Cmepa amendments affecting debt markets
By: Euney Marie Mata-Perez on July 10,2025
LAST week, we discussed amendments introduced by Republic Act 12214, or the “Capital Markets Efficiency Promotion Act” (Cmepa).
Cmepa’s key policy consideration is to allow our capital markets to develop as efficiently as possible, with the least intervention, by implementing a simpler, fairer and regionally competitive passive income tax system that encourages savings as well as deepens the markets.
Aside from introducing amendments that will support the equity market, mainly by the reduction of the stock transaction tax to 0.1 percent from 0.6 percent, Cmepa also introduced changes that will affect debt markets. However, unlike the reduction of stock taxes, we noted instead an increase in the taxes on interest income or gains derived from debt instruments.
In an attempt to probably simplify taxation of debt markets, Cmepa increased to 20 percent (from the previous 15 percent) the final tax on interest, yield or other monetary benefit derived by individual taxpayers (except nonresident individuals) and domestic corporations from any FCDU or foreign currency bank deposit, deposit substitute, trust fund or other similar arrangements.
For nonresident individuals, Sections 6 and 7 of Cmepa sought to remove their income tax exemption from similar income as provided in Sections 27(D)(3) and 28(A)(6)(b) of the Tax Code, respectively, by proposing to delete these provisions. The Tax Code provisions basically provide that “any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax.” The President, however, vetoed the proposed deletion.
In his veto, the President stated: “This paragraph embodies a long-recognized exemption, which has contributed to the country’s financial openness, foreign currency liquidity and capital market stability. Removing the exemption may dampen the country’s competitiveness in attracting foreign capital. Thus, to ensure policy consistency and the continued effectiveness of the tax exemption for nonresident FCDU transactions, I veto its deletion, thereby retaining the paragraph as part of the proposed amended Section 27(D)(2) and Section 28(A) of the tax Code under the enrolled bill.”
The effects of the amendments considering the President’s veto are as follows:
– Nonresident individuals and nonresident corporations retain the exemption of their income derived from transactions with depository banks under the FCDU system.
– Citizens and resident aliens, as well as domestic corporations and resident foreign corporations, are now subject to a higher 20-percent final withholding tax on interest income derived from transactions with depository banks under the expanded system, from the previous 15-percent rate.
Cmepa also deleted the exemption from income tax of interest income from long-term deposits or investments in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form as prescribed by the Bangko Sentral ng Pilipinas.
The exemption for long-term deposits was previously enjoyed by all individual taxpayers, whether they be resident or nonresident citizens or aliens.
Such income from short-term or long-term deposits will now be subject to a final withholding tax of 20 percent.
Prior to Cmepa, pursuant to Section 32(g) of the Tax Code, gains realized from the same or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five years were excluded from a taxpayer’s gross income, and thus, not subject to any income tax. The new law deleted this provision, thereby removing the exclusion or exemption. Instead, Cmep added a new exclusion for specific bonds issued by the Republic of the Philippines or any of its instrumentalities to finance capital expenditures or programs covered by the Philippine Development Plan or its equivalent and other high-level priority programs of the national government, as determined by the Secretary of Finance.
In summary, with the Cmepa amendments, any gain derived from the retirement of long-term bonds are now subject to regular income tax rates.
Cmepa, however, amended Section 32(B)(7)(h) of the Tax Code to expand exclusions from gross income to now cover gains derived from redemption of units of participation in Unit Investment Trust Funds. Previously, this provision only dealt with gains on redemption from units of a mutual fund company. However, Cmepa added a qualification providing that the exclusion will only apply if, prior to such redemption, final taxes due on realized gains were previously withheld at the level of the underlying assets.
In summary, Cmepa did not actually reduce income tax rates on interest income from debt or bond instruments. In fact, it sought to make all such interest income subject to a 20-percent final withholding tax, except that the President vetoed the increase on interest income from FCDU units of nonresidents. It also removed the income tax exemption on interest income derived by individuals from long-term commercial papers and gains from redemption of long-term instruments. These amendments do not seem to support the debt market.
Euney Marie J. Mata-Perez is a CPA-lawyer and the managing partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A and tax lawyer and has been ranked as one of the top 100 lawyers of the Philippines by the Asia Business Law Journal. She is also the chairman of the tax committee of the Management Association of the Philippines.