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. 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.
CMEPA’s tax uniformity may sound appealing in technocratic terms, but it contradicts the country’s broader goals of deepening domestic capital markets, promoting financial inclusion, and reducing dependence on foreign funding.
Worse, it disincentivizes the very behavior needed to address these gaps. The Asian Development Bank (ADB) has consistently stressed that high savings rates fuel investment-led growth in East Asia — a path the Philippines risks veering away from.
The proponents of CMEPA in Congress and the Senate, with the Department of Finance (DoF) providing key support, presented an argument that focuses on tax neutrality and revenue needs. However, this lens misses the developmental context: growth cannot be built on fiscal efficiency alone — it needs a savings culture.
DoF officials have argued that the exemption only benefits the rich who have enough funds to stash away and not touch for at least five years. No less than the DoF Secretary has said in a public interview that the measure, especially the reduction on stock transaction tax, is to invite the public to invest in the stock market where there is opportunity for higher returns.
The reasoning is flawed. Many long-term time deposits now allow interest payouts quarterly or semi-annually. For the small folk and the retirees, this is living on interest, while preparing for the future. Wealthier individuals, meanwhile, can navigate into bonds, equities, real estate, or even offshore instruments to preserve their purchasing power. The ordinary people do not have the risk appetite for stocks in a volatile environment where information is not readily available to all. Those who lack access to financial literacy or higher-yield instruments end up putting their money in bank accounts that slowly erode its value.
This measure risks being remembered as a fiscally convenient but economically short-sighted policy.
This corner even believes the 20% tax on regular savings is too much of a burden for the ordinary folks. The average savings deposit rate in traditional banks — where most Filipinos still keep their money — is a mere 0.10% to 0.25% per annum. Imagine deducting 20% from this and nominal interest income is a pittance. Can the tax not be lowered? Even in digital banks that promise higher returns, typical rates of 4% to 6% are often capped at low balances, and the sustainability of these rates remains uncertain.
Now layer on inflation and the picture becomes even starker. For the few savers earning 4% interest from a digital bank, the after-tax return is 3.2%. Subtract inflation, and you get a real interest rate of -0.6%. In simpler terms: you are losing money in real value, even while saving.
In this context, discouraging long-term savings through taxes and low yields is not just bad economic policy — it’s self-sabotage. Thus, what should have been a neutral financial habit — saving — has become a regressive burden.
Instead of a flat 20% tax on all long-term savings, policymakers should:
1. Reintroduce tax exemptions for savings held over extended periods.
2. Offer tax-deferral mechanisms or lower rates for retirement-oriented products.
3. Provide tax credits or exemptions for investments channeled into infrastructure, micro, small, and medium enterprises, and green finance.
4. Introduce tiered tax rates that protect small savers — say, the first P10,000 in annual interest.
5. Encourage financial institutions to develop low-risk, inflation-beating products that are accessible to ordinary citizens.
The Philippines must not mortgage its long-term growth for short-term fiscal gain. It is time for Congress to reassess CMEPA’s unintended effects on savings. To quote former Bangko Sentral ng Pilipinas Governor Amando Tetangco, Jr., “Savings is not just personal prudence; it is national strength.”
Savings should not be punished. They should be protected, nurtured, and encouraged — because they are not just a personal virtue but a national necessity. When inflation, low yields, and taxes combine to make saving a losing proposition, the message to ordinary Filipinos is tragic: spend or speculate, but don’t save.
If the country is serious about development, savings should be nurtured — not taxed away.
The views expressed herein are the author’s own and do not necessarily reflect the opinion of his office as well as FINEX.
Benel Dela Paz Lagua was previously EVP and chief development officer at the Development Bank of the Philippines. He is an active FINEX member and an advocate of risk-based lending for SMEs. Today, he is independent director in progressive banks and in some NGOs.