Passive income tax cuts not viable until 2028–BofA

MANILA, Philippines  Tax cuts on passive income—proposed to deepen local financial markets—may have to wait until the twilight of the Marcos administration in 2028 due to the current lack of fiscal space, analysts at BofA Global Research said.

In a commentary dated Feb. 26, the research unit of Bank of America (BofA) said any measures that would result in foregone revenues at this point could further erode the delicate government budget position.

BofA was referring to Package 4 of the Comprehensive Tax Reform Program, which aims to harmonize and simplify varying tax structures on passive income and other financial tools.

READ: House panel OKs 4th package of tax reform program

When he took office in January, Finance Secretary Ralph Recto submitted a “refined” version of this legislation to lawmakers.

“There is less fiscal space in 2024 than there was prepandemic, when these tax cuts were first proposed,” BofA said.

“The proposed tax cuts on passive income and financial transactions would have eroded government revenue further,” it added.

What Package 4 is all about

Approved by the House of Representatives on third and final reading on Nov. 14, 2022, the bill is currently being taken up by the Senate Committee on Ways and Means.

Under Package 4, interest income tax will be set at 20 percent. Royalties will be maintained until 2027 but reduced to 15 percent in 2028. Similarly, dividend income tax—which varies depending on nationality of recipient—will remain unchanged until 2027 before being harmonized to 10 percent in 2028.

Package 4 also proposes a gradual reduction in the stock transaction tax to 0.1 percent by 2028 from the current 0.6 percent.

Existing taxes on financial transactions, sales agreements and transfer of unlisted shares will be removed in 2028.

Tax rates on bank checks, drafts, certificates of deposit not bearing interest and other instruments will remain unchanged along with that on life insurance policies.

READ: Sans new taxes, deficit spike feared

Meanwhile, rates on policies of insurance upon property, fidelity bonds and other insurance policies will gradually be decreased annually to 7.5 percent by 2028, from 12.5 percent.

While the Bureau of the Treasury has yet to release full-year 2023 numbers, latest data show that the budget position swung to a deficit of P1.1 trillion from January to November, well within the P1.5-trillion deficit cap for the year.

Funding the deficit

For 2024, the Marcos administration is projecting a smaller budget gap of P1.4 trillion, equivalent to 5.1 percent of gross domestic product (GDP). This assumed that revenues would hit P4.2 trillion while state spending would amount to P5.6 trillion this year.

To plug the budget hole, Recto plans to borrow a total of P2.46-trillion from government creditors. He ruled out new consumption taxes that may stoke inflation, instead calling for improved collection efficiency.

”If any comfort, the government appears to be able to fund its deficit easily with a mix of domestic and foreign borrowing,” BofA said. “Given the lack of fiscal space, we see government spending lagging overall GDP growth in 2024, as in 2023.” INQ

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