While the markets in the Philippines have been doing well, a number of barriers to investment exist making local stocks and bonds potentially somewhat less attractive than those in other regional markets. One of the disincentives is the tax structure. Foreigners buying shares and bonds have to pay a high withholding tax. Even when they are entitled to a reduction due to treaties, it is not always easy to get a refund.
HIGH RATES: According to the Asian Development Bank (ADB), the Bureau of Internal Revenue (BIR) charges a 20% withholding tax on interest from government bonds and 30% on corporate bonds. This can be reduced by treaty, but the ADB reports that the documentation to secure this refund is “onerous”, that the requirements are not clear and that the application can take years to process. Investors looking to claim a refund have to prove, for example, that the securities were bought as part of a buy-and-hold portfolio.
“Tax reclaims are available via direct filing with the BIR, but can take years and are rarely successful,” the ADB notes in its 2012 Philippines Bond Guide.
STOCKS: Stock dividends attract a withholding tax of 15-30%, and those rates can be reduced through treaty as well, according to Deloitte. Non-resident aliens engaged in business in the country pay 20%. Non-resident aliens not engaged in business locally pay 25%, and non-resident foreign corporations pay 30%; under certain conditions the latter may be reduced to 15%. Philippines rates are high by regional standards. Singapore charges 0% for dividends and 15% for interest, as does Malaysia. In Thailand, the rates are 10% and 15%. In Vietnam, the rates are 0% and 5%, while in Hong Kong they are 0% and 0%. Brokerage commissions and other transaction costs are also relatively high, and these may also add friction to foreign capital flows.
According to the Philippine Stock Exchange (PSE), transactions below P100m ($2.4m) attract a minimum commission of 0.25%. That falls as the transaction size increases, all the way down to 0.05% for trades above P10bn ($241m). A value-added tax equal to 12% of the commission is also charged. On top of that, the Securities and Exchange Commission levies a fee of 0.005%, the PSE charges a transaction tax to the seller of 0.5% and a transaction fee of 0.005%, while the Securities Clearing Corporation of the Philippines charges 0.01%. The maximum brokerage commission stands at 1.5%.
In most markets in the region, commissions are negotiated and the add-on fees are lower. In Singapore, rates have been negotiated since 2000 (though it does charge a clearing fee of 0.04%, a trading fee of 0.0075% and 7% goods and services tax). Malaysia is partially liberalised and online, interbroker and institutional commissions are negotiable and retail trades have a minimum commission. Its clearing fee is 0.003%, and a stamp duty is charged. In Thailand large and institutional trades are negotiable and a 0.005% trading fee, a 0.001% clearing fee and a 0.0018% regulatory fee are added.
AEC: The ASEAN Economic Community (AEC) is expected to have some effect on the financial sector in the Philippines, and its formation could make investment into the country easier and less costly. According to the AEC Blueprint issued in 2008, restrictions on capital market activity between member states are supposed to be substantially removed by 2015 and almost fully removed by 2020. The document also calls for harmonisation of capital markets standards, mutual recognition of qualifications and a withholding tax structure that encourages cross-border investment.
Still, progress has been slow. From the outset, member states have always supported a flexible approach to the opening of financial services. The concept has been “liberalisation according to readiness”. Indeed, in the blueprint, two categories – financial services and capital flows – were granted a high degree of flexibility. The commitments are, thus, guidelines and safeguards are permitted to prevent instability. Delays have also been a function of practical issues, as seen in the implementation of the ASEAN Trading Link. The PSE’s president Hans Sicat said in December 2012 that the Philippines may take two or three years yet to join.
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