Transaction Tax on Traded Shares
By Nica Marsha Gasapo on May 12, 2022
The National Internal Revenue Code, as amended (Tax Code), imposes a transaction tax on the sale, barter, exchange or other disposition of shares listed and traded through the local stock exchange (other than the sale by a dealer in securities) at the rate of 0.6 percent of the gross selling price, to be paid by the seller or transferor. Before the enactment of the “Tax Reform for Acceleration and Inclusion” (Train) law (Republic Act 10963), the rate was 0.5 percent.
The duty to collect and remit the tax to the Bureau of Internal Revenue (BIR) is placed on the stockbroker who effected the sale. The stockbroker must remit the tax within five banking days from the date of collection. For primary offerings, it is the issuing corporation that is duty-bound to file the return and pay the tax within 30 days from the date of listing of the shares.
In 2021, the Supreme Court, in the case of IFC Capitalization (Equity) Fund, L.P. vs Commissioner of Internal Revenue (GR 256973), had the opportunity to restate its holding that the stock transaction tax is not an income tax and is thus not covered under the exemption provided under the miscellaneous items in Section 32(B) of the Tax Code.
In said case, the taxpayer, a nonresident foreign limited partnership, traded shares in the Philippine Stock Exchange from 2013 to 2014. The stockbrokers who effected the sale of shares withheld the 0.5-percent stock transaction tax. The taxpayer claimed an exemption and filed for a refund with the BIR based on Section 32(B), which enumerates the items exempt from income tax. The BIR did not act on the claim thus the taxpayer was constrained to file a case with a division of the Court of Tax Appeals, which rendered a decision granting the claim for refund.
The case was elevated to the Court of Tax Appeals en banc, which held that being a percentage tax, the exemption granted under Section 32(B) could be extended to the stock transaction tax and that it was clear that Section 32(B)(7)(a) excluded from gross income only the income derived by financing institutions owned, controlled or enjoying refinancing from foreign governments. The court further discussed that the stock transaction tax was not a tax on the earnings derived from the sale of shares but rather an excise tax imposed on the privilege to sell shares.
As elucidated by the court, Congress, by enacting Republic Act 7717, had taken the position that the stock transaction tax was not a tax on income. By repealing Section 25 of the then Tax Code of 1993 and replacing it with Section 124-A (now Section 127[A] of the Tax Code, as amended by the Train law), Congress in effect removed the stock transaction tax from the category of income taxes and reclassified it as a percentage tax. The en bank court also emphasized that, as early as 2007, the BIR had already opined that the stock transaction tax could not be considered as identical or substantially identical to the tax on income in place of capital gains imposed under the former Tax Code. Thus, the benefits under a tax treaty which covers income tax cannot cover stock transaction tax.
In resolving the taxpayer’s claim for refund and argument that the stock transaction tax was income covered by the exemption under Section 32(B)(7)(a) of the Tax Code, the Supreme Court, echoing the Court of Tax Appeals en banc decision, differentiated a percentage tax from income tax.
According to the Supreme Court, a percentage tax such as the stock transaction tax is “a national tax measured by a certain percentage of the gross selling price or gross value in money of goods sold, bartered or imported; or of the gross receipts or earnings derived by any person engaged in the sale of services.” Income tax, meanwhile, is a tax “imposed on the net or gross income realized in a taxable year.”
Thus, the Supreme Court found that the exemption granted under Section 32(B)(7)(a) could not be expanded to include the stock transaction tax, which is a percentage tax.
The increase in the stock transaction tax brought about by the Train law was geared toward additional revenue for the government. However, under the proposed draft of the Passive Income and Financial Intermediary Taxation Act, which is intended to complement the Train law, the stock transaction tax is expected to be gradually reduced until it reaches 0.1 percent or 0.0 percent.
Nica Marsha V. Gasapo is a junior associate of Mata-Perez, Tamayo and Francisco (MTF Counsel).