Stock tax cut seen to boost market appeal

A recently passed bill that will cut the tax on stock transactions to 0.1% from 0.6% is expected to make the Philippine stock market more appealing to investors, according to economists, who also cited the need for the government to educate Filipinos on how to invest.

“The lower tax is a welcome development, but more reforms are needed to broaden and deepen the stock market in the Philippines,” Enrico P. Villanueva, a senior lecturer at the University of the Philippines Los Baños Economics Department, said in an X message.

“Education and proper orientation about the market and its potential returns are needed. There have to be investments in education and time as well.”

He added that a lower tax on stock purchases would likely boost profit margins for Philippine stock market participants.

The Senate on Monday approved on final reading Senate Bill No. 2865, or the Capital Markets Efficiency Promotion Act, which aims to make the country’s capital market more competitive with its regional peers.

In the 2024 Capital Market Review of the Philippines published by the Organization for Economic Cooperation and Development (OECD), the number of newly listed firms and capital raised through initial public offerings (IPO) in the Philippines have been the lowest in the Association of Southeast Asian Nations (ASEAN) since 2000.

The cost of listing on local stock exchanges varies significantly across different countries, and the Philippines is no exception. When comparing the initial listing fees on the main equity markets, the Philippines stands out with a fee of 0.10% of the market capitalization for companies with a market cap of USD 150 million, according to the OECD report. This is relatively high compared to its regional peers: Indonesia and Malaysia both charge 0.01%, Thailand charges 0.05%, and Singapore is slightly higher at 0.06%.

For equity markets dedicated to growth companies, such as those with a market capitalization of USD 10 million, the Philippines charges 0.10% of the market cap. This is comparable to Indonesia at 0.11% and Malaysia at 0.12%, while Singapore charges 0.24% and Thailand is lower at 0.03%.

Under the bill, a final tax rate of 10% will be imposed on cash and property dividends received from a local corporation, joint stock company, mutual fund, or on the share of an individual in the net income of the entity.

The House of Representatives passed a counterpart bill in March, which also seeks to lower the tax on dividends for non-resident investors to 10% from the current 25%.

“The Philippines is currently one of the more expensive markets in terms of transaction costs,” Eleanor L. Roque, tax principal of P&A Grant Thornton, said in a Viber message.

“So, lowering the stock transaction tax is a step in the right direction to making our stock market more attractive and competitive to its peers in the region.”

Based on a forecast by the Philippine Stock Exchange, the lowered 0.1% stock transaction tax would boost stock trading to PHP 4.9 trillion by 2029.

On Tuesday, the value of shares traded on the local bourse rose to PHP 5.64 billion with 1.53 billion issues changing hands from PHP 5.44 billion with 1.14 billion shares traded on Monday.

Senator Sherwin T. Gatchalian, who sponsored the Senate bill, said the bill’s passage would make it easier for Filipinos to invest in the stock market and spur growth in the Philippine capital market.

But Leonardo A. Lanzona, who teaches economics at the Ateneo de Manila University, said the move would likely only favor rich Filipinos who can afford to participate in the capital market.

“The lower income classes carry the burden of the indirect taxes which dominate the country’s revenue structure,” he said in a Facebook Messenger chat.

“Instead of imposing new taxes in order to facilitate fiscal consolidation, the Senate took the opposite route by lowering taxes.”

Under the measure, capital gains from the sale, exchange, barter, or disposition of shares of stock not traded on the Philippine Stock Exchange will be subject to a 15% tax on net capital gains during a taxable year.

It will also set a 15% tax rate on net capital gains during a taxable year on shares of stock in domestic and foreign corporations.

Resident foreign corporations and their regional operating headquarters will be required to pay a minimum corporate income tax of 10% on their taxable income.

But foreign corporations not engaged in trade or business in the Philippines shall pay a tax of 25% of their gross income during each taxable year.

The bill also imposes a final tax of 20% on interest or monetary benefits earned from any currency bank deposit, trust fund, or similar arrangement.

“Cutting transaction taxes will also just boost financial profits without really leading to greater investments in the real economy,” Ibon Foundation Executive Director Jose Enrique “Sonny” A. Africa said in a Viber message.

“A better direction for tax reform would be a billionaire wealth tax and more progressive taxation on high incomes to generate public revenues for investment in social services and micro, small, medium enterprises.” – John Victor D. Ordoñez, Reporter