The Burden of Taxation and the Final Form of Corporate Profitability

This is Part 4 of a Series. Go to Part 3: The Cost of Borrowing and Its Impact Against Corporate Profitability

After Tax as The Final Form of Corporate Profitability.
Return on Assets (ROA) is the final form of corporate profitability
which factors in all components: mark-up, working capital
turnover, capital spending, cost of borrowing, and tax burden.

As of this stage, we have arrived at After Interest Business Profitability (or as expressed mathematically, EBT/Operating Assets). This profitability metric, in conjunction with Non-core Business Profitability, would now be more appropriate to be subjected to the Burden of Taxation. To review:

EBT / Operating Assets = After Interest Business Profitability

Other Income / Non-core Business Investments = Non-core Business Profitability

Non-core Business Profitability captures profitability that is outside the company's core business operations. It has something to do with investment income earned (e.g. interest income, capital gains, dividends, etc.) from real estate, stock, bonds, or other money market investment instruments. We combine both After Interest Business Profitability and Non-core Business Profitability as follows:

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.

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.

Conscious About Stock Market Transaction Costs

Stock market transaction costs summarized. The percentage variable cost when transacting in the Philippine stock market are as follows: when buying, this is 0.295% of gross purchase amount; when selling, this is 0.795% of gross sale amount. There's practically no fixed costs.

Realizing you really have to be very conscious with transaction costs since these may eat up supposed estimated capital gains in the stock market, I delved on the specifics of transaction costs. Note: This is only applicable in the Philippine Stock Market, and with my broker CitisecOnline.

I discovered that overall transaction cost, be it on the buy or sell side, essentially, is a variable cost so it doesn't really matter how many trades you make since you're not being penalized by any fixed costs. This is very useful information assuming your intention is to accumulate (buy) consistently for a stock position, or to unload (sell), and you're very wary and afraid of incurring fixed costs every time you make a transaction.