CMEPA impact on savings stirs debate

MANILA, Philippines — A newly implemented law aiming to simplify and equalize the country’s capital market tax system is facing criticism online, with some arguing that it could hurt small savers more than it helps level the playing field.

Passed into law last year, the Capital Market Efficiency Promotion Act (CMEPA) unified the final withholding tax on interest income to a flat 20 percent. It removed longstanding exemptions on long-term bank deposits and bond investments that were previously tax-free if held for at least five years.

On social media, the reform has drawn criticism for what some see as an undue burden on small investors. For instance, someone who saved P200,000 in a five-year bond at four percent interest would have earned P8,000 annually, which is tax-free under the old system. Under CMEPA, that is now taxed 20 percent, reducing the annual take-home to P6,400.

This has raised concerns about fairness, with some questioning whether a P2-million income spread over two years should be treated the same as a high net-worth investment for tax purposes.

Economist Reinielle Matt Erece said the government’s push for a flat tax is part of its broader fiscal consolidation plan, where it aims to raise revenues while reducing reliance on borrowings.

“Thus, the controversial tax adjustment on interest earnings is aimed to raise tax revenues, hopefully offsetting the potential loss of revenues after they lowered tax in investing in capital markets,” Erece said.

But while the tax unification may promote fairness, it may also backfire if savers shift to shorter placements or avoid banks altogether.

“There could be a risk in the financial system as depositors may be less inclined to leave their money in banks for a longer period,” he added.

Finance Secretary Ralph Recto defended the new law, emphasizing that while exemptions were removed, CMEPA also reduced the stock transaction tax to 0.1 percent from 0.6 percent previously, making equity investments more attractive and aligned with regional markets.

“Why is that important? Because it encourages Filipinos to explore more investment options. For example, if you want interest income, you can invest in Pag-IBIG MP2. That’s tax-free.”

The modified Pag-IBIG II is a voluntary savings scheme launched by the Home Development Mutual Fund to supplement its regular savings program. It’s designed specifically for members who wish to save more and earn higher dividends than the regular Pag-IBIG savings program.

Recto also encouraged Filipinos to explore dividend-paying stocks, noting that firms like Jollibee or Meralco offer capital appreciation and dividends. “It’s like earning interest, but sometimes you earn even more. And like land, the value of your shares can go up too.”

Bank of the Philippine Islands (BPI) president Jose Teodoro Limcaoco believes concerns over the 20 percent tax are “overblown.”

He noted that ordinary savers using short-term deposits won’t feel the impact. “The only change is for time deposits above five years and FCDU (foreign currency depository unit) deposits. The people affected are very few, mostly the wealthy,” Limcaoco told reporters.

“The final tax has always been 20 percent. All CMEPA did was apply that same rate on the bigger deposits that are over five years and the dollar deposits,” he said.

Limcaoco added that even before CMEPA, the five-year time deposit market was “not very big,” at least from BPI’s experience. “For normal savings and deposits, there’s no change at all,” he said.

As the Bureau of Internal Revenue finalizes implementing rules for CMEPA, stakeholders are watching closely to see how the new regime affects investment behavior in a high-interest environment, where more Filipinos are beginning to explore capital markets for income and long-term growth.