Tax Articles

Stock Transaction Tax: Nature & Exemption

By Atty. Fulvio D. Dawilan

Fulvio D. Dawilan Managing Partner   +632 8403 2001 loc.310 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

In my previous article in this column, I discussed the changes in the taxation of the original issuance and the subsequent sale and other transfers of shares of stock, as a result of the amendments introduced by Republic Act No. 12214 or the Capital Markets Efficiency Promotion Act (CMEPA). Essentially, I presented the changes in tax rates and the new coverage of the capital gains tax (CGT) and the stock transaction tax (STT).

Apparently, there are two different tax treatments of sale or other disposition of shares of stock – one imposing the CGT and the other imposing the STT. These two types of taxes are found in different Titles of the National Internal Revenue Code (NIRC) – with CGT found under Title II (Tax on Income), while the STT is part of Title V (Other Percentage Taxes). These two types of taxes, resulting in different tax treatments, had been existing long before CMEPA was enacted. Before 1994, the STT was part of the sections on CGT, specifically under Title II of the NIRC. In fact, it was described as presumed capital gains. Clearly then, the STT was an income tax. It was transferred to Title V (Other Percentage Taxes) with the enactment of Republic Act No. 7717.

CMEPA did not make any change on this classification. It only made further changes on what should be covered by these taxes – with CGT now applied on transfers of shares not traded in stock exchanges, while STT is imposed on shares sold or disposed of through local or foreign stock exchanges. Before CMEPA, only the shares of stock traded in the local stock exchange were subject to the STT.

Subsequent to the transfer made by RA 7717, and with the presence of the STT under Title V of the NIRC, this has resulted in a number of controversies between the taxpayers and the tax authority, and that had required the clarification by the tax authority and the intervention of the Courts. That controversy is usually associated with the nature of the STT and whether it should be entitled to the same exemption available for the CGT. Recently, the Supreme Court declared in G.R. No. 256973, November 15, 2021, that the STT is a percentage tax and not income tax, and therefore not entitled to the tax exemptions that are available for income taxes.

Indeed, there are certain types of tax exemptions or preferential tax treatments that are clearly applicable to tax on income (or income tax), including the CGT on the sale of shares of stock. Does that exemption from income tax or preferential income tax treatment extend to STT? The answer to that question rests on the nature of STT – is it an income tax, business tax, or other type of tax?

Let’s focus on the application of the exemptions provided under the existing tax treaties which the Philippines has with other countries. Apparently, in the recently issued Revenue Regulations No. 021-2025, which implemented some of the changes introduced by CMEPA, and which indicated the tax rates applicable to each type of income, it included parenthetical notations that the tax treaty rate may instead apply. This notation suggests that the income, including capital gains on sale of shares not traded in the stock exchange, may be subject to tax rates based on a tax treaty if so applicable. Apparently, there is no similar notation for the stock transaction tax.

The tax authority had not actually been consistent in its view. To be sure, unless specifically provided, the exemptions or preferential tax treatments available under the tax treaties extend only to income taxes. And many of these tax treaties exempt from Philippine tax the capital gains realized from transfers of shares, subject to specific conditions. While this exemption refers to income tax, our tax authority has issued a number of rulings confirming the exemptions from STT as well.

The reason is that while these tax treaties cover only tax on income, they include provisions applying their coverage to any identical or substantially similar taxes. In essence, the STT is identical or similar to the CGT. If the CGT enjoys exemption, so does the STT. More importantly, some of these rulings declared that the reclassification of the tax on sale of shares listed and traded through the stock exchange from Title II (Tax on Income) to Title V (Other Percentage Taxes) does not remove the same from the coverage of the tax treaties. In fact, in some rulings, the tax authority declared that since the tax treaties do not distinguish whether or not the shares of stock being sold are listed and traded in the stock exchange, the exemption provisions of the tax treaties should apply as well to tax on shares of stock listed and traded through the local stock exchange which had been reclassified to percentage tax. But contrary to these rulings, the tax authority has also declared that the STT cannot be considered as an identical or substantially similar to tax on income in place of the CGT. Hence, the shares listed and traded through the facilities of the stock exchange should not avail of the benefits under the treaty.