The signing into law of the Capital Market Efficiency Promotion Act (CMEPA) with the 20 percent interest income tax rate has caused some concern. Our short-term bank deposits have been taxed this rate since 1998. So, what is causing the uproar?
Before CMEPA, a tiered tax system for interest on deposits was in place. Under the National Internal Revenue Code of 1997, interest income tax rates were tiered for different-term investments: for those less than three years (20 percent), for those three years to less than four years (12 percent), for those four years to less than five years (5 percent).
Interest income earned from investments of five years or more were exempt from taxes.
Effective July 1, 2025, however, interest income from all deposits regardless of term or currency denomination (foreign currency deposits were taxed at 15 percent previously) are now subject to a uniform 20 percent final withholding tax.
Here lies the difference between then and now. This is where the uproar comes from.
Previously, people were encouraged to lock in their funds for a longer maturity period because the longer the term, the less tax you’d have to pay on interest earned and if you lock in for at least five years, the interest would be tax-exempt.
The new tax rate of 20 percent across-the-board does dis-incentivize savings. There is no incentive to keep money saved and invested for a longer term because, now, there are no tax savings.
And this is really bad as well as sad, for us. Filipinos, by nature, are not savers. We are spenders. We spend more than what we earn. We live beyond our means. This is why we need incentives to keep our money locked away or we will spend everything today.
The government defends CMEPA, saying that a uniform tax rate is simpler. I agree.
They say CMEPA removes the preferential treatment granted to long-term deposits. But why? Isn’t it only fair that those who undertake greater risk with a longer-term maturity be rewarded with a greater yield?
The uniform 20 percent rate allegedly corrects an unfair system that favors the wealthy. The fact is that it is not the wealthy who enjoy preferential rates. It is everyone who chooses to save their money and invest long-term. This includes the middle-class: the young, hard-working professionals just beginning to earn a good income and trying to build a future for their growing families.
Statistics show that only .4 percent of deposits actually enjoyed these so-called preferential rates. Shouldn’t government have added more incentives to increase this percentage? Why wouldn’t we want people to invest long-term?
Why take punitive action, instead, towards owners of these .4 percent of deposits — said to consist only of the wealthy? By punishing the wealthy, the government punishes the middle class, as well, or all depositors, for that matter.
Life will go on for the wealthy. Their demand for anything is inelastic. They are unaffected by price. Those members of the middle class, however, who choose to be fiscally responsible and prepare for their future, will bear the brunt of this punitive across-the-board tax rate of 20 percent.
If 99.6 percent of deposits are already paying 20 percent interest income tax, there is no playing field to level. You don’t make life better by punishing the minority .4 percent of deposits by taking away their lower tax rates. You make life better by uplifting the majority 99.6 percent paying higher taxes.
If government truly wants to establish equitable tax rates for everyone, why not lower the tax rate across-the-board, from 20 percent to 10 percent? This move doesn’t punish anyone. In fact, it helps everyone—except those who want to line their pockets with public funds.
We don’t need more money. What we need is good governance, efficiency, and honesty.