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Teves backs off

(Article published in the May 14, 2008 issue of Manila Standard Today)  

From the looks of Revenue Regulations No. 6-2008, my former classmate, Department of Finance Secretary Margarito Teves has capitulated to the stockbrokers.  The instrument of surrender is Section 2(n) defining the concept of “shares listed and traded through the Local Stock Exchange.” The last sentence declares that the quoted “term includes block sale or other types of sales, trades, or transactions in the Local Stock Exchange and executed through the trading system and/or facilities of the Local Stock Exchange in accordance with the rules of the Local Stock Exchange as approved by the Securities and Exchange Commission.”

 Since 05 November 1970, stock brokers and their clients have been a special breed.  On that day, Section 9 of R.A. No. 6141, or what is now known as the “stock transaction tax” took effect.  Every sale, exchange, transfer or similar transaction intended to convey ownership of, or title to, any share or shares of stock was taken out of the class of transactions generating income.  The transfer was instead subjected, initially, to a tax of 2% on the gross selling price.  Any gain was not taken into account in computing for the seller’s gross income, and the tax itself was not an allowable deduction. 

 The money thus collected was to be turned over by the Commissioner of Internal Revenue to the Treasurer of the Philippines to form part of, believe it or not, the Peace and Order Special Account in the General Fund.  It was a period of discontent and we needed peace and order.


Cosmetic changes to the tax were effected since then.  On 02 October 1972, President Ferdinand Marcos using his martial law powers issued Presidential Decree No. reducing the tax to one-fourth of one percent.  The reason? Not because we no longer needed peace and order. ‘’But because the imposition of the 2%  was said to have “adversely affected transactions in stock,” and thus, as per the brokers and their clients, seen as to have “consequently slowed down operations of various industries.”  Accordingly, “the fiscal and economic experts of the Government are agreed that the tax [should] be reduced to a more reasonable rate.”

 After EDSA I, clamor started building up exerting pressure on the ¼ of 1% level.  The capitalist-leaning character of the tax had to be tempered.  Thus, on 04 May 1994, Congress, under R.A. No. 7717, approved an increase of 100%, from just ¼% to ½ of 1%; but still, the new rate was lower by 50% than the initial 2%.  At the same time, conscious that the stock transaction tax has become a gapping hole that enabled stockholders of closely-held corporations to avoid, by simply listing the company with stock exchange, the capital gains tax, Congress also imposed what is known as the Initial Public Offering (IPO) Tax.  The IPO tax collected a tax based on a regressive rate schedule that moved inversely with the amount of equity disposed of in the IPO and thus made available to the public.  Thus, if only 33 and 1/3% or below was disposed of, the tax was 4%; if over 33 and 1/3% but lower than 50%, 2% and if the owners were really sincere in taking in the public by giving up over 50%, then the tax bite is only 1%.

 Subsequently, the equity percentage benchmarks were “reformed” by R.A. No. 8424, known as the Tax Reform Act of 1997.  The IPO tax rates were changed to what they are now: 4% is for 25% or lower; 2% for over 25% to not over 33 and 1/3% and 1% to over 33 and 1/3%.  In other words, from encouraging with the tax break of only 1% IPO tax the opening up a closely-held corporation up to 50%, the law bent backwards to give top preferential treatment to those who opened up with what was only only the minimum of 33 and 1/3% under the “unreformed” law.  “Reform” as we know is related more to “reformatting” than to conversion of the heart.

 Bureau of Internal Revenue Commissioner Lilian Hefti, pressed by Gary Teves to collect more than her predecessor Jojo Buñag, saw last year way of narrowing, if not closing, the tax-free avenue of the stockbrokers.  She adopted the position that the purpose of the stock transaction tax and the complementary IPO tax was not to enrich the stockholders  but to encourage the meaningful participation of the public in heretofore exclusive domain of capitalists through the mechanism of a true market.  Hence, when the privileges of the tax break were at some point limited to those shares which were traded and sold through the stock exchange, she demanded that the “market” component, in order to be tax benefited, must include the free play of “market forces”.

 Thus was born Revenue Memorandum Circular No. 73-2007 which in effect instructed the Commissioner’s men to deny the benefit of the tax preference to transactions “where the sale is prearranged or the buyer is predetermined.”  In other words, “block sales” where the parties use the facilities of the local stock exchange, not to find the right price, but to simply take advantage of the tax loophole, were not to be considered “traded and sold through the local stock exchange”.

 As this column observed almost six months ago, on 28 November 2007, the Philippine Stock Exchange screamed and howled in pain and anger.  Dire predictions were made of the capital market’s demise, as presaged by the drop in the trading volume since the good Commissioner issued her internal marching orders in Rev. Memo Circular No. 73-2007.  The army of rich, led I understand by a bejeweled Joan of Arc, marched to Malacañang.  Faced with such formidable opposition, the Secretary Teves suspended the implementation of Commissioner’s Hefti’s memo circular.  The Philippine Stock Exchange, for its part, was silent on how its trading volume behaved after the suspension.

 That suspension, with the Teves approval of Revenue Regulations No. 6-2008, has become permanent.  And the way it became so is a study on how this administration does its thing. No open, transparent, and outright announcement that it has sided with the brokers and their clients and, ipso facto, undermined both efforts and morale of its own tax collectors.  Just an innocuous twitting of the definition, a section in the regulations no one pays attention to, except cantankerous old men, like me.