CMEPA Law: Transformative Changes to Passive Income Taxation in the Philippines

On May 29, 2025, the Philippine government enacted Republic Act No. 12214, known as the Capital Markets Efficiency Promotion Act (CMEPA), a significant legislative reform aimed at improving the taxation of passive income. As the economy continues to evolve, the CMEPA law is expected to simplify the tax structure for Filipinos, enhancing investment opportunities and competitiveness within the local capital markets.

The CMEPA law introduces several key amendments to the Philippine Tax Code, primarily targeting the taxation of interest income and royalties. Previously, interest income was subject to varying tax rates, creating considerable confusion among taxpayers. Under the new regulation, all interest income derived from bank deposits, deposit substitutes, and trust funds will now be uniformly taxed at a final rate of 20%. This adjustment includes foreign currency deposits, which previously benefited from a preferential tax rate of 15%. According to John Alexis S.B. Sumulong, a manager in the Tax Advisory & Compliance division at P&A Grant Thornton, this uniformity is aimed at promoting fairness among investors and simplifying compliance (BusinessWorld, June 10, 2025).

Moreover, royalty payments have been distinctly categorized under the CMEPA law, also subjected to a 20% tax rate—excluding payments related to books, literary works, and musical compositions, which will maintain a lower tax rate of 10%. These changes not only streamline tax obligations but also aim to incentivize local investments.

In addition, the CMEPA law significantly reduces the stock transaction tax (STT) for sales or exchanges of listed shares from 0.6% to 0.1%. This reduction is anticipated to enhance market liquidity and lower transaction costs, making the Philippine capital market more competitive on a regional scale. The law also imposes a 15% capital gains tax on net gains from the sale of shares in foreign corporations, aligning the tax treatment with that of domestic shares, thereby eliminating any previous advantages enjoyed by foreign investments.

The CMEPA's impact extends to the documentary stamp tax (DST) on original share issuances, which has decreased from 1% to 0.75% of the shares' par value. This reduction is designed to lower the cost of capital formation for businesses, further encouraging domestic investment.

Another notable aspect of the CMEPA law is its provisions regarding employer contributions to Personal Equity and Retirement Accounts (PERA). Employers contributing at least the same amount as their employees to PERA will be eligible for an additional tax deduction equal to 50% of their contributions, subject to a maximum allowable contribution of PhP100,000.

As the law is set to take effect on July 1, 2025, stakeholders are eagerly anticipating its implications on the Philippine economy. According to Dr. Maria Elena Bautista, an economist at the University of the Philippines, these reforms could significantly boost local capital markets and stimulate economic growth by encouraging higher participation from both individual and institutional investors (Philippine Institute for Development Studies, 2023).

The CMEPA law represents a pivotal shift in the Philippine tax landscape, aimed at maximizing the financial potential of taxpayers while simultaneously promoting a more competitive investment environment. As investors prepare for these changes, the focus will be on optimizing their earnings and contributing to a thriving capital market. The implementation of the Bureau of Internal Revenue's (BIR) rules and regulations will be crucial in determining the law's ultimate success and effectiveness.

In conclusion, the CMEPA law is an essential step towards enhancing the investment climate in the Philippines, addressing long-standing complexities in the tax system. As stakeholders await its full implementation, the hope is that this legislative change will empower individuals and businesses alike to leverage their resources effectively and contribute to the nation's economic development.