Taxing long-term savings: a misstep

The recently enacted Capital Markets Efficiency Promotion Act (CMEPA), hailed by some as a tax reform milestone, is turning out to be a misguided step when it comes to savings and investments.

- BENEL D. LAGUA

Its provision to remove the tax exemption on interest from long-term deposits and investments (those exceeding five years) now subjects these instruments to a 20% final withholding tax — a measure with far-reaching negative consequences for the economy.

The Philippines already faces a structural weakness: a low savings rate of around 13-14% of gross domestic product (GDP), according to World Bank data, compared to Vietnam (27%) or Indonesia (32%). This savings deficiency limits the country’s capacity for domestic investments in infrastructure, industry, and innovation.

Without a robust domestic savings pool, the country remains dependent on foreign capital, overseas Filipino workers’ remittances, and short-term inflows — all vulnerable to global financial turbulence.

Dr. Cielo Magno, former Undersecretary of Finance, succinctly captured this in a recent forum: “We must increase domestic savings to fund our development ambitions. Taxing long-term savings is a disincentive when we should be building a culture of investment.”

Taxing long-term savings affects the middle class and ordinary Filipinos the most. Time deposits, government bonds, and other secure instruments have been the traditional vehicles for long-term wealth accumulation in the absence of accessible, well-regulated investment alternatives.

Financial literacy campaigns advocate “saving for the future,” yet government policy now sends the opposite signal: save less, spend more, or risk more in volatile markets. This is hardly conducive to building financial security, especially in a country where social protection and retirement systems remain inadequate.