Should you bother about CMEPA's 20% tax on interest earned from savings?

GMA Network

13 hours ago

The spotlight is on the Capital Markets Efficiency Promotion Act (CMEPA), signed into law by President Ferdinand 'Bongbong' Marcos Jr. last May and took effect this month, because of a provision that standardized the tax rate on interest income earned on savings or deposit products in a bank.
This provision might have caused public confusion, perhaps due to several posts circulating that it imposes a 20% tax on total savings.
The Department of Finance (DOF) has since clarified that only the interest earned from a depositor's savings in a bank is taxed 20%, and not the amount of savings itself.
Under CMEPA, all interest income deposited in banks is charged a 20% withholding tax, which local banks started to implement on July 1, 2025.
'A final tax of 20% is hereby imposed upon the amount of interest yield, or other monetary benefit earned or received from any currency bank deposit, deposit substitute, trust fund, or other similar arrangements,' Section 6 of the measure reads.
Clearly, the law does not slap tax on total savings deposited in a bank, but on the interests it earns.
What is CMEPA?
The Republic Act No. 122141 or CMEPA amended several provisions of the National Internal Revenue Code, namely sections 22, 24, 25, 27, 28, 32, 34, 38, 39, 42, 51, 56, 57, 127, 149, 174, 176, 179, 190, 199, and 258, to 'harmonize' and simplify taxation of passive income across financial instruments in a bid to encourage wider public participation in the country's capital markets.
The law defines 'passive income' as any income earned from sources that do not require a taxpayer's active pursuit and performance of trade or business.
CMEPA and the 20% interest tax: What gives?
Prior to CMEPA's enactment into law, all interest earned in a regular savings account is already charged 20%.
Interviewed on Super Radyo dzBB, Finance Secretary Ralph Recto said, '1998 pa may buwis 'yan.'
Recto said 99.6% of depositors or those with regular savings accounts are already being taxed on the interest they earned before the law took effect.
Below is a sample computation from the Asian Consulting Group (ACG), which shows how a 20% tax on interest earned in a year at 0.250% could be reflected in a regular savings account with P100,000:
Before CMEPA After CMEPA Interest earned at 0.250% (1year) P250 P250 Less: 20% final withholding tax P50 P50 Interest income received P200 P200
Prior to the uniform tax rate, taxes on interest earned from savings were tiered and based on the maturity or lock-in periods — 20% for those less than three years; 12% for three years to less than four years; 5% for four years to less than five years; exemptions for more than five years; and 15% for foreign currency deposit units (FCDUs) or dollars.
The Finance chief said that only 0.4% of depositors enjoyed the preferential tax rates.
'Kaya ginawang uniform… kasi 0.4% lang ang may long-term savings,' Recto said.
With the law in effect, those who will open a long-term time deposit account would now bear the 20% tax on the interest they earn, which was previously tax-exempt if the maturity was over five years.
Below is a sample computation from ACG for a seven-year time deposit of P500,000 earning an annual interest rate of 2.50%:
Before CMEPA After CMEPA Interest earned (1 year) P12,500 P12,500 Less: 20% final withholding tax Tax-exempt P2,500 Interest income earned P12,500 P10,000
ACG chief tax advisor Mon Abrea echoed Recto's explanation, saying that the 20% tax on interest earned from savings is 'not a new tax.'
'The recently enacted Capital Market Efficiency and Protection Act (CMEPA) does not introduce a new tax on savings or deposit accounts. Interest income from such deposits has long been subject to a 20% final withholding tax under the Tax Reform Act of 1997,' Abrea said.
'What CMEPA does is standardize the tax treatment by also imposing the same 20% final tax on interest income from long-term time deposits, which were previously exempt if held for more than five years. This reform promotes fairness and consistency in the Philippine tax system and aligns with international best practices, where interest income - regardless of the term - is generally subject to tax,' the tax expert said.
The Finance Department has further clarified that the standardized tax rate of 20% is 'not retroactive,' meaning it does not apply to financial instruments that were issued or transacted prior to July 1, 2025.
'Therefore, existing long-term deposits made prior to the effectivity of the law will continue to enjoy the preferential rate until their maturity,' the DOF said.
