PIDS urges government to revisit taxes on financial services

MANILA, Philippines — State-run Philippine Institute for Development Studies (PIDS) is urging the government to revisit the imposition of taxes on the financial services sector under the Tax Reform for Acceleration and Inclusion (TRAIN) Law, noting that increased friction costs may discourage investments.

In a new policy note titled “Taxation in Financial Services under TRAIN,” the policy research body said higher taxes imposed on financial services in the country since the implementation of the law last year have led to significant increase in transaction costs for firms.

PIDS said this may lead investors to divert their investments to neighboring ASEAN countries where conditions in the financial services sector are more favorable to business.

The study covered the effects of higher taxes on banking, equities, and insurance sectors.

TRAIN, which was implemented in January 2018, doubled the documentary stamp tax (DST) on bank checks, drafts, certificate of deposits not bearing interests, bills of exchange and letters of credit, mortgages, pledges, and deeds of trusts and certificates.

It also raised the DST for insurance products, as well as DST and capital gains for sales of stocks.

“This study recommends a careful analysis of the imposition of taxes on financial services to prevent unintended consequences. While taxes are meant to raise funds for the government to pump prime the economy, they may also serve as deterrent to investors and businesses,” said PIDS.

“These investors and businesses may turn to the Philippines’ ASEAN neighbors instead, resulting in revenue losses from annual income taxes,” it added.

The study said that even if the aspect of competition with neighboring countries in ASEAN, taxation in the domestic financial services sector should still be assessed in line with broadening the tax base.

“If investors and businesses find taxes on transactions as burdensome costs and shun the Philippines for friendlier jurisdictions, then the tax base would not widen,” said PIDS.

“Tax rates under TRAIN have significantly increased. Such increases, particularly on DST, may be acceptable in single transactions. However, from the business standpoint, the cost of completing a transaction or delivering their service has already doubled,” it added.

The study noted that higher taxes for bank products and services are now viewed as extra burden by businesses.

“Higher DST (documentary stamp tax) means costlier financial transactions in the country. It is charged to each transaction and increases transaction costs and is thus viewed as a friction cost which could discourage investors or inhibit the flow of trade,” said PIDS.

This is not the case for the insurance sector, but the higher prices of products may inhibit growth in the market.

“The cost may drive down demand for non-life insurance and discourage the entry of investors in this particular sector,” the study said.

PIDS noted that in the equities market, higher taxes dragged down trade volume.

“What is apparent at the moment is that the increased taxes on the sale of equities contributed to the decline in the volume of trade. With ecommerce facilitating the transfer of funds in other markets, the effect on the Philippine equities market is immediately felt,” the study said.