New tax law spurs ‘dramatic’ retreat from long-term bank savings
The new law ending tax breaks on long-term time deposits has triggered a “dramatic” exodus from those savings products, leaving banks and policymakers to wonder where the cash will flow next.
Michael Angelo Kho Samson, who chairs the capital markets development committee of the Bankers Association of the Philippines, said member-banks had reported as much as a 95-percent drop in deposits with maturities longer than five years.
Those products previously enjoyed exemptions from taxes on interest income.
“You would expect that behavior,” Samson told participants at the Philippine Tax Academy Convention on Wednesday. “But it’s dramatic and quick.”
For now, Samson said banks had yet to see any impact to long-term lending, which is usually funded by deposits of similar tenor.
“The gestation period of our long-dated capital investments can take years,” he explained.
Effective July 1, the Capital Market Efficiency Promotion Act (CMEPA) imposed a flat 20 percent tax on all bank savings, ending preferential treatment for long-term deposits.
Officials had argued that the old system unfairly favored wealthier Filipinos able to tie up cash for years.
Citing data from the central bank, the Department of Finance estimated that some 99.6 percent of total deposits were already subject to the 20 percent tax rate prior to CMEPA, while only 0.4 percent enjoyed preferential rates.
The government wanted the reform to steer savings into other investments with higher returns, though Samson said it was too soon to tell if they’re ending up in the capital market.
“I guess the market is saying their new tax code is no longer attractive. Maybe they’ll have to find another instrument to invest in,” he said.
“Now you might ask the ancillary question, where did that money go? Did it go to a shorter instrument? Did it go to the equities markets? Did it go offshore? We don’t know. It’s too early to tell,” he added.
Ramon Monzon, president and chief executive of the Philippine Stock Exchange, said foreigners had been net buyers of local equities since CMEPA took effect.
“So, empirically, it (deposits) might have gone there,” Monzon said. “I hope it did.”
Still, McJill Bryant Fernandez, a commissioner at the Securities and Exchange Commission, said the local market needed a broader menu of investment products to capture shifting savings.
“Of course, we acknowledge the challenge of the availability of instruments in capital markets where these funds will go to,” he said.
