CMEPA Tax Reforms Now in Effect: Key Changes in Investment Taxation
12214, introduces significant reforms to the Philippine tax system, particularly in the taxation of investment income and capital market transactions. Effective July 1, 2025, CMEPA amends various provisions of the National Internal Revenue Code of 1997, including Sections 22, 24, 25, 27, 28, 32, 34, 38, 39, 42, 51, 52, 56, 57, 127, 149, 174, 176, 179, 190, 199, and 259.
Contrary to some misconceptions, CMEPA does not introduce new taxes. Instead, it seeks to simplify, rationalize, and align the taxation of passive income and financial instruments, with the goal of making the capital markets more efficient and accessible.
Key Highlights
1. Uniform 20% Tax on Interest Income
All interest income is now subject to a flat 20% final withholding tax, regardless of the investment’s maturity period.
Under the previous tax regime, a tiered structure applied:
- Interest from short-term deposits was taxed at 5% to 20%
- Interest from long-term time deposits (exceeding 5 years) was tax-exempt
This structure often favored individuals who could afford to hold large sums for longer periods. By applying a single rate, CMEPA removes this disparity.
Note: Long-term deposits issued before July 1, 2025, will retain their tax-exempt status until maturity, preserving the expectations of existing investors.
MEPA reduces transaction taxes to make capital market investments more cost-effective and accessible:
- The Stock Transaction Tax (STT) on listed share sales is reduced from 0.6% to 0.1%
- The Documentary Stamp Tax (DST) on the original issuance of shares is reduced from 1% to 0.75%
- Mutual funds and unit investment trust funds (UITFs) are now fully exempt from DST, including on issuance, sale, and redemption
These changes aim to increase market liquidity, lower barriers to entry, and encourage broader participation by retail and institutional investors, both local and foreign.
3. Alignment of Capital Gains Tax on Domestic and Foreign Shares
Previously, only capital gains from the sale of domestic shares were subject to a 15% final tax, while gains from foreign share sales were often not taxed.
CMEPA now applies the same 15% final tax to capital gains from both domestic and foreign shares. This reform:
- Promotes tax fairness and consistency
- Aligns the Philippines with international standards
- Helps prevent tax arbitrage, where investors could structure foreign transactions to avoid taxation
4. Enhanced Employer Incentives for PERA Contributions
To strengthen long-term retirement savings, CMEPA allows employers to claim an additional 50% deduction from gross income for their contributions to employees’ Personal Equity and Retirement Account (PERA).
This measure encourages employer participation in PERA while supporting employees' long-term financial security.
Implementation and Outlook
While the removal of exemptions for long-term deposits has raised concerns from some savers, it is important to note that CMEPA focuses on standardizing existing tax rules, rather than introducing new taxes. The changes aim to correct imbalances in the old system that previously favored a small segment of investors.
According to the Department of Finance, CMEPA is expected to:
- Broaden participation in the capital markets
- Improve investor confidence
- Enhance tax fairness and simplify compliance
- Align the Philippine system with international tax practices
Effective Date: July 1, 2025
Reference: Republic Act No. 12214 – Capital Markets Efficiency Promotion Act (CMEPA)
Further Information: Implementing rules and regulations are expected from the Bureau of Internal Revenue (BIR) and Department of Finance (DOF).
This article was prepared by Morfe, Ceneta & Co., and CPAs for general information only and should not be used as a replacement for expert advice.