Advisory » Update on new Laws
Towards A More Vibrant Philippine Capital Markets
Date Posted: March 16, 2009by: Francis Ed Lim, President and CEO Philippine Stock Exchange
Two ACCRALAW alumni, Senator Edgardo J. Angara and Congressman Juan Edgardo “Sonny” Angara, have been in the forefront of helping the country put in place a new legal framework that will help spur the development of the country’s capital markets. Senator Angara was one of the founding members of ACCRALAW in the early 1970s while his son, Sonny Angara, was an associate attorney of ACCRALAW before he went to take up his master’s degree in law from Harvard University.
The need for a new legal framework stems from the fact that the Philippine capital markets remain underdeveloped and lag behind other countries in the region. Our laws are not at par with those existing in the region and the result is a capital market whose growth is severely hampered.
Several bills were proposed, and some laws have already been passed, in an effort to jump-start the country’s sluggish financial and capital market system.
Personal Equity Retirement Act of 2008
The first capital market-related law principally authored by the Angaras was Republic Act No. 9505, otherwise known as the Personal Equity and Retirement Account (PERA) Act of 2008, which was signed by President Gloria Macapagal-Arroyo into law on 2008.
The PERA is the local and improved version of the 401(k) and IRA systems of the United States.
This unprecedented law seeks to encourage voluntary personal savings and investments to provide for one’s retirement. PERA refers to the voluntary retirement account established by a contributor which will be invested in PERA investment products in the Philippines as a means of providing financial security to PERA account holders during their retirement years. Employers are allowed to claim tax deductions for their contribution to their employees’ PERA to the extent of the maximum amount allowed by the law. It is also open to self-employed individuals and to foreigners who are residing in the Philippines.
To encourage the establishment of PERAs, the law grants substantial tax incentives to contributors, among which are: (a) all income earned from the investments and reinvestments of the maximum amount allowed will be tax exempt; (b) all distributions upon retirement or death will be tax exempt; (c) a 5% income tax credit based on total PERA contribution will be offered to contributors. If the contributor is an overseas Filipino, he will be entitled to claim tax credit from any tax payable to the national government under the National Internal Revenue Code of 1997, as amended; (d) PERA assets will not be considered assets of the contributor for purposes of estate taxes; and (e) employer contributions to the PERA of its employees will be allowed as a deduction from the employer’s gross income.
The new law puts a cap on tax incentive-eligible contributions. In the case of local residents, the cap is Php100,000.00 per year per individual and Php200,000.00 each for husband and wife. To encourage overseas Filipinos to remit their income into the country, the law doubles the tax-eligible cap for them, i.e., Php100,000.00 annually per individual and Php200,000.00 annually each for husband and wife. This benefit extends to the legitimate spouse and children of the overseas Filipino.
To further help in the development of the local capital markets, the new law provides that the tax exemption for investment income will only be available if the PERA money is invested in the Philippine capital markets.
Credit Information System Act of 2008
The second bill signed into law was the Credit Information System Act (CISA), which was enacted on 2008 as Republic Act No. 9510.
The law establishes the foundation for a comprehensive and centralized credit information system to be administered by the Credit Information Corporation (CIC). The CIC shall receive and consolidate basic credit data; act as a central registry or central repository of credit information; and provide access to reliable, standardized information on credit history and financial condition of borrowers. Under this law, it will be mandatory for entities like banks and other financial institutions to submit credit-related information about borrowers to the CIC. Certain entities will be given access to the credit data gathered and processed by the CIC. As observed by President Arroyo when she signed this piece of legislation into law, “a credible and comprehensive credit information system ran by the credit information corporation will cut credit processing time, will lower transaction cost, will reduce the risk of defaults because of better credit information, will reduce the credit premium charged by lenders and will increase lending volumes.”
The law will not only strengthen the financial sector of the economy by reducing the risk of borrower defaults but will also make available more funding at cheaper cost for business operation and expansion. It will mean more dividends for investors in our stock market.
The CIC will be owned 60% by the National Government with the remaining shares of stock to be owned and held by qualified investors, which will be limited to industry associations of banks, quasi-banks and other credit related associations including associations of consumers. The National Government shall continue to hold 60% of the common shares of CIC for a period not to exceed five years from the date of commencement of operations. After this period, the National Government shall dispose of at least 20% of its stockholdings to qualified investors.
