Pifita amendments to promote tax neutrality in capital markets
Credit to Author: EUNEY MARIE MATA-PEREZ| Date: Wed, 11 Dec 2019 16:22:31 +0000
Funds are raised through borrowings or equity. The decision on which instrument or vehicle to use is influenced by various factors. In the Philippines, however, because of the diversity in the tax rules and varying rates, taxation is a major consideration and complicates the capital market system.
We discuss below the differences in the tax treatments of debt and equity instruments, and how House Bill 304, or the “Passive Income and Financial Intermediary Taxation Act” (Pifita), seeks to simplify the system and neutralize the taxation between debt and equity instruments.
Interest income derived by lenders from borrowings are subject to income tax. The rates will depend on the type of instrument and the tax classification of the lender.
If the lending instrument qualifies as a “deposit substitute,” or a loan that is obtained from 20 or more lenders, the interest income would be subject to a final withholding tax (FWT).
The FWT would be 20 percent if paid to citizens, resident aliens, nonresident aliens engaged in trade or business (Nraetb), domestic and resident foreign corporations, 25 percent if paid to nonresident aliens not engaged in trade or business (Nranetb), and 30 percent if paid to nonresident foreign corporations. These FWT rates apply to bonds issued with coupons, as well as zero-coupon bonds. With respect to the latter, the FWT is applied to the discount upon the issuance of the bonds. If the instrument is in the form approved by the Bangko Sentral ng Pilipinas, long-term and held by a citizen, resident alienor Nranetb individual, no tax on interest income is due, unless the instrument is pre-terminated. Taxes at varying rates will apply in case of pre-termination.
If the lending instrument does not qualify as a deposit substitute, the interest income of the lender would generally be included in the lender’s gross income in the calculation of its net taxable income subject to the regular income tax. A creditable withholding tax of 15 percent would be required to be withheld by the payor of the income.
If the debt instrument like bonds or debentures are traded, trading gains derived by a taxpayer are also generally subject to the regular income tax. However, trading gains of instruments that have a maturity of more than five years are excluded from taxable income, and thus, exempted from income tax.
Documentary stamp tax (DST) at the rate of P1.50 for every face amount of the debt, or approximately 0.75 percent thereof applies. DST is due even in the absence of any debt instrument, such as on intercompany advances, as settled in the Supreme Court in its 2011 decision in the CIR vs Filinvest Development Corp. (GR 163653 and 167689).
Equity instruments, on the other hand, are in the form of shares of stock, whether traded or not in the facilities of the Philippine Stock Exchange (PSE).
If the shares are listed in and sold through the facilities of the PSE, a stock transaction tax (STT) of 0.6 percent of the gross selling price applies. No DST is due on the transfer of such shares.
On the other hand, the capital gains tax on net capital gains from sale, exchange, transfer, barter and disposition of non-listed of shares of stock not traded in the stock exchange or organized marketplace is at 15 percent (pursuant to amendments introduced by Republic Act 10963 or Train 1), except with respect to capital gains derived by nonresident foreign corporations where the old 5 percent and 10 percent capital gains taxes continue to apply.
DST on the issuance of shares is P2 for every P200 of the par value of the shares, or approximately 1 percent (as increased under Train 1). DST on transfer of shares was also increased to P1.50 for every P200, or approximately 0.75 percent of the par value of the shares.
On the other hand, dividend income (or intercorporate dividends) are subject to zero-percent tax if paid to or received by a domestic corporation or resident foreign corporations, or 10 percent if paid to citizens, resident aliens or Nraetb individuals. The dividend tax would be a 30-percent FWT if paid to nonresident foreign corporations, 20 percent if paid to a Nraetb and 25 percent if paid to a Nranetb. Rates can be reduced in some instances pursuant to the tax sparing provisions in our Tax Code or applicable double income tax treaties entered into by the Philippines with foreign countries.
In an attempt to neutralize the tax treatment between debt and equity instruments, the Pifita proposes the following:
Application of the 15-percent capital gains tax even to capital gains derived by nonresident corporations;
Reduction of the FWT on interest income on debt instruments qualifying as a deposit substitute to15 percent;
Increase of the FWT on cash and/or property dividends received by individuals and nonresident foreign corporations to 15 percent, without prejudice to preferential rates under applicable income tax treaty;
Removal of the DST on the transfer of shares outside the facilities of the stock exchange to align with the DST exemption on transfer of shares through such facilities;
Reduction of the DST applicable to issuance of shares (which was increased by Train 1 to 1 percent of the par value of the shares issued) to 0.75 percent of the par value of the shares; and
Removal of the distinction of the tax on trading gains of debt instruments based on the length of maturity of the period of the instrument.
The Pifita, however, proposes to keep the exemption of intercorporate dividends.
Pifita also proposes the reduction of the current STT, which was increased by Train 1 to 0.6 percent to 0.1 percent of gross selling price by 2025. It also seeks to reclassify the STT as an income tax on “presumptive gain.” At present, such tax is classified as a percentage tax in the Tax Code, preventing the application of income tax treaties.
No doubt, the foregoing amendments which Pifita seeks to introduce will in a major way align the tax treatment between debt and equity instruments and simplify the tax rules. It is hoped that such amendments, if passed, will achieve the objective of promoting the Philippines’ capital markets.
Euney Marie J. Mata-Perez is a CPA-lawyer and the managing partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A and tax lawyer. She is the president of the Asia-Oceana Tax Consultants’ Association. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF Counsel’s website at www.mtfcounsel.com.