Republic of the Philippines
HOUSE OF REPRESENTATIVES
Constitution Hills
Quezon City

SEVENTEENTHCONGRESS
First Regular Session

House Bill No, 46.1.4

~_Introduced by : Rep. Josephine Y. Ramirez-Sato

EXPLANATORY NOTE

The Philippine financial sector institutions including their respective financial
products at present have varying tax treatment. In a study commissioned by the
Capital Market Development Council on the financial sector taxation policy in 2007"
described taxation in the sector as a competitive factor in investment decisions.
Furthermore, the 20% tax on interest income on deposits was a disincentive to save.
While there are cases for incentives, these are only given to preferred institutions.

The study further described the financial sector as the most sensitive to
distortive taxation. That what may appear to be a small tax on financial transactions
can be very high in relation to the value added generated by the sector®. In addition,
the virtually identical economic activities in the sector are taxed differently resulting
in an unjustified bias for or against instruments that have equivalent financial effects
but offered by different financial institutions.

This bill aims to help develop the capital market of the Philippines through
the promotion of an efficient and neutral taxation system. The passage of this bill is
envisaged to level the playing field for various bank deposit transactions and
investment instruments issued by different institutions to encourage savings and
develop the general capital market. Sound economic policy reform measures such as
neutral tax system will help the country attain sustainable economic growth and
moving forward to a more competitive Philippines.

Given the potential benefits this measure will give to the country, this proposed
measure should be considered and approved by the House of Representatives with

all deliberate dispatch.

HON. Jf SEPHINE Y. RAMNR)
Loye Distffct pf Occid

tZ-SATO
Mindoro

' The report is the result of technical assistance provided by the EcoKomic Modernizations through
Efficient Reforms and Governance Enhancement (EMERGE) activity supported by USAID,

> illustrated by the effects of the documentary stamp taxes (DST) on secondary markets for government
securities ~ The DST rate of PhP0.30 for every PhP200 is large compared to the interest income per peso
of government securities held for one week.

1



Republic of the Philippines
HOUSE OF REPRESENTATIVES.
Constitution Hills
Quezon City

TEENTHCONGRESS
t Regular Session

Firs

House Bill NoABLA

ed by : Rep. Josephine Y.

AN ACT AMENDING CERTAIN PROVISIONS OF THE NATIONAL REVENUE
CODE OF 1997, AS AMENDED, AND PRESIDENTIAL DECREE NO. 1185
OTHERWISE KNOWN AS THE FIRE CODE OF THE PHILIPPINES, AND FOR
OTHER PURPOSES.

Be it enacted by the Senate and House of Representatives of the Philippines in
Congress assembled:

ARTICLE 1
GENERAL PROVISIONS

Section 1. Title. This Act shall be known as "The Financial Sector Tax Neutrality

Section 2. Declaration of Policy. - It is the policy of the State to promote an

efficient and neutral taxation system that level the playing field for various bank
deposit transactions and investment instruments issued by different institutions to
encourage savings and develop the general capital market.

Section 3. Section 22 (L) of the National Internal Revenue Code of 1997, as

amended, is hereby further amended to read as follows:

"(L) The term 'shares of stock! shall include shares of stock of a corporation,
warrants and/or options [to purchase shares of stock], futures, depositary
receipts, commodities, exchange traded funds, units of participation in a
collective investment product, as well as units of participation in a partnershi
(except general professional partnerships), joint stock companies, joint
accounts, joint ventures taxable as corporations, asso\ and recreation or
amusement clubs (such as golf, polo or similar clubs), and mutual fund
certificates commodities contracts and other securities or investment products
listed and traded in a local exchange.”

