/27/2019 subject to change. Draft for discussion. Subject to change. CTRP – Package 4: Top 10 (as of August 27, 2019) Ten reasons why we need to reform the passive income and financial intermediary tax system. 1. To rationalize the multiple tax rates and bases 2. To lower the current high rates 3. To reduce the tax burden of low-income people 4. To deepen the shallow capital market 5. To level the uneven playing field among financial intermediaries 6. To harmonize the unequal treatment on insurance products 7. To reduce the high friction cost of documentary stamp taxes (DST) 8. To lower the high DST on non-life insurance 9. To lessen administrative and compliance cost 10. To broaden the narrow tax base due to many exemptions and special rates 5 Draft for discussion. Subject to change. CTRP – Package 4: Top 10 (as of August 27, 2019) Problem 1: Multiple tax rates and bases make the tax structure very complicated, causing arbitrage and unfairness. 1. By product (interest income, dividends, capital gains, banks, insurance, DST) 2. By currency (peso, foreign) 3. By maturity (short-term, long-term) 4. By type of lending (private, public) 5. By issuer (RBU, FCDU, OBU) 6. By taxpayer (individual, corporate) 7. By residency (resident, non-resident) 8. By business status (engaged in business, not engaged in business) 9. Under special laws (42 special laws) 6

Draft for discussion. Preliminary and 8/27/2019 subject to change. Draft for discussion. Subject to change. CTRP – Package 4: Top 10 (as of August 27, 2019) Problem 1: Multiple tax rates and bases making the tax structure very complicated, causing arbitrage and unfairness. DST Passive income Financial intermediaries 7 Draft for discussion. Subject to change. CTRP – Package 4: Top 10 (as of August 27, 2019) Solution 1. Reduce the number of unique rates and bases from 80 to 40. 8

Draft for discussion. Preliminary and 8/27/2019 subject to change. Draft for discussion. Subject to change. CTRP – Package 4: Top 10 (as of August 27, 2019) Problem 2: Among the highest passive income tax rates in the region, reducing competitiveness. Tax on interest income is generally higher than ASEAN average. Tax rates on interest income of resident individuals Tax rates on interest income of resident corporations 25 25 25 24 20 20.1 20 20 20 20 20 17 15 15 15 15 Percent In percent 15 10 9.3 10 10 5 5 5 0 0 0 Singapore Malaysia Vietnam Indonesia Cambodia Thailand Philippines 0 Cambodia Singapore Thailand Vietnam Philippines Malaysia Indonesia Source: NTRC Tax rate Average Note: The broken line represents the average rate for all countries included in the chart. 9 Draft for discussion. Subject to change. CTRP – Package 4: Top 10 (as of August 27, 2019) Problem 2: Among the highest passive income tax rates in the region, reducing competitiveness. Tax on dividend of resident individuals is almost double the ASEAN average. Tax rates on dividend income of resident individuals 16 15 14 12 10 10 10 Percent 8 5.7 6 5 4 2 0 0 0 0 Singapore Malaysia Cambodia Vietnam Thailand Philippines Indonesia Source: NTRC Note: The broken line represents the average rate for all countries included in the chart. 10

Draft for discussion. Preliminary and 8/27/2019 subject to change. Draft for discussion. Subject to change. CTRP – Package 4: Top 10 (as of August 27, 2019) Problem 2: Among the highest passive income tax rates in the region, reducing competitiveness. Tax on capital gains is higher than ASEAN average. Tax rates on capital gains 30 25 25 20 20 20 20 Percent 15 14.3 15 10 5 0 0 0 Singapore Malaysia Philippines Cambodia Vietnam Thailand Indonesia Source: NTRC and Deloitte Note: The broken line represents the average rate for all countries included in the chart. 11 Draft for discussion. Subject to change. CTRP – Package 4: Top 10 (as of August 27, 2019) Solution 2: Harmonize and general lower the tax rates. Generally lower the tax rates on interest income, dividends, equity and debt instruments, insurance, financial institutions, and other financial transactions High Generally lower 12

