Fool’s disclosure

The entire stock market is up in arms against the government rules on full disclosure that the Department of Finance imposed this year upon the urging of the Bureau of Internal—our beloved BIR.

Signed by Finance Secretary Cesar Purisima himself last December, the rules involved the alphabetical list of taxpayers, known in the industry as “alphalist,” which the BIR has been requiring from businesses since 1998 for payment of withheld taxes.

In effect, however, the BIR also banned a peculiar practice in the stock market in which listed companies lumped together recipients of dividend payments under nonspecific terms, such as “various payees” or “nominees” or even the generic “others.”

When they submit to the BIR the alphalist for withheld taxes on dividend, the listed companies therefore must specify—in alphabetical order—the name, birth date, nationality, even TIN and, to top it all, total investment of each and every stockholder.

Or else … well, the BIR would consider the withholding tax on dividends as unpaid, even if the listed companies already remitted the money to the BIR, and then the listed companies would still be open to criminal cases in violation of BIR rules.

But the rules, according to banks and stockbrokers, only created monstrous problems in the capital markets, forcing influential business organizations to ask the Supreme Court to declare the rules as unconstitutional and invalid.

Now, in its explanation of the new rules, the BIR justified them by saying that the bureau only wanted to gather more “information” on taxpayers, which the bureau simply would use for … well, monitoring and future policies.

In other words, the BIR wanted to build its computer database, and the “alphalist” of dividend payees apparently should make the job of the BIR easier.

Still, as banks and stockholders stated in their petition before the Supreme Court, the rules already twisted stock trading somewhat. In fact there was evidence of uneasy downturn in trading of certain stocks in the first half of 2014.

And so the securities industry was one in saying that the rules would only create layers of tedious work and processes for the market, not to mention exposing stockbrokerages and banks to criminal cases to be filed by their clients.

And all those for what—well, so that the BIR could do its research job much easier! Not even to enhance tax collection, boss? Well, not even to gather information on rich individuals to arm some hooligans in the bureau with means to harass them!

But the government could hardly fool the securities industries with sweet talk about research and policy database. To start with, the withholding tax on dividend was always a final tax, and as such, whether the listed companies just lumped together the payment, or they broke it down into the individualized alphalist, the total tax take of the government would just be the same amount.

It was just that, as the BIR suddenly did not want the listed companies to lump the withheld dividend tax under general terms, and unfortunately for the listed companies, they had no way of knowing who the actual payees for the dividends would be.

To start with, in the local stock market, as in most other stock markets abroad, including those in advanced countries like the United States, Japan and the United Kingdom, we had these things known as “street certificates.”

Many in-and-out fast-action investors wanted to put their trades in the brokers’ accounts, which would eliminate the long tedious process of changing the names in the certificates and such. Ease of trading, in short! Good for market liquidity and all!

Thus, in the alphalists submitted to the BIR, the listed firms simply lumped together the payees for the dividend as “nominees” or “others,” which the BIR said would no longer be allowed in the name of … well, policy research.

The only problem was that the BIR had no authority to change stock trading rules, and so the Aquino (Part II) administration rallied its forces and tapped the Securities and Exchange Commission to step into the picture.

Some three months ago in May, the SEC issued its own back-up rules to the new BIR rules, requiring stock brokerages, transfer agents and depositories to provide the listed companies the breakdown of information on all their investors—I mean, ALL!

The SEC rules put the entire stock market in panic. Even before the case was filed before the Supreme Court, business organizations submitted a well-crafted position paper to the Aquino (Part II) administration.

They noted that, for one, the BIR rules violated the right to privacy of the citizens of this country, who might or might not want their stock market investments to stay away from prying eyes of kidnapping syndicates, for instance. Or their mistresses!

Through the bank secrecy law, for instance, investors in bonds and other securities would demand confidentiality from banks and securities companies which, by the way, has always been the practice here and abroad.

They feared that if they followed the BIR rules, their clients would sue them; if they did not follow the rules, the BIR would forfeit their withholding tax payments, or even file cases against them or, heaven help us, humiliate them in media campaigns.

As the business sector pointed out in the position paper, the main problem was that the DOF and the BIR, and for that matter anybody in the entire Aquino (Part II) administration, did not bother to consult the securities industry on the new rules, known in legal parlance as “due process.”

You mean, boss, that not a single public hearing was done? None even a single freaking text message was exchanged! Ah, basta, the DOF issued BIR RR 1-2014 last December to take effect the next month, and that was that!

Ironically, when at one time the BIR analyzed itself on possible reasons for its failure to meet tax collection targets, it concluded that there was a crucial item missing in the campaign: public information.

Apparently the government did not need such a crucial item when it came to imposing new rules on a critical sector in the economy known as the capital market, and the BIR did not need inputs from its customer—the entire securities industry.

Thus the question arose: Could the BIR not build up it “database” through other means that would not damage the capital market, since the new rules evidently already showed ill effects, such as the downtrend in preferred shares, on which big business relied to raise “fixed” cost securities to raise money for investments.

In the past two years, you see, foreign funds accounted for some 50 percent of the stock market trading value. Thus in the first half of 2014, the market saw P46 billion in “net” buying by foreign investors. Yes, they bought more stocks than they sold!

For the “preferred shares” and other “fixed income” securities, which relied mostly on fixed dividend payments, the market, however, witnessed a mysterious drop in prices, going against the market trend of 16 percent increase in stock prices. There was more: There was net selling by foreigners in preferred shares, amounting to P2 billion, in sharp contrast to the P46-billion net buying in other stocks.

Way back in 2010, the Organization for Economic Cooperation and Development, or OECD, already warned about too much rules and regulations on economic activities, such as some “burdensome disclosure requirements.”

The Aquino (Part II) administration apparently also did not bother with the OECD study.