In order to attain civilization, mankind created laws to define the limits of what can and cannot be done. These rules provide guidelines on what one can or cannot do in maintaining an ideal state of order. However, now and then, the rules created beyond the authority of our leaders become the very cause of disorder in our society. Thankfully, a mechanism on judicial review is in place to provide that much-needed check when such things occur.
Take for example the recently promulgated Philippine Stock Exchange, Inc. v. Secretary of Finance decision by the Supreme Court, which declared Revenue Regulations (RR) 1-2014, Revenue Memorandum Circular (RMC) 5-2014, and SEC Memorandum Circular (MC) 10-2014 void for being unconstitutional.
RR 1-2014, prohibits, among others, the lumping or grouping together of payees into one account such as “various payees”, “PCD nominees”, or “others” in alphalists that are required to be attached to the Annual and Monthly Information Returns, since including any alphalist that does not conform with the prescribed format will result in the unsuccessful upload into the Bureau of Internal Revenue (BIR) system. Correspondingly, such alphalist will be deemed as not received and the income payments appearing in the alphalist shall not qualify as a deductible expense for income tax purposes.
On the other hand, RMC 5-2014 requires, among others, withholding agents to indicate the tax identification numbers (TINs), the complete name of payees, the amount of income, and the tax withheld from the payees.
Meanwhile, SEC MC 10-2014 was issued by the Securities and Exchange Commission to echo the above BIR issuances and compelled the Philippine Depository and Trust Corporation (PDTC) and broker-dealers to provide the listed companies or their transfer agents an alphalist of all depository account holders and the total shareholdings in each of the accounts and sub-accounts.
The above issuances from the BIR and the SEC posed a challenge to stakeholders of the scripless or uncertificated system of stock trading, wherein a security intermediary, such as the PCD nominee, is considered by the listed company as the registered stockholder for the shares of stocks lodged by the brokers and dealers with the PDTC. Consequently, the PCD nominee is the payee of the dividends and is the entity listed in the alphalist. The PCD nominee then forwards the net dividend payments to the brokers, who in turn distribute it to their investor clients.
The petitioners challenged the issuances for establishing vague requirements, and that the implementation of the same would place the listed companies and broker-dealers in a predicament as to who should be identified as the payee of dividend payments due on uncertified shares in the alphalist of the listed company concerned. As such appellants filed a petition before the SC to declare the abovementioned issuances void for having been issued in violation of their constitutional rights.
In striking down RR 1-2014, RMC 5-2014, and SEC MC 10-2014, the SC pointed out that government agencies, such as the Department of Finance (DOF), the BIR and the SEC, should have promulgated the contested issuance without violating the constitutional rights to due process and the right to privacy of the investors affected. In this regard, the SC ruled that the SEC Chairperson had no authority to issue SEC MC 10-2014 since the SEC cannot enforce tax laws and regulations. In issuing the circular, the SEC delved into matters beyond its mandate, and that it should only exercise its rule-making powers to implement the Securities Regulation Code (src), and other related corporate laws.
On a similar note, the SC also held that the DOF Secretary and the BIR Commissioner acted outside their scope of authority in including the prohibition on the use of “PCD nominee” in RR 1-2014 and RMC 5-2014. The use of uncertified shares, which resulted in the designation of PCD nominees, is allowed by the src, and the law does not particularly provide that the designation of securities intermediaries and PCD nominees is not allowed for tax purposes. By virtue of such revenue issuances, the DOF and BIR effectively prohibited the use of something that is otherwise allowed by the law.
Finally, in granting the petition to render the questioned issuances unconstitutional, the SC noted that it acknowledges the trend toward disclosure of beneficial ownership information. However, it cannot be done without careful and proper adjustments in policy and legislation on taxation, which must be in compliance with the Constitution, laws, and jurisprudence.
A civilized society is built by order and maintained by laws and rules that keep the relevant stakeholders in place and in check. We have not yet seen the last of our society’s struggle towards regulations, but that only means there is still a promise of growth for all of us.
Arik Aaron C. Abu is a manager from the tax group of KPMG in the Philippines (R.G. Manabat & Co.), a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The firm has been recognized as a Tier 1 in transfer pricing practice and general corporate tax practice by the International Tax Review. For more information, you may reach out to tax manager Arik Aaron C. Abu or tax principal Kathleen L. Saga through ph-kpmgmla@kpmg.com, social media, or visit www.home.kpmg/ph.
This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity. The views and opinions expressed herein are those of the author and do not necessarily represent KPMG International or KPMG in the Philippines.