Increased foreign equity in investment houses
Republic Act No. 8366 (Act) was made law on October 21 1997 and took effect on November 14 1997. The law aims to liberalize the Philippine investment industry by amending certain sections of Presidential Decree No. 129 (Decree), known as the Investment House Law.
The Decree was enacted to provide the statutory framework for the underwriting of securities and to harmonize operations with national monetary goals. An investment house is defined by the Decree as any enterprise which engages or purports to engage, regularly or not, in the underwriting of securities of another person or enterprise, including securities of the government and its instrumentalities. The requirements for an investment house under the Decree included:
- a minimum paid-in capital of Ps20 million (US$500,000);
- majority of the voting stock owned by Filipino citizens; and
- majority of members of the board are Filipino citizens.
The Act intends to expand and strengthen the capital base of the economy to ensure sustained economic development by increasing foreign equity participation and raising the minimum capitalization of investment houses. More specifically, the requirements for an investment house under the Act are as follows:
- a minimum paid-in capital of Ps300 million for new investment houses;
- a minimum paid-in capital of Ps300 million for existing investment houses within two years. This involves an initial Ps200 million and an additional Ps50 million for every successive year until the minimum capitalization of Ps300 million is attained;
- 40% of the voting stock owned by Filipino citizens and up to the remaining 60% may be owned by foreigners;
- foreign nationals may be members of the board of directors, participating in equity of the enterprise.
An investment house, under both the Act and Decree, is prohibited from engaging in banking operations which involve lending funds attained from the public through the receipt of deposits.
Highlights of the Tax Reform Act of 1997
On December 8 1997, the Philippine Congress enacted Republic Act No. 8424. Otherwise known as the Comprehensive Tax Reform Programme, it became effective on January 1 1998.
The Programme amended the National Internal Revenue Code to raise additional government revenues, along three main lines:
- restructuring the tax rates, particularly income tax;
- introducing new tax impositions; and
- strengthening the tax reporting system.
In brief, the Programme restructured the following tax rates:
- income tax rates for citizens and residents, regardless of the nature of income -- these rates now range from 5% to 34%, with the top marginal rate to be lowered to 32% by year 2000;
- income tax rate for non-resident aliens not engaged in trade or business in the Philippines -- lowered to 25% of gross income, from the old 35% rate;
- corporate income tax rate -- lowered from 35% to 34%, effective January 1 1998, 33% effective January 1 1999, and 32% effective January 1 2000;
- capital gains tax on the sale of shares of stock not traded through the local stock exchange -- halved from the existing 10% to 20% rate to 5%, for net gains under Ps100,000, and 10%, for net gains over Ps100,000; and
- 15% branch profits remittance tax imposed under the NIRC -- the basis is the gross amount declared as profit without deduction for the tax component.
The Programme also imposed the following new tax measures:
- Minimum corporate income tax (MCIT) of 2% of the gross sales or receipts of domestic corporations where the MCIT is higher than regular income tax;
- Final tax on the sale by corporate taxpayers of realty treated as capital assets--equivalent to 6% of the gross selling price or fair market value of the realty, whichever is higher;
- 10% tax on income of regional operating headquarters;
- tax on case and property dividends actually or constructively received by an individual from a domestic corporation--6% in 1998; 8% in 1999; and 10% in 2000 (the tax exemption of inter-corporate dividends, ie dividends received by a domestic or resident foreign corporation from a domestic corporation, is retained);
- 10% tax on improperly accumulated earnings of a domestic corporation (other than publicly-held corporations, banks and other non-bank financial intermediaries and insurance companies);
- 7.5% tax on interest income earned by individual and corporate (domestic and resident foreign) taxpayers from depositary banks under the expanded foreign currency deposit system; and
- fringe benefit tax (based on grossed-up monetary value of the benefit) imposed on the employer for case and non-cash benefits paid to non-rank and file employees--34% effective January 1 1998; 33% effective January 1 1999; and 32% effective January 1 2000.
The Programme also introduced the following provisions: by 2000, corporate taxpayers will have the options to be taxed at 15% of gross income after certain conditions have been satisfied. This option will be made available only to enterprises whose ratio of cost of sales to gross sales, or receipts from all sources, do not exceed 55%, and once elected, the option will be irrevocable for three consecutive taxable years; the accounting system for long-term construction contracts (lasting more than one year) will be on the basis of the percentage of completion; there will be an optional treatment of interest expenses incurred to acquire property used in business or profession, either as an ordinary deduction or a capital expenditure; under certain conditions, a corporate taxpayer is allowed to carry-over for the next three consecutive taxable years after the year the operating loss was incurred, provided the loss has not been previously deducted from gross income; deduction of charitable contributions of corporate taxpayers increased from 3% to 5% of the taxable income; and interest income derived by citizens or residents for long-term (at least five years) deposit or investment in savings, trust funds, deposit substitutes, investment management accounts and other investment with certificates in a form prescribed by the Bangko Sentral ng Pilipinas will be exempt from tax.
To strengthen the collection power of the taxing authorities, the Programme introduced the following provisions:
- Persons or corporations undertaking the collection of foreign payments of interests or dividends by coupons, cheques or bills of exchange are required to obtain a licence from the Commissioner of Internal Revenue and will be subject to the rules and regulations that would enable the government to obtain the information required under the Programme.
- All persons, corporations or duly registered co-partnerships, trustees, administrators or employees making payments to another person or entity, whether or not Philippine residents, are required to render a true and correct return to the Commissioner, under the rules and regulations prescribed, setting out the amount of gains, profits or income and the name and address of the recipient of the payments.
- Any attorney, accountant, fiduciary, bank, trust company, financial institution, or other person, assisting, advising in the formation, organization or reorganization of any foreign corporation will file a return with the Commissioner, setting out the relevant information under the rules and regulations.