Stock transaction tax: An income tax or percentage tax?

Last year, the Philippine Stock Exchange (PSE) released a report on the profile of its investors, noting that there was a massive increase in the number of Filipinos who opted to invest in listed stocks through online trading platforms. Overall, the PSE stated that 98.3 percent of the stock market accounts are held by domestic investors (a mix of retail, institutional, and individual investors) and 1.7 percent are held by foreign investors. If the stock market has also piqued your interest, you may be wondering what taxes are due from the sale of listed stocks.

The short answer is that the Tax Code enforces a stock transaction tax (STT) on every sale, barter or exchange of shares in a listed company. Under Section 127(A) of the Tax Code, as amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Law, the STT rate is 6/10 of one percent based on the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged, or otherwise disposed.

The burden to pay the STT, as provided in Revenue Regulations (RR) 6-08, is imposed on the seller or transferor, and remitted by the seller or transferor’s broker. The stockbroker who effected the sale has the duty to collect the tax from the seller upon issuance of the confirmation of sale, issue the corresponding receipt thereof, and remit the same to the tax authorities.

Notably, Section 4 of the RR provides that the STT is not imposed on (a) dealers in securities, (b) investors in shares of stock in a mutual fund company, and (c) all other natural or juridical persons who are specifically exempt from national internal revenue taxes under existing investment incentives and other special laws.

In relation to this, one common question of non-resident foreign investors enjoying an income tax exemption under a law or treaty is: Does their tax exemption fall under Section 4 of the RR and thereby extend to STT? This has been the subject of some debate in the past.

In a 2000 Supreme Court (SC) ruling, the SC held that stocks listed on the exchange are capital assets of investors “which result in either capital gains or loss.” Citing this 2000 SC case, a 2005 Bureau of Internal Revenue (BIR) ruling held that the STT is essentially a tax on income as the object of the capital gains tax and STT are the same—income from the sale, exchange, or other disposition of a capital asset. The tax authorities expressly noted in the BIR ruling that “although the STT falls under Title V of the Tax Code, the said tax is essentially a tax on income”. Coincidentally, Title V of the Tax Code covers percentage taxes.

The BIR issued a similar ruling in 2009, wherein the tax authorities reiterated that the STT under Section 127(A) of the Tax Code is a tax on income and is a substitute for the capital gains tax.

However, in a recent case decided by the SC, they had the opportunity to clarify whether STT is a tax on income and whether the STT is covered by the tax exemption under Section 32(B)(7) of the Tax Code.

In this case, a non-resident foreign partnership that is owned, controlled, and enjoyed refinancing from foreign financial institutions, filed a claim for a refund of STT withheld (formerly at the rate of 1/2 of one percent) by its stockbrokers from the sale of shares listed on exchange. The non-resident claimant presented a tax exemption ruling issued by the International Tax Affairs Division and argued that, based on the ruling that STT is an item of exclusion in its gross income, withholding tax or STT was improper.

The BIR did not act on the claim, and thus, the nonresident claimant filed its judicial claim before the Court of Tax Appeals (CTA). The CTA in division ruled in favor of the non-resident foreign partnership saying it is entitled to the refund of STT considering it is exempt from income tax under Section 32(B)(7)(a) of the Tax Code as a financing institution owned and controlled or enjoyed refinancing from foreign governments.

However, at the CTA en banc level, the tax court reversed and set aside the decision of the CTA in division saying that the exclusionary benefit under Section 32(B) of the Tax Code excludes only income derived from the items enumerated therein and does not extend to STT. In reversing the decision of the CTA in division, the CTA en banc traced the legislative history of Section 127 of the Tax Code and held that during the congressional deliberations, the authors of the law intended to delineate between the STT (as a percentage tax) from the provisions on income tax.

The SC further clarified the difference between the two kinds of taxes as to the tax base, echoing the CTA en banc’s ruling. The percentage tax is a national tax that imposes a fixed percentage or tax on the gross selling price or gross receipts or earnings derived by any person engaged in the sale or services. Income tax, on the other hand, is also a national tax is imposed on the net taxable income of a taxpayer (gross income less discounts and allowable deductions) in a taxable year.

In ruling for the tax authorities, the SC reiterated the ruling of the CTA en banc, that the tax exemption under Section 32(B)(7)(a) of the Tax Code is applicable only to income tax under Title II of the Tax Code and cannot be stretched to cover Title V on other percentage taxes.

Because the two tax types have been clearly distinguished from one another, non-resident foreign investors claiming tax exemption under Section 32(B)(7) of the Tax Code and their local representatives should keep in mind the ruling of the SC, that STT is a percentage tax rather than income tax, and as such, any exemption on income tax cannot be stretched to apply to STT.

Gretchen R. Pano is a supervisor from the tax group of KPMG R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International. The firm has been recognized in 2021 as a Tier 1 in Transfer Pricing Practice and in General Corporate Tax Practice by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity. The views and opinions expressed herein are those of the author and do not necessarily represent KPMG International or KPMG RGM&Co.

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