The separate taxation of passive incomes is retained under the CTRP. The experience in the past demonstrated that the collection of a final tax at source, or at the point when income is earned, is an efficient way of collecting the tax from passive income. It simplifies tax administration and compliance. Taxpayers are no longer required to report passive incomes in their tax returns. More importantly, the problems of tax avoidance and evasion are directly addressed with the collection of the income tax at source.

The CTRP corrected a glaring distortion in the past by re-imposing the tax on dividends. The reform promotes equity by ensuring that all forms of incomes, especially those, which are received by taxpayers from the higher income classes, are taxed. The tax on dividends is also an efficient means to tax income which has escaped the corporate income tax.

According to section 24 (B) of the CTRP, a final tax of six percent (6%) effective January 1, 1998, eight percent (8%) effective January 1, 1999, and ten percent (10%) effective January 1, 2000 is imposed on cash and or property dividends, as well as on the share of an individual from the distribution of profit from a partnership. A transitory provision exempts the declaration of dividends from retained earnings as of December 31, 1997, from taxation.

A radical reform was made with the taxation of interest income from foreign currency deposits (FCD). While interest income from peso deposits has long been subject to a twenty percent (20%) final tax, interest fromdollar deposits remained untaxed. It was a clear case of inequity with the tax system displaying a bias against income from peso deposits. The initial proposal was to tax interest from FCD deposits at par with peso deposits. After an intensive debate, the tax rate which Congress adopted was seven and one-half percent (7.5%).

In line with international practice, the tax is imposed on interest of FCD deposits of residents while that of nonresidents is not subject to tax. In case where a bank account is jointly named after a non-resident citizen such as an overseas contract worker, and his spouse, who is a Philippine resident, only fifty percent (50%) of the interest income is subject to the tax. The other half is tax-exempt (Sec. 24 (B)).

The tax-exempt privilege is only granted if the depositor can present documentary evidence that he is truly a nonresident of the Philippines. These evidences should include the original and certified true copy of:

l a certificate of contract of employment of an overseas contract workers which is duly registered with the Philippine Overseas Employment Administration (POEA); or a Seaman's Certificate, in the case of a Filipino seaman

With an aim in view of encouraging long-term savings, CTRP exempts interest income from long-term deposit or investments from the 20 percent income tax at source (Sec. 24 (B)).

Long-term deposit or investment certificate refers to certificate of time deposit or investment in the form of savings, common, or individual trust funds, deposit substitute, investment management accounts and other investment with a maturity period of not less than five (5) years, the form of which shall be prescribed by the Bangko Sentral ng Pilipinas and issued by banks only to individuals in denominations of ten thousands (P10,000) and other denominations as may be prescribed by BSP.

The rules provide for the imposition of the tax if the investments or savings are pre-terminated before the due date.

The CTRP also excluded gains realized from the sale or retirement of bonds, debentures, and other certificate of indebtedness with a maturity of more than five years (5) from the coverage of income taxation (Sec. 32 (B) (7) (g).

Reduction of the tax on capital gains from stocks not traded in the stock exchange.

In an effort to assist small and medium enterprises in broadening their capital base, the CTRP lowered the income tax rates on capital gains from stocks which are not traded in the stock exchange (Sec. 24 ©. The rates are as follows:

Non-taxability of capital gains on redemption of shares from a mutual fund.

Another measure which is intended to develop the capital market and promote savings is the exclusion of any capital gains on the redemption of shares from a mutual fund from income tax (Sec. 32 (B) (7) (h).

Restructuring the capital gains tax on sale of real property.

The capital gains tax on the sale, exchange, or disposition of real property is imposed at six percent (6%) percent on its gross selling price or current market value. However, capital gains which have been realized from the sale of the principal residence of an individual taxpayer are exempt from the income tax if the proceeds from the sale are fully utilized in acquiring or constructing a new principal residence within eighteen calendar (18) months from the disposition of the property (Sec.24 (D).

Changes on the income tax on other forms of passive incomes.

The twenty (20) percent tax on passive income has been retained except for royalties from books, other literary works, and musical compositions which shall be subject to a lower tax rate of ten percent (10%), Prizes and winnings are subject to the twenty (20%) percent tax rate except for prizes won from the Philippine Charity Sweepstakes and lotto, which are tax exempt (Sec. 24 (B) (1).

The Tax Code defines a "resident alien" as an individual whose residence is within the Philippines and who is not a Filipino citizen. Resident aliens are taxable on their incomes derived from the Philippines in the same manner as resident citizens (Sec. 24 (A). A special tax regime applies on aliens who are employed by the following: a) regional or area headquarters and regional operating headquarters of multinationals; b) offshore banking units; and c) petroleum service contractors and subcontractors. They are imposed a flat rate of fifteen percent (15%) on their gross income. The CTRP ensured that the same tax treatment would be accorded Filipinos who are occupying the same positions in the said organizations (Sec. 25 (C) (D) (E).

A nonresident alien is an individual who is not a Filipino and is not residing within the Philippines. The tax treatment on nonresident aliens under the CTRP depends on whether they are engaged in business within the Philippines, i.e. whether they stay in the country for an aggregate period of 180 days or more.

A nonresident alien who is engaged in trade or business within the Philippines is taxed just like a resident citizen and a resident alien (Sec. 25 (A) (1).

A nonresident alien who is not engaged in trade or business within the Philippines is imposed a twenty-five percent tax on his entire income from all sources within the Philippines such as interest, dividends, rent, salaries, wages, among others. His income from capital gains from the sale of shares of stocks and real property is taxed similar to the tax applicable to a resident citizen.