In most instances, the stock transaction tax would be a lower tax compared to the capital gains tax. The former is, in fact, considered a preferential tax given to listed shares and is aimed to promote the local stock market.

However, news reports disclosed that about 16% or 40 companies listed at the stock exchange are, in fact, not publicly owned, with their public ownership falling below the minimum public ownership (MPO) requirement of 10% of the issued and outstanding shares, exclusive of any treasury shares.

Amid allegations that some company owners are using the stock exchange to avoid capital gains tax, the BIR announced last year its plan to subject sales of such shares, even though listed and traded through the stock exchange, to the higher tax of 5%-10% capital gains tax. The BIR insisted that for the stock transaction tax to apply, the listed company must be publicly owned or at the very least, must be compliant with the MPO rule.

The PSE, for its part, took the position that as long as the company has not been delisted, the preferential stock transaction tax should apply. Due to the expected effect on the local stock exchange, the MPO rule and the applicable tax were widely discussed among the Securities and Exchange Commission (SEC), Philippine Stock Exchange (PSE) and the Bureau of Internal Revenue (BIR).

The discussions culminated when the SEC, in its executive session on 19 December 2011, approved the PSE’s proposed amendment to the Rules on Minimum Public Float with minor modifications. The amended rules took effect on 1 January 2012 and gave listed companies twelve months, but not beyond 31 December 2012, to comply with the MPO requirement. Immediately after the grace period to comply with the MPO rule, the PSE shall suspend the trading of shares of the erring company for six months. If the listed company remains non-compliant after the lapse of the suspension period, the company shall be automatically delisted and shall be prohibited from relisting within five (5) years.

The amended rules also state that a listed company which is non-compliant with the MPO requirement may apply for an extension or grant of a grace period provided that the shortfall in the MPO is due to justifiable cause and the listed company has concrete program to comply with the MPO. Justifiable causes include tender offer and merger and acquisition transactions.

Under the amended MPO rules, a company that decided to voluntarily delist on the ground of noncompliance with the MPO rules must conduct a tender offer to all stockholders of record. The voluntary delisting will be allowed if the company demonstrated that following the acquisition of the tendered shares, the persons conducting the tender offer have obtained 90% of the shares of the company. The tender offer requirement is applicable even if the person proposing the delisting already beneficially own 90% of the shares of the company.

While there are companies that have opted for delisting, several listed companies have confirmed their decisions to comply with the 10% MPO within the allowed grace period. In fact, the record high stock index last week was attributed in part to some companies’ efforts to comply with the requirement.

With the approval of the rules giving listed companies a grace period to comply with the MPO requirement, stockholders of such listed shares were able to heave a sigh of relief that their transactions through the stock exchange remains subject to the one-half of one percent stock transaction tax. The tax is imposed on the gross selling price or gross value in money of the shares of stock sold or disposed. This tax is generally assumed and paid by the seller through the remittance of the tax by the seller’s broker.

Considering the developments that surrounded the issue that listed companies must comply with the MPO rule to enjoy the preferential tax rate, should taxpayers now expect the BIR to issue new regulations making compliance with the MPO rule a continuing requirement for the sale of listed shares through the exchange to be subject to the stock transaction tax? More importantly, considering that compliance with the MPO rule is not imposed by the 1997 Tax Code, may an additional requirement be validly imposed through a regulation or will the tax authorities move for the amendment of that specific provision of the Tax Code to ensure strict compliance?

The last few years had shown decline in interest rates on saving account and bank deposits. Perhaps. it is now time for Filipinos to seriously consider investing in shares listed in the stock exchange.

One thing for sure, with the good performance of the local stock index lately, the market is upbeat and investor confidence seem to be rallying. Hopefully, these will translate to a better and brighter Philippine economy this year of the dragon. Kung hei fat choi!

The author is the head of the Tax and Advisory Compliance Division at Punongbayan Araullo, a member firm within Grant Thornton International Ltd. For comments and inquiries, please e-mail the author at lea.roque@ph.gt.com or call 886-5511 (550).)