Legislators urged to amend CMEPA

Cielo Magno, the former Finance undersecretary for fiscal policy and monitoring who has returned to the academe and is currently an associate professor at the University of the Philippines School of Economics, is urging government to return the controversial Capital Markets Efficiency Promotion Act or CMEPA to Congress to amend certain provisions that may discourage long-term savings.

In a briefing for members of the Monday Circle at the Westin Manila Hotel in Ortigas, Magno explained that the imposition of the 20 percent tax on interest earnings was actually proposed during the time of former president Rodrigo Duterte as part of the Passive Income and Financial Intermediary Taxation Act or PIFITA, and the idea was to boost the capital markets.

However, at the time, she said, the challenge for the Department of Finance was to minimize a revenue impact of policies.

The CMEPA, she pointed out, unfortunately doesn’t really just focus on the capital markets. She cited a provision that repeals the exemption of pickup trucks that will subject buyers to pay excise tax. As such, she believes that CMEPA is “a combination of different policies that try to produce a law that will have a neutral impact on the revenue.”

She agrees with the government’s move to lower the transaction costs with respect to the stocks and bonds, and the removal of documentary stamps. But during her time with the DOF, they were looking more on how to lower the tax on interest earnings to 15 percent, acknowledging that doing so would have a significant impact on government revenue.

“But for us, theoretically, that’s what makes sense, right? You lower the tax on savings because on the regional level we’re one of the countries that have the lowest savings rate. Right now, it’s only around 27, 29 percent compared to the average in the region, which is 35 percent. Malaysia, Indonesia, is at 35 percent and Singapore is 40 percent. So, we need savings, obviously, because that’s how we get our investments, right?”

Magno highlighted the fact that only 0.4 percent of the population hold long-term savings. “The idea is to expand that, not to eliminate it. But if you impose a higher tax, when before it was zero, then definitely that will not expand, that will shrink.”

For the banks, she said, what they want is a more stable, consistent source of savings to make money available for loans. Raising the tax on interest earnings, she warned, would shrink savings further, with the savers looking for alternatives.

“The question is, will these individuals really shift toward the bonds and stock market? The reason why they’re using time deposits is that they don’t have time to engage in that riskier sector which requires more research, right? So will they shift? And then what will be the real impact in terms of the availability of funds for banks?”

Banks rely on long-term funds to finance household and SME loans.

Magno, thus, questions, “what’s the DOF thinking when they push (the CMEPA)... I think at the minimum they’re thinking ‘if we do this, we will collect more money, we will be able to cover the deficit that will be caused by the removal of the documentary stamps, and transaction cost on stocks and bonds.”

On the contrary, Magno argues, “the greater economic impact would be negative, given it might even increase the cost of borrowing, with less money supply available for loans... Then obviously, the interest rate will go up. Di ba?”

“So it doesn’t make sense. That’s the general point... you’re encouraging people to save. If you’re encouraging people to save, then they should get rewarded.”

Additionally, she said, “the idea also is that the interest should be greater than inflation so that the money will have added value in the future. But we know that inflation is so high, there are situations when your interest is slower than actual inflation. So the future value of your money will be less.”

With taxation, she stressed “definitely that will discourage savings.”

Another point she questioned is the DOF’s claim that they are targeting the upper class individuals, clarifying that savings have already been taxed 20 percent for a long time.

Thus, for long-term savings which were subject to lower interest, Magno said, “you want to incentivize savers, that behavior. And in this case, if you flatten it, you don’t differentiate between one year, three year and more than five years, then you remove that incentive.”

“So I think it’s important that Congress reviews (CMEPA) again, that part of this policy and amend it, return it to what it should be in terms of taxation. There should be zero tax in terms of long-term savings to encourage the growth of that sector.”

Magno argued that the DOF is not actually targeting wealthy individuals,”because I think the wealthiest individuals will not put their money in a time deposit. They will be gambling, pursuing a riskier portfolio, as compared to putting the money in time deposits. So, who are the individuals investing in time deposit? These are the people who are trying to save, retiring, middle class, maybe OFWs who are saving money for their family, putting it in a time deposit.”

“The danger is with this perception that now you’re being discouraged. They may even go to underground financial investment endeavors that are riskier and also fake, and which are all under the radar of the BSP. Some of them might shift to crypto. Some of them will do the five-six lending because that’s what the middle class sector is more familiar with.”

The higher tax, she went on, “also contradicts the idea of financial inclusion because what you want is the middle class and the lower classes to do would be to actually utilize a banking system, and now with the perception that their money will be taxed, the more that they will withdraw from the formal institution.”

“And so, I really think the government has to fix this law,” she concluded.