Fear factory

Only last month, when the Bureau of Internal Revenue (BIR) missed its collection target for August by some 10 percent, or by more than P14 billion, BIR Commissioner Kim Henares reportedly heaped the blame on the congestion at the Port of Manila.

To the feisty Henares, the mess at the piers apparently affected business so badly that many large companies posted lower incomes that, in turn, cut into their tax payments to the government.

The only thing was, well, the government was also responsible for the debilitating port congestion in Manila. And so to Henares, the failure of the BIR was actually the fault of other government units, and not the BIR’s. Was that it?

But then again Henares, just last week, insisted on imposing a new BIR rule that, according to the business sector, would have a chilling effect on business in general.

Ultimately, it could also disturb the tax collection efforts of the Aquino (Part II) administration, perhaps even ruining its ambitious goal of hitting a revenue-to-GDP ratio of 15 percent by 2016, or by the end of the term our dear leader, Benigno Simeon, aka BS.

And so whose fault would be such a likely slump in tax collection of the Aquino (Part II) administration? Perhaps not the BIR’s again?

The new BIR tax rule covered the withholding tax on dividends, issued by the commissioner only last Sept. 12, entitled Revenue Memorandum Circular 73-2014, claimed as a mere “clarification” of some old rules.

In the securities industry, however, particularly the banks and the stock brokerage firms, the new rule was only a simple attempt by the BIR to go around an order of the Supreme Court.

Earlier this month, as Breaktime reported last Sept. 8, the securities industries filed a case before the Supreme Court to stop the BIR from imposing its requirement on listed companies to divulge all sorts of information on their stockholders.

The requirement came with the title “BIR RR 1-2014,” signed by Finance Secretary Cesar Purisima in December 2014, in effect banning the practice in the securities industry of lumping together stockholders as “nominee accounts” of the Philippine Central Depository, or PCD, when they reported the BIR the withholding taxes on dividend payments.

Thus when listed companies would report to the BIR on the dividend withholding tax, they must specify the names of stockholders in alphabetical order, i.e. “alphalist,” plus report other info like total amount of investments. Or else… well, they would face stiff sanctions!

When the Securities and Exchange Commission, or SEC, joined the fray and required the PCD to furnish the listed companies all the information on the stockholders, the securities industry ran to the Supreme Court.

The petition contained names like the Philippine Stock Exchange, Bankers Association of the Philippines, Philippine Association of Securities and Dealers, Fund Managers Association of the Philippines, and Trust Officers Association of the Philippines. In short, the big guns in the securities industry!

The Supreme Court promptly stopped the BIR, plus of course the DOF and the SEC, from enforcing the new regulation on “alphalist,” by issuing a TRO. That was when, just a couple of days later, the BIR chief issued a memo, zeroing in on dividend withholding taxes for PCD nominees.

Looking precisely like one creative way to circumvent the TRO issued by the Supreme Court, the new BIR memo nevertheless would still compel the entire securities industry to identify their clients by name—i.e. the stockholders receiving the dividends.

In effect, the memo said that, unless it is “satisfactorily” shown that the actual equity investor was a domestic corporation, the BIR would consider the income recipient to be an individual subject to final withholding tax of 10 percent.

Also, in the case of non-Filipino nominees, unless it is “satisfactorily” shown that the actual equity investor was either a resident alien, a non-resident alien or a resident foreign corporation, the income recipient will be considered a non-resident foreign corporation subject to final withholding tax of 30 percent.

Thus, the securities industry complained that the new BIR “clarification” was still targeting foreign investors, specifically, which brought the securities industry back to the same problem in the DOF-BIR-SEC rule that earned the Supreme Court TRO.

And that complaint was it could dampen foreign investments in domestic securities, particularly the fixed dividend issues like preferred shares. To begin with, when the first DOF-BIR-SEC rule took effect this year, the stock market already saw a net selling by foreign investors in preferred shares, amounting to P2 billion in the first half of 2014, which went against the trend of P46-billion net foreign buying in other stocks.

Now, in the 1990s, it was also the government itself that encouraged the securities industry to go into scripless (i.e. computerized) trading in the country to buoy the financial markets, which required the services of the PCD.

The concept of the depository unit like PCD was to ensure the fast and easy transfer of shares traded in the market, not to mention its impact on the so-called market integrity. Well, the PCD was supposed to protect the identity of its nominees from some third parties like kidnapping syndicates.

Subsequently it became the practice of the industry to declare the stockholders as “PDC nominees” in reporting dividend withholding taxes to the BIR, which the bureau accepted as a normal practice, since those taxes were already final.

That would no longer be the case, obviously, under the new Henares memo.

And so the fight now would shift. This whole thing used to be an issue between the BIR and the securities industry. With the new Henares memo, the fight would be between financial institutions and their clients. Rather wicked!

With the BIR pressure on the securities industry to reveal the identities of their investors, banks and stockbrokerage firms face the risk of court suits from clients for violation of some data privacy laws.

According to bankers, the new Henares memo would likely affect only small equities investors—not the “big fish,” which became a favorite term of the BIR under our leader, BS.

Well, most of the big institutional investors were always presumed to be following to the letter the disclosure rules, in the first place.

The securities industry, thus, complained that the whole thing would likely sow fear among investors, thus eroding confidence in the capital markets, which—I am willing to bet—was not what BIR chief Henares wanted.

But then again, at the start of the term of our leader, BS, in 2012, Henares promised that she would turn the BIR into a “law enforcement” office, believing that the BIR would need to be feared by everybody in this democratic republic.

You know—not respected for the integrity of its personnel! Just feared!

With horror stories running around on how BIR personnel harassed some poor operators of some small factories and businesses, the fear factor indeed has become a reality.