Simplified tax on stocks to boost trades

MANILA, Philippines — The proposal to simplify the tax structure in stocks, including the removal of the IPO tax, would encourage the entry of more players and help boost the domestic capital market, the state-run tax think tank said.

In its latest journal, the National Tax Research Center (NTRC) said stock market reforms under Package 4 of the Comprehensive Tax Reform Program (CTRP) would make the local capital market more competitive and encourage more individuals and firms to invest in the stock market.

“The taxation of stock investments is indeed ripe for reforms. The proposed reforms which form part of Package 4 will put the Philippines at par with its neighboring countries and would encourage stock market participation of both individual and corporate investors,” the NTRC said.

Among the provisions under Package 4 is the adoption of a uniform final tax of 15 percent for interest income, dividends and capital gains.

“The adoption of a single rate on capital income, including dividends, would simplify the current complicated tax structure that is susceptible to tax arbitrage. It will create a more even playing field which will result in more equitable distribution of the tax burden,” NTRC said.

“With the tax reform proposals, the country can compete better for capital and investments which is urgently needed to finance infrastructure, create more and better jobs, and boost the inclusive and sustainable growth of the economy,” it added.

Package 4 also proposes to remove the initial public offering (IPO) tax to encourage public listing in the  stock exchange.

Currently, only the Philippines and Indonesia collect tax on IPO among the member-countries of the Association of Southeast Asian Nations (ASEAN). NTRC said this results in the Philippine Stock Exchange lagging behind its counterparts as well as having a shallow market capitalization.

The measure is also pushing to gradually reduce the current stock transaction tax of 0.6 percent by 0.1 percentage point every year starting 2020 until it reaches 0.1 percent by 2024.

The tax think tank said this would align the country’s stock transaction tax with Indonesia  and Vietnam, and would encourage secondary trading which would eventually result in higher trading volume.

Furthermore, Package 4 also seeks to exempt the sale or transfer of unlisted shares or certificates of stock from the documentary stamp tax (DST), similar to those traded at the PSE.

“The proposal is seen also to encourage trading activities which would spell positive economic growth for the country.  It is also seen to enhance liquidity in the secondary trading of equity instruments,” NTRC said.

Meanwhile, the documentary stamp tax imposed on original issuance which is currently at one percent is proposed to be lowered to 0.75 percent to equate with debt instruments.

According to the NTRC, the proposed tax reforms on the shares of stocks are expected to result in a net revenue gain of P6.1 billion. This, however, excludes the losses from the reduction of final withholding tax on interest income, which is also under Package 4.

NTRC said P12 billion in additional revenues would be generated from the increase in the final withholding tax on dividends, but P3.8 billion would be lost due to the reduction of capital gains tax and stock transactions tax, and removal of the IPO tax.

 Reforms on DST, particularly the reduction of the tax on original issuance of shares of stocks is seen to reach P2.1 billion.

   Despite this, the NTRC maintained that Package 4 is still designed to be broadly neutral.

 “While the proposed tax reforms on the sale of shares of stock will result in revenue gain, this will compensate for the revenue losses in other proposals within the package, such as the proposed reduction in the tax on interest income from 20 percent to 15 percent final tax and reduction and removal of the DST in some financial transactions,” NTRC said.