Businessman Investor

Touching base with the rational business psyche of stock market investors

Thursday, September 22, 2011

BIR Tax Legality, PSE Administrative Impossibility, Logistical Burden, Illiquidity Tendencies

This is Part 2 of a Series. Go to Part 1: The Philippine Stock Exchange Tax Dilemma—Clarifying the ½ of 1% Stock Transaction Tax and the 5 to 10% Capital Gains Tax

The Ayala Tower One & Exchange Plaza: seat of the Philippine Stock Exchange (PSE) in Makati. Implementation of the capital gains tax rule on traded stocks through the local exchange is problematic legal-wise, and poses administrative issues. It may actually deter liquidity than improve it.
Problematic Legal-wise. I still have my reservations on the applicability of the 5 to 10% CGT on traded shares of listed firms primarily because there’s no provision in our National Internal Revenue Code (NIRC) saying that when a listed firm falls below the MPO requirement, it should be subject to the CGT. Under Sec. 127 (A), the tax code was very clear and particular that shares traded through the local stock exchange shall be subject to a final ½ of 1% STT.

The 5 to 10% CGT stipulated under Sec. 24 (C) of the tax code, on the other hand, is actually intended for shares not traded in the stock exchange, and not for those traded through the local stock exchange. So even if the BIR issues a Revenue Regulation ordering and outlining the implementing guidelines, this would conflict against the provisions of the tax code. I’m not a lawyer, but by the rule of law, it’s going to seem null and void. The only way to put it into effect legally is to revise the tax code, and the tax code is law. Revision of law requires involvement, consent, and action of our legislature—the Congress and the Senate.

Administrative Impossibility. So even if BIR goes around the legal issue and decides to implement the 5 to 10% CGT, how do they intend to go about it? In my curiosity to clear up the issue, I called the PSE to confirm if this CGT rule would really be put into effect. My phone call was relayed to its legal division, and there I was able to talk to one of the exchange’s lawyer. The lawyer told me they share the same sentiment on the legality issue, and on top of that, he pointed out the administrative impossibility of putting the CGT rule into effect. Confirmed, too, is that this issue is far from resolved.

Implementation of CGT would require the tracking of historical acquisition costs of traded stocks. Since the current system in place, as the lawyer described, is not capable of tracking the historical cost of traded shares, I would assume the only way to implement this is to do it manually (in the current system, STT is immediately withheld by the executing brokerage house from selling investors, and directly remits them to the BIR, saving the investors some headache). And doing it manually would require disclosure from the part of the investors.

I can anticipate more issues coming out if that would be the case. Can you imagine... tracking your acquisition cost for all the stocks you bought?! Unless you're nitty-gritty about doing it yourself, you might need someone doing this for you, e.g. an accountant. Unlike in STT’s case, it's so easy to ascertain BIR’s collectible tax since they just have to look at the total gross traded value for the day and simply get 1/2 of 1% of that, and demand this computed figure from all the brokerage houses. It's so automated to the convenience of the investors and BIR.

There's also the possibility or tendency for taxpayers to rig their "capital gains/losses" to minimize or avoid paying taxes! So in BIR’s part, collection efficiency will negatively be affected because of the logistical problem, and for the part of the PSE, the investors, brokers, and our stock exchange in general, liquidity’s going to be an issue because of likely aversion from the administrative burden.

Anyhow, as an aside, should this be implemented, the positive effect is to investors who have sold at a loss or at cost (i.e. breakeven). In that case, should capital gains be the tax base, then there shall be no payable tax (and there may even be some claimable tax deductions) since capital gains/loss is equal or below zero.

I'm curious though.... in the States, I think they apply CGT even on stocks traded in the stock exchange and not a simplified stock STT. How do they implement it there?

1 comment:

  1. In the US, the brokers' online database has the capability to track cost and selling price by transaction by securities. Calculating CGT on each trade is a non-issue. The IRS also has the capability to track understatement of CGT so no one dares rigging the system as they end up paying the understatement anyway.

    Being an investor in the Philippines as well, I saw STT does not always favor the investor. Depending on the price of the stock traded and the number of shares, you may end up losing or with a thin take home gain. This does not sit well with me. We can talk about the math in detail but trust me, STT drives me nuts sometimes particularly when some million Peso of transaction is involved with almost no gain at all, having considered all the buy and sell cost plus the STT.



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