Taxes on investment products must be harmonized, says BSP

The tax treatment of collective investment products should be harmonized to remove distortions, the Bangko Sentral ng Pilipinas (BSP) said yesterday.

As financial regulators moved to align their regulations with international best practices, the BSP said congressional action might be necessary to rationalize and ultimately harmonize taxes applicable to collective investment products such as trust funds, mutual funds and variable insurance products.

According to the BSP, existing tax regulations on these products tended to create distortions that could be abused or discourage investments in the market in dire need to liquidity in order to develop and acquire more depth.

BSP Deputy Governor Nestor Espenilla Jr. said there were efforts already underway to address the issue but ultimately, there would be a need to lay down an omnibus tax policy on collective investment products.

"The biggest source of distortion in these instruments is the tax treatment," Espenilla said. "That’s why the BSP is supporting the initiative to harmonize that because distortions lead to abuses and they could also have the effect of discouraging investments."

In the recent Financial Sector Forum, Espenilla said financial regulators recognized that significant disparities in the treatment of the products arise due to differentials in tax treatment.

"But there are existing initiatives to this end, so the FSF decided it will just continue to monitor developments and support any projects that help bring about a level playing field for these products," Espenilla said.

The BSP has started working with the Securities and Exchange Commission (SEC), the Insurance Commission (IC) and the Philippine Deposit Insurance Corp. (PDIC) on developing the rules on collective investment products.

If approved, regulators would be implementing harmonized rules on eligible investments, exposure limits, valuation and disclosure, sales practices, fees and commissions, custodianship, reporting and incentives.

Financial regulators said that to minimize violations, confusion and abuses, regulatory policies should be aligned with international best practice that have been tried and tested in more developed markets.

According to Espenilla, the existing regulations were complex and the FSF would have to determine the individual flexibilities of the agencies involved and how far they could go without requiring Congressional action.

"On the part of the BSP, the Monetary Board is already empowered to put down rules and regulations on trust funds but the SEC, for example, might have to go through amendments in order to adopt the international best practice," Espenilla said.

According to Espenilla, the regulations governing mutual funds, in particular, were hard-coded in the Investment Company Act and adjustments might need legislative action.

"What we did is to lay down the international best practice as the starting point," Espenilla said. "The next question is how can we align ourselves and to what extent can we do it?"

International best practice, according to Espenilla, would give regulators the starting point as well as the target for regulatory adjustments.