THE NATIONAL TAX Research Center (NTRC) said failure to harmonize regulation of financial instruments has led to arbitrage to take advantage of favorable tax regimes, resulting in foregone revenue for the government.
“The current policy of the Philippine government is to develop the capital market by providing an efficient regulatory framework, and creating a favorable market environment among its participants. In terms of taxation, there is a need to harmonize taxes on interest, dividends, capital gains and transactions to make the taxation of capital income simpler, fairer and more efficient,” the NTRC said in its research journal.
The government currently has different taxes for interest income, trading gains, documentary stamps, and other instruments issued overseas.
Rates also vary depending on whether the taxpayer is a resident or non-resident citizen; a resident or non-resident alien engaged or not engaged in business; a domestic corporation; or a resident or non-resident foreign corporation.
It said investor decisions on financial products are largely influenced by the potential tax exposure.
The NTRC said that the government could consider a financial transaction tax (FTT) in lieu of paying tax on capital gains.
“Aside from being a potential source of revenue, the imposition of an FTT aims to curb instability caused by speculative trading… arbitrageurs, and big corporations as each transaction would be taxed and therefore reduce volatility,” the NTRC said, adding that it would be easier to implement as the collection is centralized through the stock exchange.
“Ideally, an FTT should be imposed on all types of transactions in order to minimize tax avoidance and arbitrage by switching to other untaxed securities or those with lower tax in order to pay the least amount of tax. This would offer a broader tax base and a lower tax rate that could possibly yield high revenues with lower welfare losses,” it added.
It warned that the volume of trading may decline, but may be tempered by proposals to lower the transaction rate, and the abolition of the tax on initial public offerings.
The NTRC added: “The proposal will benefit both investors and tax authorities in terms of lower administrative and compliance cost.”
The Department of Finance (DoF) is currently pushing a comprehensive tax reform program, whose fourth tranche involves the streamlining of taxes on passive income and financial products.
The DoF has said that the package includes the lowering of interest income tax earned from peso deposits to 12% from 20%, and at the same time increases capital income tax rate for dollar deposits, investments, dividends, equity, fixed income, among others, to the same rate.
“The unification of the final withholding tax on dividend, interest income, and capital gains on unlisted shares of stock and debt instruments along with the imposition of harmonized transaction tax and documentary stamp tax on both instruments will greatly simplify the capital income tax system,” the NTRC said. — Elijah Joseph C. Tubayan