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The genesis of the stock transaction tax

(Article published in the Nov. 28, 2007 issue of Manila Standard Today)  

The stock market heaved a sigh of relief when the Bureau of Internal Revenue last Friday (Nov. 23) suspended the implementation of Revenue Memorandum Circular No. 73-2007.  The Philippine Stock Exchange  Memorandum this Monday informed its brokers that the recent BIR issuance was “operationally suspended until the Exchange has resolved the matter with the BIR through issuance of position papers.  In the event that the BIR will not be able to resolve the issue in the Exchange’s favor, the BIR will issue letter assessments to the parties concerned.”

 The cause of PSE’s concern centered on the second attempt in about three years of the BIR to remove from the coverage of the preferential tax rate of ½ of 1% on every sale, barter, exchange or other disposition of shares of stock listed and traded through the local stock exchange other than the sale by  dealer in securities, the sale of shares of stock “where the sale is prearranged or the buyer/s is predetermined.”  Clarifying further, the intent of the issuance was to cover “any transaction which in effect excludes the public by any means from taking part in the trading.” 

 Directly hit, among other similar deals, were the so-called “block sales”  which are sale transactions over listed shares where the meeting of minds of buyers and sellers does not occur through the automated order matching system of the stock exchange but instead as the result of intense negotiation between buyer and seller.  In the stock exchange’s automated order matching system, the transaction price brings the willing buyers and sellers together; in the block sale, the buyers and sellers, having already found each other, together find the common acceptable price.


            The BIR believes, and in my view, rightly, that there is a substantial distinction between the two kinds of sales.  The automated order matching system regime is essentially a “public” environment in the sense that any buyer wishing to buy at the seller’s price and any seller willing to sell at the  buyer’s price may take part, as in any public market.  The block sale is essentially a private deal, where primarily matters of size resulting in what industry players call “control premium” significantly affect the price.  The crowd or the market is necessarily excluded from the process of price determination.  Determinative of the price are matters extraneous to the intrinsic value of the shares and are more functions of the motives of the parties to the transaction.

 The substance of the block sale therefore is not “public-including” and is as private as a transaction where a seller of listed share, such as an odd lot owner for example, simply endorses his certificate to a buyer at a fixed price to transfer ownership over his minuscule interest in a publicly listed corporation.  Since the stock transaction tax was intended to entice and stimulate the public into active trading of shares in the stock market, the block sale, like the odd lot transaction, both of which localize the deal to the parties, is not within the purview of the purpose of the preferential tax. 

 The private sale of listed shares in odd lots is taxed under the regular income tax regime; so too, correctly argues the Commission of Internal Revenue, ought to be transactions that are in substance identical to it and differ only by reason of size. 

 But then, in the stock industry, as elsewhere, it is the ideology of the rich that prevails and the principle of fairness and equal treatment is quickly overwhelmed and buried under the verbiage of the day.  Development of the capital market is the mantra of the times and hence it was not surprising that the Philippine Stock Exchange claims that the RMC should be scrapped permanently since it will harm the local stock markets and capital markets in general.  Proof cited is the decline of the average daily transaction of Php 5.4 to Php 3.9  in the four days that the RMC was effective, resulting in government revenue loss of about Php 26 million in foregone government revenue because selling investors held back their block sales for fear of the increased tax burden.  In a time of revenue collection short falls, that is persuasive argument in the ears of the president.

 What the Philippine Stock Exchange, which is owned by stock brokers principally, did not say is that the decline in the transactions it attributes to the issuance of the RMC also resulted in the decline of the brokers’ commissions on the block sales they had held back.  And if their commission is somewhere between 1% to 1.5% of the transaction price, i.e. double if not triple the tax, then they lost more money than did the government. It is thus too expensive for them therefore to hold back much longer; hence, it was time to run to the President for help under the banner, of course, of having been all along a good boy, contributing to the coffers of the Treasury.  

 The bull market not unexpectedly produces a lot of bull.  In the process, people forget the initial reason for the stock transaction tax.  But my generation remembers that the stock transaction tax was made part of the Tax Code way back in December 1970 by R.A. No. 6141.  That law made two impositions: the additional travel tax and the stock transaction tax. 

 The purpose of R.A. No. 6141 was not to develop the stock market.  It was to raise revenue for a specific purpose. Section 2 says “to carry out the purpose of this Act, there is hereby created in the General Fund a Peace and Order Special Account…which shall be used to finance the activities, functions and program of the Police Commission to carry out its powers and duties as defined in the Police Act of 1966 and certain police activities of the National Bureau of Investigation.” 

 Maybe it is because we have forgotten what the money collected from the stock transaction tax was originally intended for that our police authorities  today fail to give satisfactory closures to their investigations of the blasts in Glorietta 2 and Batasan Pangbansa.