The CIC will be chaired by no less than the Chairman of the Securities and Exchange Commission (SEC). Rules and regulations to implement the CISA will be issued by the SEC, as the lead government agency, in coordination with the relevant government agencies and existing stakeholders.
Credit information shall be strictly confidential and shall be used only for the declared purpose of establishing the creditworthiness of the borrower.
Already, the Bangko Sentral ng Pilipinas has lauded the signing of the CISA, stating that its passage into law could not have come at a better time the as CISA would enhance confidence in this time of financial crisis.
Other Capital Market-Related Laws
The capital market-related laws do not end with the PERA and CISA. There are other bills now pending in Congress that are envisioned to promote Philippine capital markets development.
Real Estate Investment Trusts Law
Among them is the Real Estate Investment Trusts Law (REITS), which seeks to establish the regulatory and tax framework for real estate investment companies or “REITs”. A REIT is a legal vehicle established for the sole purpose of allowing small and large investors alike to participate in the ownership of income-producing real estate assets and real estate-related assets. Under the proposed law, the REIT must distribute at least 90% of its distributable income as dividends and maintain its status as a public company and listed company. The REIT shall enjoy tax incentives, among which is that it will be taxed on taxable net income less dividends distributed to the shareholders of the company. To this extent, the Philippine version of REITS adopts the Japanese-style REITS system.
Corporate Reform Act
Another piece of legislation being deliberated is House Bill No. 3456, or the Corporate Reform Act (CRA). Patterned after the United States’ Sarbanes-Oxley Act of 2002, the Corporate Reform Act aims to reinforce auditor independence and strengthen corporate accountability measures among publicly listed companies as well as organizations imbued with public interest, with the objective of curbing corporate abuses and providing a stable climate for investments. Highlights of the bill include the prohibition of services outside the scope of practice of auditors, rotation of an accounting partner overseeing the audits of a specific company every five years, requiring covered companies to institute internal controls to ensure the integrity and transparency of annual reports, and the establishment of procedures to allow confidential, anonymous submission of concerns regarding questionable accounting or auditing matters. Considerable penalties are imposed on officers of the corporation, primarily the Chief Executive Officer and Chief Financial Officer, who knowingly violate the provisions of the Act.
Corporate Rehabilitation and Insolvency Act
The country’s insolvency law is of 1909 vintage. There is an urgent need to overhaul it especially in the light of the present financial turmoil that has seen companies around the world go bankrupt. The Corporate Rehabilitation and Insolvency Act (CRIA) seeks to do this. This bill seeks to provide a framework which will encourage efficiency in the resolution of rehabilitation and insolvency cases and balance the competing rights of creditors and debtors. It will include a “first” in insolvency proceedings by including provisions governing out-of-court rehabilitation, which will become effective without court intervention in an effort to speed up the recovery of financially distressed companies.
Collective Investment Schemes Law
Another archaic law in our statute books is the Investment Company Act, which is almost 50 years old. This law is proposed to be revised by Senate Bill No. 1181, otherwise known as the Collective Investments Schemes Law (CISL). The CISL aims to establish a comprehensive regulatory framework for collective investment schemes in line with best international practices.
The bill will not only govern open-ended and close-ended investment companies, but will cover all such other collective investment schemes/vehicles like unit investment trust funds and other similar indirect or collective investment schemes/vehicles which solicit funds from the investing public for the purpose of investing, re-investing and/or trading in securities or other assets. The bill also proposes to eliminate existing differences in regulatory and tax treatment of different investment products regardless of the issuer like banks, insurance companies and ordinary investment companies.
Documentary Stamp Tax Law
The latest capital market-related law is Senate Bill No. 2497, which proposes a permanent exemption from the documentary stamp tax (DST) for the sale, barter or exchange of shares of stock listed and traded through the local stock exchange. The current exemption is time-bound and will expire in March 2009. This proposed law seeks to eliminate added friction costs of investing in the Philippine stock market, which already ranks among the highest in the region due to the relatively high stock transaction tax. The abolition of the DST for transactions involving shares of stock listed and traded through the local stock exchange will benefit the Philippine capital market in the short and long-term, given that the trend across stock markets is to lower friction costs in order to compete globally against other markets.
The Philippine Stock Exchange is spearheading work on the foregoing bills in the firm belief that they are essential to putting in place an enabling environment for the development of a robust and vibrant stock market.
(The author wishes to thank Atty. Jay Banaag, Deputy General Counsel of the Philippine Stock Exchange, for putting together the materials for this article.)
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