Section 4. Section 22 (Y) of the National Internal Revenue Code, as amended,

shall be further amended to exclude from the definition of deposit substitutes reverse


repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas
(BSP) and any authorized agent bank, as follows:

(Y) The term "deposit substitutes" shall mean:

(i) In the case of banks and non-bank financial intermediaries, an alternative
form of obtaining funds other than deposits, through the issuance,
endorsement, or acceptance of debt instruments for the borrowers own
account, for the purpose of relending or purchasing of receivables and other
obligations, or financing, their own needs or the needs of their agent or deale
These instruments may include, but need not be limited to bankers!
acceptances, promissory notes, repurchase agreements, excluding reverse
repurchase agreements entered into by and between the Bangko Sentral ng
Pilipinas (BSP) and any authorized agent bank, certificates of assignment or
participation and similar instruments with recourse: Provided, however, That
debt instruments issued for interbank call loans with maturity of not more
than seven (7) days to cover deficiency in reserves against deposit liabilities,
including those between or among banks and quasi-banks, shall not be
considered as deposit substitute debt instruments.

(ii) In the case of finance companies, other than those specified in (i) above,
lending investors, investment houses, trust companies and similar institutions
and corporations engaged in commercial, industrial, and other activities, all
borrowings to finance its own needs or the needs of its agents thru commercial
papers issues as evidences of indebtedness whether registered with the
Securities and Exchange Commission of the Philippines, or not, regardless of
maturity period and with or without recourse basi

(iii) In the case of other non-financial companies, including the national and
local government and its instrumentalities, all borrowings through the
issuance of debt instruments denoted as treasury bonds, treasury bills,
treasury notes, and similar instruments.

Section 5. A uniform final tax at the rate of ten percent (10%) shall be imposed
upon the amount of interest income derived by individual citizens and individual
resident aliens from:

(a) any currency bank deposit and yield or any other monetary benefit from
dleposit substitutes and from trust funds and similar arrangements; or

(b) any foreign currency bank deposit with a depository bank under the
expanded foreign currency deposit system except if the citizen is a non-
resident in which case interest income is exempt from income tax); or

(©) long-term deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment management
accounts and other investments evidenced by certificates in such form
prescribed by the Bangko Sentral ng Pilipinas (BSP).



For this purpose, Section 24 of the National Internal Revenue Code, as
amended, is hereby further amended as follows:

SEC. 24. Income Tax Rates.

(a) Rate of Tax on Certain Passive Income on Individual Citizens and Individual
Resident Aliens,

a.1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of ten
percent (10%) is hereby imposed upon the amount of interest derived by
individual citizens and individual resident aliens from any currency bank
deposit and yield or any other monetary benefit from deposit substitutes and
from trust funds and similar arrangements regardless of denomination and
term of the instrument or currency of the investment; royalties on books, as
well as other literary works and musical compositions, provided, that royalties
on items other than books and literary works and musical compositions, prizes
(except prizes amounting. to ten thousand pesos (PhPLO,000) or less which shall
be subjected to tax under Subsection [A] of Section 24); and other winnings
(except Philippine Charity Sweepstakes and Lotto winnings), derived from
sources within the Philippines shall remain subject to final tax at the rate of
twenty percent (20%); and provided, further, that interest income derived by a
non-resident individual, whether a citizen or an alien, from a depository bank
under the expanded foreign currency deposit system shall remain exempt from
income tax.

Section 6. A uniform tax rate of ten percent (10%) shall be imposed upon the
amount of interest income derived by domestic and resident foreign corporations
from:

(a) any currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements;

(b) any currency bank deposit with a depository bank under the expanded
foreign currency deposit system; except if interest income is derived by
foreign currency deposit units and offshore banking, units from a foreign
currency deposit transaction under the expanded foreign currency deposit
system in which case the provisions of Subsection (D) (3) of Section 27 and
of Subsection (A) (4) and Subsection (A) (7) (b) of Section 28 shall apply.

Section 7. Domestic and resident foreign banks and non-bank financial
intermediaries performing quasi-banking functions shall not be subject to the final tax
on interest imposed under Subsection (D) (1) of Section 27 and Subsection (7) (a) of
Section 28 respectively. Interest derived by such domestic and resident foreign banks
and non-bank financial intermediaries performing quasi-banking functions shall form
part of their gross income.

