There has been growing public discussion, and some confusion, surrounding the recent changes in the taxation of deposit interest income under the Capital Markets Efficiency Promotion Act (CMEPA) or Republic Act No. 12214. As finance and tax professionals, it’s important to understand these changes based on actual provisions of the law and regulatory issuances, rather than speculation.

What’s New and What Isn’t?

First, let’s clarify: the 20% final withholding tax on interest income is not new. This has long been part of our tax system under the National Internal Revenue Code (NIRC) of 1997, specifically under Section 24(B)(1).

Historically, this tax applied to:

• Interest from bank deposits
• Yields or benefits from deposit substitutes
• Earnings from trust funds

However, the law previously granted tax exemptions for long-term deposit instruments, specifically, those with a maturity of five years or more. This exemption was supported by Section 24(B)(1) and Section 25(A)(2) of the NIRC, and further clarified in BIR Revenue Regulations No. 14-2012, among others.

In contrast, short-term deposits (less than five years) remained subject to the 20% tax. This created a natural incentive for savers to opt for long-term placements.

What Changed Under CMEPA

With the passage of RA No. 12214, effective July 1, 2025, this distinction between short- and long-term deposits has been removed. All interest income from bank deposits will now be subject to a flat 20% final withholding tax, regardless of the term or maturity.

The rationale behind this change is to simplify the tax structure on passive income and redirect long-term capital from idle savings into active participation in capital markets. According to the Department of Finance (DOF), uniformity in taxation promotes fairness and transparency while supporting broader investment growth.

Supporting Reforms Under CMEPA

To balance the impact of the new rule, CMEPA also introduced the following key reforms:

1. Reduction in Stock Transaction Tax:
   From 0.6% to 0.1% (amending Section 127(A) of the NIRC)
2. Reduction in Documentary Stamp Tax (DST):
   On original issuance of shares of stock, from 1.0% to 0.75%
3. DST Exemption:
   On collective investment schemes, including mutual funds and unit investment trust funds (UITFs)

The goal is to create a more attractive environment for retail investors to participate in equities and managed funds, rather than parking long-term savings in fixed deposit products.

The Concerns of Savers and the Public

While the reform promotes capital market development, it understandably raises concerns among conservative savers, particularly retirees, OFWs, and middle-income families who have traditionally relied on long-term deposit products for stability and predictability.

These instruments were not only secure but previously enjoyed tax-exempt interest, making them a preferred choice for those saving for future needs like education, housing, or retirement.

With the removal of the exemption, these same savers may now be discouraged from long-term placements and pushed toward higher-risk investments, which may not align with their financial goals or risk appetite.

Broader Implications for Banks and SMEs

As CPAs, we also recognize the role long-term deposits play in supporting bank liquidity, especially for lending to small and medium enterprises (SMEs). A shift away from long-term savings could lead to tighter credit conditions and increased reliance on shorter-term funding instruments, which may not be ideal for long-term financing needs.

Can the 20% Final Tax Be Lowered?

Some economic stakeholders have proposed reducing the final tax rate on deposit interest to 10% or even 6% to promote more inclusive saving behavior. While attractive from a policy standpoint, this is unlikely in the short term due to fiscal pressures.

As of May 2025, the Philippines’ national debt stands at ₱16.92 trillion, based on data from the Bureau of the Treasury. Any reduction in passive income taxation would have a significant impact on government revenue, especially in light of this debt level.

Even a modest cut, say from 20% to 15%, would result in notable revenue losses, which could be difficult to justify without broader tax reform.

What This Means for Taxpayers

The CMEPA represents a significant step in restructuring the tax landscape for passive income. While its long-term benefits aim to encourage capital market participation, its short-term effects on individual savers, bank liquidity, and investor confidence warrant close attention.

From a compliance standpoint, taxpayers should:

• Update their financial strategies
• Understand how the uniform tax applies to their current investments
• Accurately reflect interest income and final tax in annual filings
  (e.g., BIR Form 2306 / 1601-FQ)

Final Thoughts

Tax reforms like CMEPA are designed to improve economic efficiency, but they also bring challenges. As professionals, we must stay informed, advocate for financial literacy, and support clients in adapting to these evolving tax rules.

If you’re unsure how these changes affect your tax position or investment planning, consult with a trusted tax advisor or CPA.

This article is for educational and tax compliance awareness purposes only. For specific guidance, please seek professional advice.