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Documentary stamp tax
Nov 16, 2001
 

When I was asked to give a lecture a little over four years ago at the 1997 Stamp Duty Conference organized in Singapore and in Kuala Lumpur by the IBC Asia Limited on the topic "Philippine Documentary Stamp Duty on Financial Instruments", I could not help but squirm every time I was asked about how we taxed the secondary sale of commercial paper.

I had to explain that the documentary stamp tax was one of our oldest taxes, that the law is largely what it was (except for some rate changes and certain minor modifications) when it was introduced into the country in the early part of the century, and that, laboring under the impression that it was an insignificant part of the tax system, our legislature has not taken time to reassess the impact of the documentary stamp tax not only on the greater scheme of government finance but on the development of our capital market. My lame excuse: law generally lags behind economic and technological developments.

What I left unsaid was that some laggards lag more than others and the Philippine documentary stamp tax has the unenviable role of bringing up the rear. But, now, four years later, it seems we are playing catch up with our more progressive neighbors. In a forum on tax reform held last month, Finance Undersecretary Cornelio Gison, standing in for the lecture portion for his boss, the Finance Secretary, disclosed that the part of the current administration’s tax reform agenda was, among other proposals, the imposition of the documentary stamp tax only on original issues of debt instruments and removing the liability for the stamp duty on secondary trading. News reports coming out early this week further confirm that the Department of Finance has endorsed to Congress a bill to the same effect.

If indeed for everything there is a season, then undoubtedly, today is the opportune time to push for the abolition of documentary stamp tax on secondary trading. The Bangko Sentral ng Pilipinas, on Oct. 25, 2001, issued rules designed to stimulate the production and trading of long-term negotiable instruments of deposits. That bold measure, despite the certificate’s income tax free feature, will remain a bald gesture if the negotiation of the certificates, which is essential to its liquidity, is subjected every time, as it is under present law, to the documentary stamp tax.

The obstructive provision is Section 198 of the National Internal Revenue Code. It imposes "upon each and every assignment or transfer" of certain instruments, including "any evidence of obligation or indebtedness", a documentary stamp tax "at the same rate as that imposed on the original instrument". A documentary stamp tax of P1.50 for every P200 of face value of all debentures and certificates of indebtedness (Sec. 174) and of all certificates of obligation (Sec. 176) is imposed on the original issue of said instruments. Consequently, if during a long term negotiable deposit certificate’s five year tenor, it changes hands about 300 times, the total amount of documentary stamp tax that has to be paid after all the turnovers will be more than the face value of the certificate. This makes secondary trading too expensive considering that secondary trading is done on very thin margins.

Congress should act on this proposal to remove the documentary stamp tax on secondary trading of debt instruments with the same dispatch and concentration that it accorded to the anti-money laundering law. For while the ant-money laundering law, for all its pro-active provisions, is simply a preventive measure, this one is developmental and is an essential feature of the other capital market development initiatives which we have to institute in order to guide our ship of state out of the shoals that currently threaten its very existence.

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