CMDC initiates review on taxes on financial products, instruments

The Capital Market Development Council (CMDC) has launched a tax structure review to harmonize differential tax treatment on similar or easily substitutable financial products or instruments.

"The objective of this review is to reduce if not eliminate tax arbitrage thereby encouraging real competition among different financial providers," Dr. Conchita L. Manabat, CMDC chairperson explained.

In fact, the council has applied for a technical assistance from grant providers to conduct the review of the present tax structure.

The council said that the financial market is not tax-neutral due to various tax laws and incentives issued in the past which have contributed to a situation wherein taxation has become a competitive factor in the investment decision process.

Manabat said in a statement that the review would cover all major tax-related issues in the bank and non-bank sectors identifying products, transactions and undertakings where tax arbitrage may exist, solicit comments of all stakeholders concerned and recommend changes that could improve tax neutrality.

The council will then meet to discuss the results of the review and its implications, cognizant of the short-run effects on government revenues in terms of forgone income that may arise in case of expansion of coverage of tax incentives vs. the potential growth and deepening of Philippine capital market.

Another major policy initiative of the CMDC is pension reform.

The council believes that strengthening pension institutions and reforming the entire retirement income architecture are necessary ingredients to developing the domestic capital market. Other countries have anchored the growth of their capital markets on a strong pension/provident fund scheme. This reform area could serve to mobilize long-term funds needed for the country’s growth and development.

These two policy reform initiatives are actually interlinked, in the sense that tax incentives would be an important component of pension reforms.

Former Finance Undersecretary Romeo Bernardo, who also served as chair of the Presidential Retirement Income Commission in 1999, said that, "a justifiable case exists for the provision of tax incentives for long-term savings together with a multi-pillar system incorporating a mandatory private pension scheme as a means to address the weak financial position of public pension providers and the consequent contingent liability that the national government will face should the present set-up continue."

The expected output from this initiative is an overall plan or vision for the retirement income system and the appropriate tax and regulatory framework as well as draft legislations incorporating the desired reforms.

Meanwhile, the council is working towards the development of the country’s fledging capital markets.

Manabat, and Finance Secretary Cesar V. Purisima, said that development of the local capital market should lead to the expansion of financial choices made available to savers and investors. Manabat and Purisima share the council chairmanship.

However, there should be effective regulations in place to guide market operations and enhance market integrity.

The council likewise believes that the different segments of the financial sector must have the same opportunity in competing for business from the public.

"There should be no tax advantage or disadvantage in favor or against a particular product, institution or provider and that such products or services must be delivered as efficiently as possible. A wide array of financial products to choose from should be made available to our savers and investors who have different needs or requirements like retirement, education, housing, insurance and business expansion," it said in a statement.

The CMDC was formed in 1991 as a partnership between three government agencies and five private sector organizations.

The original eight members were the Department of Finance (DOF), the Bangko Sentral ng Pilipinas (BSP), the Securities & Exchange Commission (SEC), the Financial Executives Institute of the Philippines (Finex), the Bankers Association of the Philippines (BAP), and the Philippine Stock Exchange (PSE).

Since then, it expanded to include the Insurance Commission (IC), the Philippine Life Insurance Association (PLIA), the Philippine Federation of Pre-Need Plan Co. Inc., and the Philippine Insurers and Reinsurers Association.