DOF allays fears of capital flight due to dividend disclosure

MANILA, Philippines - The Department of Finance has debunked claims made by the local banking and securities industry that a controversial ruling requiring the disclosure of recipients of dividend income would trigger capital flight from the country.

Finance Secretary Cesar Purisima noted the robust stock market and steady inflow of foreign portfolio investments despite the issuance by the Bureau of Internal Revenue (BIR) of various regulations requiring the submission of an alphabetical list of investors receiving income payments and dividends.

Purisima cited figures from the Philippine Stock Exchange itself which ran contrary to the assumptions of capital market and banking institutions.

“Ten months since the amendment took effect, relevant indicators show that the regulation has produced none of the negative effects feared by investors. In fact, the Philippine Stock Exchange is maintaining its all-time high; the monthly inflow of foreign portfolio investments has surpassed outflow since April this year; and foreign trading in the PSE has increased as a share of total trading over the past few months. The facts simply do not support the undue fears being raised,” Purisima said.

While the Philippine Stock Exchange Index (PSEi) closed 0.18 percent or 12.58 points lower at 7,103.55 Friday, it continues to outperform most of its Asian counterparts given its strong macroeconomic fundamentals and improving fiscal position.

“This comes even on the back of the United States ending its quantitative easing stimulus program and speculations that the US Federal Reserve will be raising interest rates,” Purisima said.

Purisima likewise noted the new record set by the PSEi last Sept. 8 when it reached 7,314.94.

Monthly net foreign portfolio investments, which account for securities and other financial assets passively held by foreign investors, have been positive since April, registering $489.5 million net inflows in August alone, up by more than 200 percent year-on-year, Purisima said.

Latest figures showed that the share of foreign trades to total stock transactions expanded to 51.09 percent last August from only 49.82 percent in the same month last year.

“Notably, the PSEi performance has held strongly, reflecting highly positive investor sentiment, despite recent tightening moves by the Bangko Sentral ng Pilipinas,” Purisima said.

“Clearly, all these indicators do not demonstrate capital flight. The Department of Finance remains committed to develop the Philippine capital markets. Thus, the new regulation results to transparency in the market, which redounds to creating an atmosphere of trust among stakeholders,” he added.

Securities and Exchange Commission chairperson Teresita Herbosa, for her part, stressed how the new regulation facilitates a transparent and professional market.

Herbosa also explained that no privacy rights of the investors are compromised since tax-paying investors have all along provided the information sought in the said BIR Revenue Regulation.

“Only investors seeking to avoid taxes need to be concerned. As Philippine markets are getting more attractive, such regulations only serve to protect our investors. There is no reason for investors to leave an increasingly attractive market that seeks to be more transparent,” the SEC chief said.

The implementation of the hotly contested regulation is subject of a restraining order (TRO) issued by the Supreme Court.

The TRO was in response to the petition filed by the Philippine Stock Exchange, the Bankers Association of the Philippines, the Philippine Association of Securities Brokers and Dealers, the Fund Management Association of the Philippines, the Trust Officers Association of the Philippines and Marmon Holdings, Inc.

The business groups have maintained that the new regulation would discourage portfolio inflow and likely deal a setback to the Philippine capital market’s growth trajectory.

The Office of the Solicitor General (OSG) argued that the submission of the alpha list has always been a requirement under the National Internal Revenue Code (NIRC) since the time of manual alphabetical listing.

It cited Sec. 245 (i) of the NIRC, which specifically mandates the Commissioner of Internal Revenue to specify, prescribe or define “the manner in which tax returns, information and reports shall be prepared and reported and the tax collected and paid, as well as the conditions under which evidence of payment shall be furnished the taxpayer, and the preparation and publication of tax statistics.”

The OSG pointed out that the mere fact that companies were already complying with the said regulations prior to the issuance of the TRO shows that the petitioners’ concerns were unwarranted and even unrepresentative of the majority of the market players.

Government lawyers also argued that the questioned regulations are in preparation for the on-going Asia Pacific Economic Cooperation (APEC) Asia Region Funds Passport (ARFP), which will be launched in 2015, with more and more jurisdictions implementing stricter rules on disclosure to ensure transparency on the heels of the financial crisis half a decade ago.

These requirements are also the government’s response to corporate governance advocates espousing disclosure of shareholdings as key to preventing future financial crises and as part of a global trend towards transparency and good corporate governance, the OSG said.