Is the CMEPA bill the cherry on top that will boost capital markets?
Foreign investors choose the Philippines to invest their excess money in for various reasons, which include the country’s strategic location, which provides investors proximity to major markets, consistently rapid economic growth in the region, a demographic profile 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 President emphasized the country’s focus on growth led by investment. One of the steps the government is taking to achieve this is the proposed reform of our capital markets.
What is a capital market? It is where businesses can raise capital by selling securities such as stocks, bonds, and corporate paper, 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.
The capital markets in the Philippines have grown rapidly in recent years. Despite this, the performance of the markets is lackluster when compared to Singapore, Thailand, and Malaysia. Factors behind the lagging performance include the high cost of capital, the low level of capital market sophistication, limited options for investors, and high taxes on income generated from such investments.
House Bill No. 9277, or the proposed Capital Markets Efficiency Promotion Act (CMEPA) bill is intended to make the capital markets more attractive to investors by aligning the tax rates more closely with other countries in ASEAN. The bill has passed third reading at the House of Representatives and has been endorsed to the Senate. Once the Senate passes its own bill, the two bills will be harmonized or modified in bicameral conference, after which the President can choose to sign or veto it in part or in full.
The provisions of the CMEPA bill that will enhance the attractiveness of equity securities are as follows:
• Reduction of the Stock Transaction Tax (STT)
Existing rules provide that a STT of 6/10 of 1% be levied, assessed, and collected on every sale, barter, exchange, or other disposition of shares of stock of a publicly listed company other than 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 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 a capital gains tax. The reduction in tax will lower trading costs, which makes it cheaper for investors to buy and sell shares and encourage more frequent trading.
• Standardized the final withholding tax rate (FWT) rate on dividend income for all individual investors
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 a 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 positive impact on certain aspects of the capital markets, our legislators may also consider the following:
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 compared to resident individual investors.
The legislators may also consider providing resident investors with the same benefits provided in Republic Act No. 9505, or Personal Equity and Retirement Account (PERA) Law, which provides a tax credit of 5% to the contributor and a tax exemption on the investment income.
Incentives to resident individual investors will encourage them 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 portfolios consist mainly 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 legislators.
Providing relief, or at least a comparable reduction in the tax on income arising from trading debt securities, will benefit investors in debt securities. This will also encourage investors to diversify their portfolios and not only focus on one type of investment.
3. Provide tax relief to those nonresident foreign corporation (NRFC) investors who invest in the capital markets
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 relief to the extent possible to NRFC investors who will invest in our capital markets.
This will make our capital markets more appealing to foreign companies that are looking to invest their excess funds.
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 our 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.
Christian Derick D. Villafranca is a senior manager of the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.
pagrantthornton@ph.gt.com