Tax Articles

Headlines circulating in social media platforms on the imposition of 20% tax on bank deposit accounts elicited so many comments of frustrations from various groups who were misled to believe on what they thought as imposition of additional tax burden introduced by Republic Act No. 12214 or the Capital Markets Efficiency Promotion Act (“CMEPA”) which became effective on July 1, 2025.

At the outset, it is not true that the 20% tax is imposed on the total bank or savings deposit account. It is the interest income derived from that bank or savings deposit account that is taxed.  The imposition of tax on the principal amount deposited in banks can never be subjected to tax as doing so is contrary to the long established general principle of taxation that taxes are imposed not on the capital but on the income or gain derived from the capital. Income refers to all wealth which flows into the taxpayer other than a mere return of capital. The bank deposits are in the nature of capital.  The inflow of wealth is the gain derived from the principal or fund deposited in bank in the form of interest income. So, it is the interest income that is taxed, not the principal.   

Indeed, the imposition of tax on interest income derived from bank deposit accounts is not a new tax as it has been there for a long time but somehow, CMEPA modified it to the effect that interest income earned from long-term deposits which used to enjoy tax exemption prior to the effectivity of CMEPA no longer enjoy the exemption upon the effectivity of CMEPA on July 1, 2025. This is to make the tax treatment of interest income uniform, by removing the preferential tax treatment of long-term investments.

Before the amendments introduced by CMEPA, Sections 24(B)1 and 25(A)2 of the 1997 Tax Code provide for the exemption from tax of interest income derived by individuals from long term deposits and lower tax rates in case of pre-termination of the deposit or investment before the fifth (5^th) year, subject only to certain requirements and conditions provided under the law.

As defined, the term ‘long-term deposit or investment certificate’ refers to certificate of time deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments with a maturity period of not less than five (5) years, the form of which shall be prescribed by the Bangko Sentral ng Pilipinas (BSP) and issued by banks only (not by nonbank financial intermediaries and finance companies) to individuals in denominations of Ten thousand pesos (P10,000) and other denominations as may be prescribed by the BSP.

To qualify for tax exemption, the instrument should not be terminated by the investor before the fifth (5^th) year. Otherwise, the graduated rates of 5%, 12% or 20%, depending upon the maturity of the instruments shall apply on the entire income to be deducted by the depositary banks.

With the effectivity of CMEPA on July 1, 2025, the above rules with respect to the tax exemption of interest income derived from long-term deposit accounts is now a thing of the past.  Likewise, the imposition of preferential or lower tax rates in case of pre-termination of long-term deposit accounts is no longer available. So, as it stands now, interest income is now taxed uniformly at twenty percent (20%) final withholding tax regardless of the instrument’s maturity period, whether short term or long term, or whatever terms and conditions as may be offered by the banks.

A simple summary of the changes may be tabulated as follows:

The transitory provision of the law states that any tax exemption and preferential rate on financial instruments issued or transacted prior to July 1, 2025 shall be subject to the prevailing tax rate at the time of its issuance for the remaining maturity of the relevant agreement. So, therefore, applying this provision with respect to the deletion of the tax exemption and imposition of preferential tax rates on long-term deposits, the law may mean that any exemption and preferential rates enjoyed by a long-term deposit account entered into prior to the effectivity of CMEPA on July 1, 2025 will continue to enjoy the perks until its maturity even after the effectivity of CMEPA. Only instruments issued from July 1, 2025 onwards will no longer enjoy the tax perks.

Thus, if a long-term instrument, say, a 10-year time deposit account was created in June 30, 2025 prior to the effectivity of the CMEPA, it would seem that the tax exemption on interest income derived therefrom will continue to apply until the maturity of the account on June 30, 2035 notwithstanding that CMEPA is already in place. In other words, interest income derived from the instrument throughout the duration of its life will continue to be exempt. If, therefore, its term is further extended thereafter, the exemption will no longer apply on the interest income derived on the extended period, as the exemption will only apply for the remaining maturity of the instrument.

In the same example, what if the deposit account is pre-terminated on the fifth (5^th) year, will the preferential tax rate still apply? Following the transitory provision, it would seem that the application of the preferential rates upon pre-termination of the instrument will still apply despite the shortening of its maturity period as a consequence of its pre-termination. Again, the transitory provision says that the prevailing tax rate at the time of its issuance will apply for the remaining maturity of the relevant agreement.  So, in this case, since the maturity is merely shortened and under the prevailing rules at that time the instrument was created the application of the preferential rate in case of pre-termination was still in force, it should follow that the lower rates will still apply. This is not clear though in the law. So, hopefully, this will be clarified later in the regulations.

The application of the standard and uniform tax rate of 20%, they say, is a measure to correct the outdated, unfair and inequitable system that favors the rich as it is the more well-to-do individuals who have the excess and unused cash to deposit in banks and keep it there untouched for a long time.   But regardless of the real intention of the law, the standardization of the tax rates across all interest income will certainly simplify compliance which I believe in the end will benefit both the taxpayers and the government.