SEC. 8. To effect Sections 6 and 7 of this Act, Sections 27 and 28 of the National
Internal Revenue Code, as amended, is hereby further amended as follows:


SEC. 27. Rates of Income tax on Domestic Corporations
(D) Rates of Tax on Certain Passive Incomes,

(1) Interest front Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes and from Trust Funds and Similar Arrangements, and Royalties. ~ A
final tax at the rate of ten percent (10%) is hereby imposed upon the amount
of interest derived by domestic corporations from any Philippine Peso or
foreign currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements
regardless of denomination and term of the instrument or currency of the
investment; royalties on books, as well as other literary works and musical
compositions; provided, that royalties on items other than books and
literary works and compositions, prizes (except prizes amounting to ten
thousand pesos (PhP10,000) or less which shall be subject to tax under the
subsection (A) of Section 24); and other winnings (except Philippine Charity
Sweepstakes and lotto winnings), derived from sources within. the
Philippines shall remain subject to final tax at the rate of twenty percent
(20%); provided, further, that interest income derived by foreign currency
deposit units from foreign currency deposit transactions under the
expanded foreign currency deposit system shall be subject to the
provisions of subsection (D) (3) of Section 27

Provided, however, that interest income of banks and non-bank financial
intermediaries performing quasi-banking functions derived from
repurchase agreements, deposit substitutes, and securities shall not be
considered passive income subject to tax under this section, but shall
instead be subject to tax under Sec. 27 (A).

SEC.28. Rates of Income ‘Tax on Foreign Corporations.
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation.~

(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes, Trust Funds and Similar Arrangements and Royalties. ~ A final tax at
the rate of ten percent (10%) is hereby imposed upon the amount of interest
derived by resident foreign corporations from any currency bank deposit
and yield or any other monetary benefit from deposit substitutes and from
the trust funds and similar arrangements regardless of denomination and
term of instrument or currency of the investment; royalties on books, as well
as other literary works and musical compositions; provided, that royalties
on items other than books and literary works and musical compositions,
prizes (except prizes amounting, to ten thousand pesos (PhP10,000) or less
which shall be subject to tax under the subsection (A) of Section 24); and
other winnings (except Philippine Charity Sweepstakes and Lotto winnings),
derived from sources within the Philippines shall remain subject to final tax
at the rate of twenty percent (20%); provided, further, that interest income
derived by foreign currency deposit units and offshore banking, units from
foreign currency deposit transaction under the expanded foreign currency
deposit system shall be subject to the provisions of Subsection (A) (4) and
Subsection (A) (7) (B), respectively, of Section 28.



Provided, however, that interest income of banks and non-bank financial
intermediaries performing quasi-banking functions derived from repurchase
agreements, deposit substitutes, and securities shall not be consid
passive income under this section, and shall instead form part of their gro
corporate income subject to tax under Section 28 (A) (1).

Section 9, Section 34 of the National Internal Revenue Code, as amended, is hereby
further amended as follows:

SEC, 34, Deductions from Gross Income

(B) Interest

(1) In General, The amount of interest paid or incurred within a taxable year on
indebtedness in connection with the taxpayer's profession, trade or business
shall be allowed as deduction from gross income: Provided, however, That the
taxpayer's otherwise allowable deduction for interest expense shall be reduced
by an amount equal to the following percentages of the interest income
subjected to final tax:

Forty-one percent (41 %) beginning January 1, 1998;
Thirty-nine percent (39%) beginning January 1, 1999;
Thirty-eight percent (38 %) beginning January 1, 2000;
Seventy one percent (71%) beginning January 1, 2011; and
Sixty seven percent (67%) beginning January 1, 2012

Section 10, Section 37 of the National Internal Revenue Code, as amended, shall be
further amended as follows:

SEC. 37. Special Provisions Regarding Income and Deductions of Insurance Companies,
Whether Domestic or Foreign.

SEC. 37-1. Special provisions regarding income and deductions of banks and quasi-banks
In the case of interest income and trading gains of banks and non-bank financial
institutions exercising quasi-banking functions derived from repurchase
agreements, deposit substitutes, and securities, all final withholding taxes paid on
such instruments, if any, any accrued interest, and other costs of obtaining the
instrument may be deducted from other gross income.