Draft for discussion. Preliminary and 8/27/2019 subject to change. Draft for discussion. Subject to change. CTRP – Package 4: Top 10 (as of August 27, 2019) Problem 3: Inequitable distribution of tax burden. The rich pays lower taxes than the poor. Instrument Poor Rich Tax rate (percent) Tax rate (percent) Tax rate on peso 20 0, 5, 12, 20 interest income Tax rate on foreign currency Typically does 15 deposits interest income not invest Tax rate on a portfolio of investment (interest income, 20 0, 10, 15, 20 dividend, capital gains) 13 Draft for discussion. Subject to change. CTRP – Package 4: Top 10 (as of August 27, 2019) Solution 3: Harmonize and lower the tax rates on interest income. Proposed tax rate on interest income 20% 15% 1. Interest income from short-term deposits are subject to 20 percent. 2. Interest income from long term and foreign currency deposits, where the rich can invest their money, are generally subject to lower tax rates ranging from 0 to 15 percent. 14

Draft for discussion. Preliminary and 8/27/2019 subject to change. Draft for discussion. Subject to change. CTRP – Package 4: Top 10 (as of August 27, 2019) Solution 3: Harmonize the tax on dividends with interest income. Proposed tax rate on dividend income 10% 15% This increase mainly affects the rich but they can reduce the tax exposure by diversifying their investment towards interest income 15 Draft for discussion. Subject to change. CTRP – Package 4: Top 10 (as of August 27, 2019) 16

Draft for discussion. Preliminary and 8/27/2019 subject to change. Draft for discussion. Subject to change. CTRP – Package 4: Top 10 (as of August 27, 2019) Problem 4: Shallow equity and debt capital markets. Local currency bond market is weak compared to our neighbors. 140 LCY bond market (percent to GDP) 120 100 80 60 40 20 0 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 2016Q1 2016Q3 2017Q1 2017Q3 2018Q1 Indonesia - LCY bond market (% of GDP) Republic of Korea - LCY bond market (% of GDP) Malaysia - LCY bond market (% of GDP) Philippines - LCY bond market (% of GDP) Thailand - LCY bond market (% of GDP) Vietnam - LCY bond market (% of GDP) 17 Draft for discussion. Subject to change. CTRP – Package 4: Top 10 (as of August 27, 2019) Problem 4: Shallow equity and debt capital markets. Broad money as a percent of GDP is among the lowest in the region, suggesting shallow capital markets. Broad money (M3), percent to GDP 160 140 140 125 124 123 120 120 102 Percent to GDP 100 78 80 70 59 60 39 39 38 40 20 0 Indonesia Philippines Thailand Malaysia 2008 2013 2018 Source: WDI 18

Draft for discussion. Preliminary and 8/27/2019 subject to change. Draft for discussion. Subject to change. CTRP – Package 4: Top 10 (as of August 27, 2019) Problem 4: Shallow equity and debt capital markets. Market capitalization in equity also very low. Domestic market capitalization 6,000 5,608 5,000 4,714 3,875 USD billions 4,000 3,349 3,000 2,048 2,070 2,000 1,588 1,024 769 1,000 476 479 418 274 87 0 HOSE PSE BM SET IDX SGX TSEC KRX NSE BSE SzSE HKEx ShSE JPX Source: World federation of exchanges as cited in Refran (2017) 19 Draft for discussion. Subject to change. CTRP – Package 4: Top 10 (as of August 27, 2019) Problem 4: Shallow equity and debt capital markets. Average value turnover also very low. Average daily value turnover 40,000 35,280 35,000 30,460 30,000 USD billions 25,000 22,487 20,000 15,000 10,000 6,888 7,040 1,206 2,745 3,746 5,000 864 548 595 141 146 411 0 PSE HOSE IDX BM BSE SGX SET TSEC NSE HKEx KRX JPX ShSE SzSE Source: World federation of exchanges as cited in Refran (2017) 20