Fair or regressive?
The Finance Department has argued that the previous 'special tax treatment' favored depositors who can afford to park their savings in long-term deposits, which made the tax unfair for short-term depositors who face liquidity issues and need immediate access to their funds.
'The CMEPA merely corrects this outdated and inequitable system that has placed a heavier burden on ordinary Filipinos who do not have the extra cash to put in banks for longer periods,' the DOF said.
Non-profit economic research group IBON Foundation's executive director Sonny Africa, however, is not convinced that the law's standardized tax rate is 'equalizing.'
'Standardizing tax rates may sound fair but equalizing tax on interest income at 20% will be regressive in effect because ordinary savers will end up paying the same rate as the ultra-rich. The DOF is being insensitive — equal treatment of unequals is unequal in effect,' Africa said.
'The uniform 20% tax on interest income is regressive because ordinary savers will pay the same rate as the ultra-rich,' he added.
Citing a report from the Bangko Sentral ng Pilipinas, IBON's executive director said that 20.1 million or three out of four Filipino families 'didn't have any savings as of the end of 2024.'
'This brute fact should put into context any hype that the new law empowers ordinary Filipinos,' Africa said.
Nevertheless, CMEPA does not impose the unified tax rate to provident savings programs under the Social Security System (SSS) and the Home Development Mutual Fund or Pag-IBIG such as the MP2 and would remain exempt from tax.
'The tax exemptions on SSS, GSIS, Pag-IBIG are welcome because these are public schemes," Africa said.
Capital markets
With the law's aim to encourage wider public participation in the country's capital markets, CMEPA reduced the stock transaction tax (STT) rate from 0.6% to 0.1%, decreasing the documentary stamp taxes (DST) on original issuance of shares from 1% to 0.75%, and removing the DST on collective investment schemes.
It also imposes a uniform 0.75% DST on bonds, debentures, and certificates of stock or indebtedness issued in foreign countries, regardless of jurisdiction, which the government said reinforces neutrality in the tax system.
'These measures are seen to cut transaction costs, encourage market participation and financial planning, boost market liquidity, make the country's equities market regionally competitive, and increase capital market growth,' the DOF said.
Rizal Commercial Banking Corp. Chief Economist Michael Ricafort said the CMEPA would help attract more large foreign and local investors with lower stock transactions tax/costs, vis-a-vis other ASEAN/Asian stock markets, as part of making our markets more cost competitive for transactions.
'More importantly, the CMEPA Law would help structurally attract more large scale foreign fund managers and better compete with other ASEAN/Asian markets in terms of reduced transaction costs/taxes, assuming all other factors are the same. Thus, IPOs (initial public offering) and other share sales would correspondingly increase with more stock market transactions/trading activities as incentivized by CMEPA Law,' Ricafort said.
IBON's Africa, however, said ordinary low-income Filipinos could not be empowered by CMEPA's new tax structure which, he said, 'clearly also wants to drive money, including from ordinary lower-income families into capital markets.'
'Instead of pushing them to be investors in volatile capital markets and shifting risk to individuals, the government should give more attention to securing decent wages and basic incomes, pensions, and social protections,' Africa said.
'Reducing the stock transaction tax and documentary stamp tax will benefit high-volume large investors or brokers, but ordinary savers are not suddenly empowered by this. They are still burdened by unaffordable risk, lack of disposable income, and poor financial literacy. The DOF should stop thinking that Filipinos are all rich and that financial markets are somehow substitutes for social security systems,' he added.
The DOF estimates CMEPA to generate P9.0-billion worth of revenues from 2025 to 2028, the end of the term of the current administration. It is expected to raise P500 million this year; P1.6 billion in 2026; P2.8 billion in 2027; and P4.1 billion in 2028.
The government is looking to generate P4.520 trillion in 2025 and P4.983 trillion in 2026 based on the latest report of the Development Budget Coordination Committee (DBCC). — BAP, GMA Integrated News