Let me break it down to you

In a landmark move to modernize the Philippine tax system and boost investor confidence, the government enacted the Capital Markets Efficiency Promotion Act (CMEPA), or Republic Act 12214, which took effect on July 1, 2025. This reform package simplifies taxation, promotes fairness and aligns the country’s financial regulations with global standards.

CMEPA introduces several key amendments to the Tax Code, and the following are just a few of the highlights with the potential to reshape personal investment strategies:

1. Inclusion of equity-based compensation in the definition of gross income;

2. Standardization of final withholding tax rates on interest income;

3. Clear imposition of capital gains tax on the sale, exchange or other disposition of shares of stock in a domestic or foreign corporation not traded in stock exchange;

4. Rate adjustment of stock transaction tax and imposition of STT on the sale or exchange of domestic shares of stocks and other securities listed and traded through foreign stock exchange.

In a nod to international best practices, equity-based compensation, such as stock options, restricted stock units, stock appreciation rights and similar items, is now expressly included in gross income at the time of exercise.

The inclusion of equity-based compensation in the gross income definition has been confirmed by the Bureau of Internal Revenue through prior issuances and is further clarified under CMEPA. This is particularly relevant for a wide range of individuals, including executives, startup founders and employees, professionals in the technology, finance and innovation sectors and others who receive part of their compensation in the form of equity. It also benefits both local and multinational companies by providing more clarity and consistency in tax treatment, thereby reducing the risk of disputes and aligning with global practices.

Another significant change is in the capital gains tax (CGT) treatment. CMEPA now imposes a uniform 15 percent CGT on net capital gains derived from the sale, exchange or disposition of shares in both domestic and foreign corporations, provided these shares are not traded on any local or foreign stock exchange. Previously, taxable gains from the sale of unlisted foreign shares were subject to tax as ordinary income at the graduated income tax rates of up to 35 percent.

Also, the stock transaction tax previously set at 0.6 percent on the gross selling price or gross value in money of the shares of stock sold, exchanged or disposed, has been reduced to 0.1 percent. In addition to lowering the rate, the scope of STT has also expanded. It now applies not only to shares listed and traded through a local stock exchange, but also to the sale, exchange or other disposition of shares of stock and other securities of domestic corporations listed and traded through foreign stock exchanges.

Interest income also saw a major overhaul. It used to be taxed at different tax rates depending on the type, source and maturity of the financial instrument. Interest from bank deposits and trust funds was taxed at 20 percent, while some government securities and long-term deposits enjoyed preferential rates or exemptions.

Under CMEPA, a uniform 20 percent final withholding tax is imposed on all interest, yield, or any other monetary benefit earned from any currency bank deposit or deposit substitute, trust funds and other similar arrangements, regardless of their nature or tenure. This simplifies compliance and promotes equity across all income brackets.

Lastly, contrary to some public misconceptions, CMEPA does not impose a new tax on savings. The principal amount remains untaxed; only the interest earned is subject to the 20 percent final withholding tax rate. What has changed is the removal of preferential rates for long-term deposits.

These reforms represent a major step toward a smarter, more inclusive tax system. By redefining gross income to include equity-based compensation as compensation for services, aligning capital gains treatment for unlisted shares, STT rate adjustment for listed shares and uniform interest income taxation, CMEPA simplifies compliance and promotes equity and consistency. For individuals, whether employees, investors or savers, the law offers clearer rules and a more predictable tax environment that supports long-term financial planning.

Ivy Dianne Galzote is a senior manager from the Global Mobility Services Team under the Tax Group of R.G. Manabat & Co. (KPMG in the Philippines), a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The firm has been recognized as a Tier 1 in Transfer Pricing Practice and in General Corporate Tax Practice by the International Tax Review. For more information, you may reach out to tax senior manager Ivy Dianne Galzote or tax partner Karen Jane Vergara-Manese through [email protected], social media or visit www.home.kpmg/ph.