High hopes for Phl capital market

President Marcos signed into law Republic Act 12214 or the Capital Markets Efficiency Promotion Act (CMEPA) last May 29 which aims to enhance the competitiveness of the local capital markets, simplify the taxation of passive income, and reinforce fiscal stability.

To encourage more trading activity and align with regional rates, the tax on the sale of shares listed and traded through the local stock exchange has been reduced to 0.1 percent from the previous 0.6 percent. It also eliminated multiple rates and exemptions such that most interest income from bonds and bank deposits for instance are now taxed at a flat 20 percent rate, to promote equity and eliminate tax arbitrage. Non-resident individuals and corporations, however, remain subject to a 25 percent final tax.

Meanwhile, capital gains from the sale of shares in foreign corporations not traded on the local exchange are now subject to a flat 15 percent tax rate, or the same as that for unlisted domestic shares.

RA 12214 also reduced the stock transaction tax from 0.6 percent to 0.1 percent and the documentary stamp tax on the original issuance of shares from one percent to 0.75 percent..

It further exempted from DST the original issuance, redemption, or transfer of mutual fund shares, as well as certificates or proof of participation in mutual funds or investment trust funds.

According to the Department of Finance, these measures are seen to cut transaction costs, encourage market participation and financial planning, boost market liquidity, make the country’s equities market regionally competitive, and increase capital market growth.

To ensure equitable taxation of similar financial transactions, CMEPA imposes a uniform 0.75 percent DST on bonds, debentures and certificates of stock or indebtedness issued in foreign countries, regardless of jurisdiction, thus reinforcing the principle of neutrality in the tax system, the DOF explained.

On the other hand, it removed the tax exemption on long-term deposits of five or more years and now subjecting it to a 20 percent withholding tax rate.

In a study, the Philippine Institute for Development Studies (PIDS) noted that the Philippine capital market lags behind its peers in the ASEAN region due to high transaction costs, regulatory inefficiencies, and low domestic savings, limiting private investment, public-private partnerships, and increasing reliance on external financing.

Meanwhile, based on the 2021 Financial Inclusion Survey Report of the Bangko Sentral ng Pilipinas, only 8.04 million out of 77.2 million Filipino adults or only one out of 10 have investment products such as stocks, bonds and government securities.

It was earlier noted that in 2023, based on the Asian Development Bank’s key indicator database, the country’s stock market capitalization to gross domestic product, or the value of our stock market relative to the size of our economy, stood only at 54.1 percent, significantly lower than the average of 78.3 percent among ASEAN countries.

A major factor cited for our laggard stock market capitalization is our stock transaction tax which is the highest among ASEAN economies. Malaysia, Singapore, Thailand, Myanmar and Cambodia do not impose any STT while Indonesia and Vietnam only have a 0.1 percent STT rate.

Last year, the Philippine capital market was able to raise only P75.78 billion in capital. A Rappler article noted that the Philippine Stock Exchange (PSE) had 284 listed companies with a market capitalization of $337 million compared to the Stock Exchange of Thailand’s 858 listed companies and market capitalization of $450 million, Indonesia Stock Exchange’s 955 listed companies ($701 million market cap), Bursa Malaysia’s 1,050 listed companies and $435 million market capitalization, Vietnam Exchange’s 702 listed companies and $214 million market cap and Singapore Exchange’s 613 listed companies ($675 million market cap). This despite ours being one of Asia’s oldest bourses.

Only 95 Philippine companies have raised nearly $13 billion through initial public offerings since 2000 while Vietnam had 584 companies raising $36 billion during the same period. The Organization for Economic Cooperation and Development (OECD) in its capital market review of the Philippines noted that between 2000 and 2023, the capital raised through IPOs in the Philippines represented only 0.2 percent of GDP, much lower than in all other peer countries except Indonesia.

The PSE estimates that the reduction in STT from 0.6 percent to 0.1 percent will lead to the value of stocks traded increasing to P4.9 trillion by 2029, or 3.79 times greater than that in 2023.

Our government hopes that with these reforms, more ordinary Filipinos will be investing in the Philippine capital markets, thereby promoting inclusive growth.

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