Foreign investors choose the Philippines to invest their excess money for various reasons, which include the country’s strategic location providing the investors proximity to its major markets, consistent fast economic growth in the region, a large demographic of young, English-speaking, and highly skilled workers, and generous fiscal and non-fiscal incentives from the government, among other things.
In his third State of the Nation Address (SONA), the Philippine president emphasized the country’s focus on growth led by investments. One of the government’s efforts to achieve this is the proposed reforms to our capital market.
What is a capital market? It is one of the components of a financial system and is where businesses can raise capital by selling securities such as stocks, bonds, and corporate papers, as well as Treasury bills, to people and institutions looking for investments. This also serves as a way for investors to lend money to the government, which can be used to fund its projects for the nation’s development.
The capital market in the Philippines has seen rapid growth in recent years. Despite this, the performance of the capital market in the Philippines is lackluster when compared to its neighboring countries, such as Singapore, Thailand, and Malaysia. Factors affecting this include the high cost of capital, low capital market sophistication, very few options for investors, and high taxes on income arising from the capital market in the Philippines.
The House Bill No. 9277, or the proposed Capital Market Efficiency Promotion Act Bill (‘CMEPA Bill’ or ‘the Bill’) is one of the reforms that our legislators are looking into with the goal of making the Philippines’ capital markets more attractive to investors by aligning the tax rates more closely with the countries in the ASEAN region. The Bill has passed the third reading of the House of Representatives (HOR) and has been endorsed to the House of Senate (HOS). It will still undergo reading by the HOS, reconciliation of differences and/or introduction of new provisions in the Bi-Cameral Conference before it is signed or vetoed, in part or in full, by the president.
The provisions of the CMEPA Bill that will enhance the attractiveness of equity securities are as follows:
Existing rules provide that a STT of 6/10 of 1% shall be levied, assessed, and collected on every sale, barter, exchange, or other disposition of shares of stock of a publicly listed company other than the sale by a dealer in securities, provided the publicly-listed company complies with the minimum public ownership (MPO). Failure to comply would result in the imposition of a capital gains tax of 15% on the net capital gains.
One of the proposed changes under the CMEPA Bill is the reduction of the stock transaction tax to 1/10 of 1%, in lieu of capital gains tax. The reduction in tax will result in lower trading costs, which makes it cheaper for investors to buy and sell equity shares and to trade more often.
The current FWT rates for the dividends received from a domestic corporation or from a joint stock company, insurance or mutual fund company, and regional operating headquarters of multinational companies are 10% if received by resident citizen and resident alien, 20% if received by nonresident alien engaged in trade or business (NRAETB), and 25% if received by nonresident alien NOT engaged in trade or business (NRANETB).
The CMEPA Bill proposes to standardize the applicable FWT rate on dividends for non-resident alien (NRA) individual investors with the FWT rate applicable for resident citizens and resident aliens, which is a 10% FWT rate.
The tax savings of 10% FWT for NRAETB and 15% FWT for NRANETB will attract more NRA investors to invest more money in our capital market.
Although the above proposed changes will have a good impact in certain aspects of the capital market, our lawmakers may also consider the following in formulating the reforms in relation to the capital market as a cherry on top:
1. Incentivize resident individuals to invest in the trading of equity securities
While we recognize that the CMEPA Bill has aligned the FWT rate on dividends for NRA investors with that of resident citizens and resident alien investors, no incentive, neither in the form of relief nor a lower tax rate, was given to these resident investors to entice them to invest in equity securities.
Based on the current version of the CMEPA Bill, the reduction of the FWT on dividend income mainly benefits NRA investors, who are, in most cases, wealthier as compared to resident individual investors.
The legislators may also consider providing the resident investors with the same benefits provided in Republic Act No. 9505, or Personal Equity and Retirement Account (PERA) Law, where it provides a tax credit of 5% to the contributor and a tax exemption on the investment income.
By providing incentives to its resident individual investors, this will encourage new and existing investors to put their excess hard-earned money into assets that earn passive income.
2. Provide relief or incentives to investors in debt securities
The current version of the CMEPA Bill favors the lowering of taxes on the dividend income of investors whose investment portfolios mainly consist of equity securities. Meanwhile, the interest income of investors who prefer to invest in the fixed income market, where bonds issued by corporations and the government are generally subject to a 20% FWT rate, did not receive the same love from the lawmakers.
Providing relief, or at least a comparable reduction in the tax on income arising from trading debt securities, will benefit the investors in debt securities. This will also encourage investors to diversify their investment portfolios and not only focus on one type of investment.
3. Provide tax relief to those nonresident foreign corporation (NRFC) investors who will invest in the capital market
Aside from the lower final tax rate that the NRFCs can avail of on their dividend and interest income pursuant to double taxation agreements as may be applicable, legislators may also consider providing tax reliefs to the extent possible to NRFC investors who will invest money in our country’s capital markets.
This will make our capital markets more appealing to foreign companies that are looking to invest their excess funds in them.
The phrase ‘cherry on top’ refers to something that makes a good situation even better or adds a finishing touch to an already positive experience. Introducing reforms and changes to our current tax rules and policies relevant to the trading of equity and debt instruments may be the cherry on top that the Philippine capital market needs to make investing in the country’s capital market more rewarding.
Let's Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
As published in BusinessWorld, dated 30 July 2024
