The 20% withholding tax has been in effect for some time. Is this truly something to be concerned about?

Recent reports about a 20% withholding tax on interest income from bank deposits have triggered strong reactions online. A bank executive, however, has clarified that the Department of Finance simply standardized its application. Here’s all you need to know.

An Existing Practice, Not a New One

Depositors have long been subject to 20% withholding tax on deposits with maturities of less than three years. according to Helen Go-Oleta, RCBC’s Chief Investment Officer and a Trustee of the Fund Managers Association of the Philippines. Meanwhile, longer-term deposits were previously taxed at rates ranging from 5% to 12%. The Department of Finance simply streamlined the system by applying a uniform 20% rate across all deposit maturities.

“It is not new; it has been around since 1998. All they did was make the tax rate uniform, because the old system favored those who were richer,” Go-Oleta says.

Simplifying Compliance, Equalizing Burden

In a statement, the Department of Finance explained that the shift to a uniform 20% withholding tax rate on interest income from all bank deposits under the Capital Markets Efficiency Promotion Act (CMEPA) aims to simplify compliance, reduce confusion, and ensure a fairer tax system for all depositors. The DOF noted that the previous system, which imposed lower tax rates on long-term deposits (five years or more), was inequitable to short-term depositors who typically have less cash and need quicker access to their funds.

“The CMEPA merely corrects this outdated and inequitable system that placed a heavier burden on ordinary Filipinos who do not have the extra cash to put in banks for longer periods. With the new law, interest income is now taxed uniformly with a flat rate of 20%, regardless of the maturity period.”

“Estimates using Bangko Sentral ng Pilipinas (BSP) data show that more than 99.6% of total deposits were already subject to the 20% tax rate, while only 0.4% enjoyed preferential rates,” the DOF statement added.

The 20% withholding tax applies only to the interest earned on a deposit—not the full principal amount. For example, a five-year time deposit of Php500,000 with a 5% annual interest rate generates Php25,000 in interest income each year. Previously, this interest was not subject to withholding tax. Under the new rule, however, a 20% tax will be applied to the interest, amounting to Php5,000 (Php25,000 x 20%).

It’s not about the tax but how the taxes are being used and how Filipinos feel the tax is benefitting their families.

Helen Go-Oleta

RCBC Chief Investment Officer

Just Keep Saving

Oleta believes the change will not discourage people from saving. “If you need to save, you will save. Where else will you put your money?” says Go-Oleta.

Instead of being dissuaded, she encourages the public to save more, to take advantage of the improved interest rates, which currently average 5% for time deposits, from the lows of 1% to 2% during the pandemic.

A Confidence Issue

Go-Oleta concedes that the problem may not be the tax change per se, but the public’s confidence in how the proceeds are being utilized.

“It’s not about the tax but how the taxes are being used and how Filipinos feel the tax is benefitting their families. More of the (lack of) confidence that they are using it wisely and that it is not just benefitting a handful.”

Go-Oleta adds that improved transparency and upfront reporting from the government on how tax revenues will be allocated—shared before, not after the fact—could help build public confidence and alleviate concerns.