House bill seeks to overhaul tax system for stock market

MANILA, Philippines - A landmark bill proposing to revamp the tax system for the stock market has been filed with the House of Representatives to spur its development and arrest its marginalization in the regional market.

The bill, dubbed as “Stock Market Competitiveness Act or SMARTCA”, was filed by Rep. Exequiel B.  Javier, the chairman of the House Committee on Ways and Means.

Before he joined government, Javier was a highly respected practitioner in business law and particularly noted for his expertise in taxation. He has been the longtime chairman of the ways and means committee of the House of Representatives.

“We welcome with much appreciation this legislative development because of the urgent need to develop our stock market. It is unfortunate that even if we are one of the oldest bourses in Asia, we continue to lag behind other Asian markets in terms of market capitalization, number of listed companies, value turnover and capital raising activities. Our size as a market is a major deterrent to our competitiveness in the region,” Philippine Stock Exchange (PSE) president and chief executive officer Francis Lim said.

The main features of the bill are to grant a lower income tax rate of 25 percent instead of 30 percent for a period of 10 years to companies that list their shares with the stock exchange within a limited period of five years from the effectivity of the law; remove the initial public offering or IPO tax, and reduce the stock transaction tax (STT) to one-fourth of one percent from its present rate of one-half of one percent.

“On a global perspective, the flow of funds into the Philippines is inhibited by the high cost of investing in the Philippine market. Based on the 2008 Elkins/McSherry survey on trading costs, the Philippines ranked as the fourth most expensive market among 47 global exchanges with trading friction costs amounting to 71.57 basis points. The Philippines also charges the highest taxes to its investors due to the stock transaction tax (STT) rate of one half of one percent of gross value traded. Lowering the cost of trading will not only encourage foreign investments but attract as well the remaining segments of the Filipino population to participate in stock market investing. The Philippine stock market has a very shallow investor base with less than half of one percent of the population invested in the stock market,” Javier explained.

What has also deterred stock market growth is the small universe of listed companies available in the Philippine market. From 2004 to 2008, the annual increase in new company listings was only four per year. This is lower compared with 15 to 29 average new listings per year in Indonesia and Thailand during the same period. Furthermore, the Philippines is the only jurisdiction in Asia that imposes an IPO tax of as high as four percent of the capital to be raised.

For companies to be able to avail of the tax incentives and other privileges granted by the proposed law, they must meet specified trading requirements and corporate governance standards.