Section 11. The seven percent (7%) gross receipts tax on net trading gains of
banks and financial intermediaries under Sec. 121 (d) of the National Internal Revenue
Code is hereby abolished. Net trading gains derived by banks and non-bank financial
intermediaries from foreign currency, debt securities, derivatives, and other financial
instruments shall form part of their gross income.

Section 12, See, 122 of the National Internal Revenue Code, as amended, is hereby
further amended, as follows:


SEC, 122. Tax on Finance Companies, There shall be collected a tax of five percent
6 %) on the gross receipts derived by all finance companies, as well as by other
financial intermediaries not performing quasi banking functions dong business
in the Philippines, from interest, discounts and all other items treated as gross
income under this Code:

Provided, however, that gross receipts derived from financial and operating
leases by finance companies and financial intermediaries, whether or not
performing quasi-banking, functions, shall be subject to value added tax
according to SEC (e,) 108 (A) (8), and shall conform to BIR guidelines to be
issued on the proper use of input VAT credits,

Section 13. Sec. 123 of the National Internal Revenue Code, as amended is hereby
further amended, as follows:

SEC. 123, Tax on Life Insurance Premiums.
SEC. 123 (A). Tax on Pre-need companies. There shall be collected from every
Philippine pre-need company or corporation a tax of two percent (2%) of the
total premium or total contribution collected, whether such premiums or
contributions are paid in money, notes, credits or any substitute for money; but
premiums or contributions refunded or returned within six (6) months after
payment to the purchaser of a pre-need plan shall not be included in the taxable
receipts.

Section 14. The fax on the sale, barter, or exchange of shares of stock traded through
initial public offering under Sec. 27 (B) of the National Internal Revenue Code is hereby
repealed, For this purpose, Section 127 of the National Internal Revenue Code, as
amended, is hereby further amended, as follows:

SEC. 127, Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded
Through The Local Stock Exchange.

(A) Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded
through the Local Stock Exchange. — There shall be levied, assessed and
collected on every sale, barter, exchange or other disposition of shares of stock
listed and traded through the local stock exchange other than the sale by a
dealer in securities, a tax at the rate of one-fourth of one percent (1/4 of 1%) of
the gross selling price or gross value in money of the shares of stock sold,
bartered, exchanged or otherwise disposed which shall be paid by the seller or
transferor.

(C) Return on Capital Gains Realized from Sale of Shares of Stocks.
(1) Return on Capital Gains Realized from Sale of Shares of Stock Listed - It shall be
the duty of every stock broker who effected the sale subject to the tax imposed
herein to collect the tax and remit the same to the Bureau of Internal Revenue
within five (5) banking days from the date of collection thereof and to submit on
Mondays of each week to the secretary of the stock exchange, of which he is a
member, a true and complete return which shall contain a declaration of all the
transactions effected through him during the preceding, week and of taxes

7


collected by him and turned over to the Bureau Of Internal Revenue.

Section 15. Sec. 13 (b) (4) of Presidential Decree No, 1185, otherwise known as the Fire
Code of the Philippines is hereby repealed.

Section 16. Prospectioity Clause, The uniform final tax rate often percent (10%)
imposed on interest income provided Sections 5, 6, and 7 of this Act shall apply to
repurchase agreements, deposit substitutes, and securities issued after the effectivity of
this Act.

Section 17. Repealing Clause. All laws, executive orders, rules and regulati
and parts thereof which are inconsistent with this Act are hereby repealed or amended.
accordingly.

ion of this

Section 18. Separability Clause. If for any reason any article or provi
Act or any portion therefore or application of such article, provision, or portion thereof
to any person, group, or circumstance is declared invalid or unconstitutional, the
remainder of this Act shall not be affected by such decision.

Section 19. Effectivity Clause. - This Act shall take effect fifteen (15) days after its

complete publication in the Official Gazette or in at least two (2) newspapers of general
circulation, whichever comes earlier.

Approved,