Passive-income measure seen helping counter stock market delisting trend

A MEASURE seeking to gradually lower tax rates on interest rates for passive income will help ensure that capital will flow onto Philippine markets, arresting a recent trend of delistings, an investment company said at a Senate hearing.

“Instead of companies raising money and going public, last year, several companies actually delisted from the Philippine Stock Exchange (PSE),” Julio P.G. Bucoy, corporate secretary at the Fund Managers Association of the Philippines, told the Senate Ways and Means Committee.

“One of the main reasons why they delist is they are unable to raise capital in our local markets, so some of them turn to foreign markets instead, or even raise money from offshore private equity funds,” he added.

The proposed Passive Income and Financial Intermediary Taxation Act (PIFITA) seeks to “help boost the competitiveness of capital and financial products by aligning the country’s financial tax regime with regional peers,” the Department of Finance (DoF) has said.

“We believe that any loss of revenue for the government will be more than offset by the increased economic activity and capital flows going into our markets,” Mr. Bucoy also said.

The PIFITA seeks to simplify taxes on passive income and financial intermediaries. Under the measure, the tax rate on interest income will gradually decline from the current 20% to 19% in 2024, 18% in 2025, 17% in 2026, 16% in 2027, and 15% in 2028.

The proposed law seeks to increase the dividend income tax rate to 15% from the current 10%. It also aims to lower the documentary stamp tax (DST) to 0.75% from the current 1% on the sale of original issue shares of stock, and 0.75% for debt instruments.

PSE-listed International Container Terminal Services, Inc. (ICTSI) proposed to maintain the 10% withholding tax on dividend income.

“We firmly believe that the increase would be (a) disincentive to investors,” ICTSI assistant secretary Benjamin M. Gorospe III said.

Mr. Gorospe also called for the reduction of withholding tax on interest on foreign loans to 15% to benefit the banking and private sectors.

“What’s happening right now is that instead of borrowing from local banks, Philippine multinationals, especially if they require bigger loan amounts, borrow from foreign banks in countries where the Philippines has a double taxation treaty and avail of the same 15% withholding tax,” he said.

“So, by decreasing the withholding tax on foreign loans, Philippine companies can now borrow locally,” Mr. Gorospe said, adding this would ensure loans from local banks and withholding taxes for the government.

Mr. Gorospe also urged legislators to repeal or reduce the DST for intercompany loans, especially for foreign companies granting financial assistance to subsidiaries.

The government could lose almost P126 billion by 2029 under PIFITA, the DoF told senators last week.

“The goal here is not only to simplify, of course, simplification is something that we all welcome, but also to grow the size of the market,” Senator Sherwin T. Gatchalian, who heads the committee, said.

“When we grow the market, there is more revenue, and therefore there are more taxes to be collected, and that will offset the negative revenue impact of this measure,” he added.

The measure is currently being fine-tuned by a technical working group. —