BIR rule seen to trigger capital flight

The Bureau of Internal Revenue AFP FILE PHOTO

Nine of the country’s most influential business groups—including the entire banking and capital market industry—have warned of capital flight arising from a new Bureau of Internal Revenue (BIR) regulation requiring the submission of an alphabetical list (alphalist) of payees of income payments subject to withholding taxes.

Apart from being “prejudicial” to investors and infringing on the right to privacy, a seven-page position paper drawn up by the business sectors dated July 21 and sent to the BIR last week said the alphalist regulation was in violation of the principle of uniformity of taxation and existing legal requirements, was “impossible” to comply with and would “not serve any useful purpose.”

Instead, the groups warned that the selldown on preferred shares has started, resulting in P2.12 billion in net foreign selling in the first semester even when the overall market had posted a net foreign buying of P45.67 billion for the period. The paper reported that while the total market capitalization of the local stock market had grown by 11.9 percent so far this year, the market capitalization of preferred shares had retreated by 3.12 percent.

“The behavior exhibited by the market is a clear message that investors would rather dispose of preferred shares and forgo the coupon payments rather than being subjected to the alphalist requirement of the BIR,” the paper said.

Calling for the revocation of the BIR ruling along with a subsequent circular from the Securities and Exchange Commission, the following institutions signed the position paper through their top officials: Bankers Association of the Philippines; Employers Confederation of the Philippines; Federation of Filipino-Chinese Chambers of Commerce and Industry Inc.; Fund Managers Association of the Philippines; Investment Houses Association of the Philippines; Philippine Association of Securities Brokers and Dealers Inc.; Philippine Chamber of Commerce and Industry; the Philippine Stock Exchange; and the Trust Officers Association of the Philippines.

BIR Revenue Regulation 1-2014 requires all withholding agents to submit an alphalist of payees of income payments subject to creditable and final withholding taxes. It also prohibits the lumping into a single amount and account of various income payments and taxes withheld.

As applied to dividend income payments by listed companies to their investors, it also prohibited listed companies from naming PCD Nominee Corp.—the entity holding the title to all “uncertificated” shares traded in the stock market—as the payee of dividends. This was interpreted by some listed companies, through their transfer agents, to require the disclosure of the names, addresses and tax identification numbers (TINs) of the investors.

The groups warned that these regulations, which were issued without the benefit of prior consultations with industry practitioners, were already resulting in either forced retention of dividends or imposition of excessive withholding tax dividend payments, both of which were contrary to law.

The paper said these regulations were issued in violation of existing legal requirements, citing the Administrative Code of 1987, which provided that an agency, as far as practicable, must publish or circulate notices of proposed rules and afford interested parties the opportunity to submit their views prior to the adoption of any rule.

It also argued that the right to privacy was paramount. They said that brokers and custodians in the equities market, for instance, had a duty of confidentiality to their clients. For custodian banks, this duty is outlined in their custody agreements with clients while for brokers, this duty is set out in client agreements as well as in the rules (Section 8 Article V) of the Capital Market Integrity Corp.

The groups also reminded the BIR that disclosure by mutual funds and banks of the identities of their clients would be in violation of the Bank Secrecy law.