Tax hike seen making PH equities uncompetitive

The insertion of a 20-percent increase in the stock transaction tax in the Tax Reform for Acceleration and Inclusion (TRAIN) program in Congress is seen to yield P1.7 billion in additional revenue yearly but the Philippine Stock Exchange is worried this will make local equities less competitive versus regional peers.

In a chat with reporters, PSE president Ramon Monzon said the local stock market would now have to live with a 10-basis point increase in the stock transaction tax from 0.5 percent (or one half of 1 percent) to 0.6 percent.

This was among the “offsetting” measures included in the TRAIN as the government sought to lower individual income taxes and boost the net take home pay of the average Filipino.

“In absolute terms it seems to be a small insignificant increase, but really, that increase represents a 20-percent increase from the present one,” Monzon said.

“What we have to understand is the PSE does not operate in the local market alone. We compete with other exchanges—whether Thailand, Malaysia, Indonesia and Vietnam—we compete for the money of the foreign investors. When you increase the stock transaction tax, you’re increasing the friction cost,” he said.

Monzon said the existing 0.5 percent stock transaction tax in the Philippines was already the highest in the region.

In Malaysia, stock transactions at the Bursa Malaysia are charged with only 30 basis points of the transaction value in the form of stamp duty while in Hong Kong Exchanges, the charge is only 10 basis points of the transaction value in the form of stamp duty. In Vietnam, a capital gains tax equivalent to 10 basis points of gross sale proceeds is levied on transactions through the Ho Chi Minh Exchange.

Indonesia imposes a stock transaction tax equivalent to only 10 basis points of the transaction amount. There is an additional 50 basis points charged for founder shares of companies doing an initial public offering (IPO).

Singapore, a key financial center in the region, does not impose any stock transaction tax. Thailand also exempts stock transactions from taxes if they involve registered securities where the Thailand securities depository is the registrar.

“Whether you gain or lose in the trade, you have to pay 60 basis points and that’s very big for foreign investors who trade in the millions of dollars,” Monzon said.

“We have to be very conscious of what the other capital markets are doing in the region or even globally. Foreign investors will always go to a place where transaction cost is less. It’s not enough to make money on the trade. If you had the transaction cost, then you become very uncompetitive with other stock exchanges,” he added.

Monzon said it was puzzling enough that in the local market, while the main-share PSEi had seen 12 new record highs so far this year—hitting an all time high of 8,605.15 on Nov. 3—while a P62-billion tender offer by Energy Development Corp. boosted trading liquidity, value turnover at the stock market was just the same if not less than the volume for 2016.

“We need to do a lot of work to increase the volume or interest in our stock market,” he said.

The estimated P1.7 billion in additional revenue from the 10-basis point hike in stock transaction tax—as included by the bicameral conference committee in the TRAIN proposal which is now up for President Duterte’s signature—is based on the volume of stock transactions in the PSE as of 2016, he said.