Businessman Investor

Touching base with the rational business psyche of stock market investors

Thursday, September 22, 2011

The Philippine Stock Exchange Tax Dilemma—Clarifying the ½ of 1% Stock Transaction Tax and the 5 to 10% Capital Gains Tax

This is Part 1 of a Series.

The Bureau of Internal Revenue Main Building. While the ½ of 1% stock transaction tax is applied on the gross selling amount, the 5 to 10% capital gains tax is imposed on, well, just capital gains, and not on the whole gross selling amount.
There seems to have a revived stir among Philippine Stock Exchange (PSE) investors on the insistence of the Bureau of Internal Revenue (BIR)—with the backing of the Department of Finance (DOF)—that a 5 to 10% capital gains tax (CGT) be imposed for traded stocks of listed firms that failed to comply the PSE minimum public ownership (MPO) requirement of 10 to 33% (depending on the company's market capitalization). It has been revived particularly because of recent news articles (e.g. that one from the Philippine Daily Inquirer) having a seemingly confirming tone that this ruling is already scheduled for implementation.

Currently, the tax being imposed on traded stocks in the local exchange is the ½ of 1% stock transaction tax (STT). Consequently, most have initially perceived that the CGT, being 5 to 10%, immediately leads to higher tax costs because at first sight, it does indeed seem that way (5 to 10% > ½ of 1%).

Yet these assumptions should be clarified. Because while the STT is applied on the gross selling amount (i.e. Selling price x no. of shares sold), the CGT is actually applied only on capital gains (i.e. Gross selling amount – gross purchase amount)—that is, 5% on the first Php100k capital gains, and 10% on capital gains in excess of the first Php100k.

Let’s further delve on the application of these tax rules through an illustration. Let’s say I bought 100k Jollibee (PSE:JFC) shares at Php88. Later, I sold them at Php90. For this example, my gross selling amount should be Php9M (100k shares x Php90) with capital gains being Php200k (Php9M – Php8.8M). Using the STT, the tax due should be computed at Php45k (Php9M x ½ x1%). CGT, on the other hand, would result to a tax due of Php15k, i.e. Php5k for the first Php100k capital gains (Php100k x 5%) plus Php10k for capital gains in excess of the first Php100k (Php100k x 10%).

Surprisingly, in this case, the CGT (Php15k) is actually lower than the computed STT (Php45k). Continue to Part 2: BIR Tax Legality, PSE Administrative Impossibility, Logistical Burden, Illiquidity Tendencies

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