Banks' deposit composition may shift due to removal of tax perks

BANKS may see changes in their deposit base as clients could reallocate their funds following the removal of tax perks for long-term deposits under the Capital Markets Efficiency Promotion Act (CMEPA), analysts said.

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However, the impact on lenders' funding and interest income may be minimal amid the low number of time deposit accounts in the banking system.

"Banks could see a modest shift in the composition of their deposit base, especially time deposits, which may slightly affect their interest income and funding sources in the short term," Philippine Institute for Development Studies Senior Research Fellow John Paolo R. Rivera said in a Viber message.

"We don’t expect any impact on the volume of deposits in the banking system. We won’t be surprised if some funds shift to short-term deposits since there is no longer any tax advantage to long-term deposits," China Bank Capital Corp. Managing Director Juan Paolo E. Colet said in a Viber message.

Under CMEPA, which took effect on July 1, interest income from deposit products, including savings deposits, time deposits, deposit substitutes, trust funds, negotiable certificates of deposit, and similar financial instruments, are now charged a uniform final withholding tax of 20%, regardless of holding period.

Previously, interest earned from time deposits with a term of five years and up was tax exempt. Time deposits of over three years but below five years also enjoyed varying preferential rates.

The law also effectively raised the final tax on interest income from foreign currency deposits to 20% from 15% previously, but only for residents.