Recognizing the influence of tax policies on financial development, this policy brief provides a comprehensive review of the taxation of the financial sector in the Philippines and discusses the existing issues hindering its further development. It reveals that the present taxation of the sector is characterized by complexity, lack of neutrality, and relatively high tax rates on certain financial instruments and transactions. These factors result in tax arbitrage, inefficient allocation of capital, equity concerns, and a tax disadvantage compared to regional peers.
The fourth package of the Comprehensive Tax Reform Program of the government aims to address these issues by re-designing the taxation of the financial sector, with the objective of making it simpler, fairer, more efficient, and regionally more competitive. The proposed framework is embodied in House Bill No. 4339 which was approved by the House of Representatives on Third Reading in November 2022. This paper examines these proposed changes, particularly on taxes applicable to passive income, financial institutions, insurance, and financial documents or instruments. Further, it analyzes how the reform can address efficiency and equity issues, and potentially contribute to government revenues.