THE TAXMAN cometh and, as expected, some people are unhappy about it.

Last November, the Bureau of Internal Revenue ordered the imposition of a capital gains tax of 5 percent to 10 percent on shares of companies listed on the stock exchange that fail to comply with their minimum public ownership requirement, also known as “public float.”

Public float refers to the company’s stocks that are owned by persons other than its directors, officers and controlling investors. Or people who hardly have any say in the management of the company.

Their principal reason for buying stocks is to receive dividends or to profit from the appreciation of their value when they decide to sell them later.

Under existing regulations, listed companies are obliged to maintain a certain public float (computed on a percentage basis) depending on their market capitalization.

The PSE has questioned the validity of the BIR order on the grounds that it runs counter to the Tax Code provision, which states that stocks sold or bought through the exchange are subject only to a stock transaction tax of one-half of 1 percent of the gross selling price or gross value in money of the stocks sold.

The stock transaction tax is in lieu of the capital gains tax that is normally imposed on the sale of property based on the difference between its original cost and selling price.

Interpretation

The PSE believes the stock transaction tax remains constant as long as the transaction is done through the exchange, regardless of the number or percentage of the company’s stocks that form part of the public float.

The BIR holds a contrary view: If a listed company’s public float falls short of the public ownership benchmark, it loses its “public ownership” status and, in the process, the benefits of the stock transaction tax.

According to the BIR, with the change in status, the stock transactions of the concerned company become liable for the 5 percent capital gains tax on gains that do not exceed P100,000 and 10 percent if in excess of P100,000.

These are same taxes that the Tax Code imposes on the sale or purchase of stocks outside of the stock exchange or without going through stockbrokers, i.e., direct person-to-person transactions.

For the BIR, the additional tax intake could help lower the country’s budget deficit. The PSE, on the other hand, is apprehensive the additional taxes would put a damper on stock trading and, in the process, adversely affect its operation.

Objective

There is no question that the lower stock transaction tax (instead of the higher capital gains tax) is a special tax benefit given to companies that want to sell their stocks through the stock exchange.

That privilege, like any other forms of tax breaks that the government gives to private business, is not and should not be treated as a freebie.

It is granted to accomplish certain objectives that will redound to the best interests of the public in terms of, among others, additional employment, technology transfer, and community development.

Thus, for example, a company that plans to produce bags using recycled materials in an economically depressed area may be exempted from the payment of certain business taxes for a number of years in consideration for its commitment to source its workers from the residents of that place.

This tax break shoots two birds with one stone—it provides livelihood opportunities to the community and, at the same time, helps reduce environmental pollution.

The preferential tax treatment of stock transactions rests on the same footing—it encourages investments in stocks and helps widen the base of public ownership in listed companies.

Participation

The expansion of public ownership in private businesses is consistent with the mandate of Article XII of the Constitution, which states that “private enterprises, including corporations, cooperatives and similar collective organizations, shall be encouraged to broaden the base of their ownership.”

It’s for the same reason that the Securities and Exchange Commission requires initial public offerings (IPO) of companies to set aside 10 percent of their offering to local small investors.

The same objective is sought to be enforced by the BIR order through its tax collection authority which, absent of any proof of gross violation of the law or malice, is traditionally upheld by the Supreme Court.

After all, taxes are considered the lifeblood of the government.

Setting aside the coercive nature of the BIR’s order, the requirement to maintain the public float cannot be considered an unreasonable tax imposition.

It is a small price to pay to enjoy the benefit of paying only one-half of 1 percent stock transaction tax regardless of the volume of transactions in the stock exchange which runs to hundreds of millions of pesos daily.

The fear expressed by some quarters about losing management control of their company if the public float is enforced is groundless. Keeping 10 percent, or even up to 20 percent, of the company’s stock in the public float does not pose a threat to the hold of major stockholders or institutional investors on the company.

The hullabaloo over the public float is misplaced. Only 45 out of 250 listed companies are not compliant with the PSE’s existing public float requirement. The majority of the companies have a track record of scrupulous adherence to the public ownership rule.

Ironically, some of the holdouts bear iconic names.

(For feedback, please write to rpalabrica@inquirer.com.ph.)