• Transparency of beneficial ownership



    The Securities and Exchange Commission (SEC) is not backing down. In a statement issued by SEC Chairman Teresita Herbosa, it was made clear that the Commission is standing firm on its position requiring securities brokers and dealers to disclose the beneficial owners of shares for purposes of determining compliance with the foreign ownership limits in partly nationalized industries, and deter money-laundering activities.

    It isn’t alone in this position.

    Recall that in 2014, the Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) No. 1-14, which required taxpayers submitting their alphalist to specify the name of taxpayer/s or payee/s. Thus, for this purpose, it prohibited the lumping of income payments and taxes withheld under account such as “various employees”, “various payees”, “Philippine Central Depository (PCD) nominees”, “others” etc., into a single amount.

    In case a taxpayer violates RR 1-14, Revenue Memorandum Circular (RMC) No. 5-14 clarified that the taxpayer is liable to criminal penalty of a fine not less than P10,000 and imprisonment of not less than one year but not more than 10 years, or in lieu thereof, the taxpayer will have to pay the compromise penalty in the amount that corresponds to the taxpayer’s gross annual sales, earnings or receipts, under the updated Schedule of Compromise Penalties. Moreover, remember that income payments, which are otherwise deductible under the Tax Code, shall be allowed as a deduction from the gross income only if the income tax required to be withheld has been paid to the BIR in accordance with the Tax Code.

    For its part, the SEC says it has the authority to require every exchange, clearing agency, broker dealer, transfer agent, other self-regulatory organizations or persons required to register under the Securities Regulation Code (SRC) to submit the names of owners or stockholders.

    Backing the BIR issuance, SEC Memorandum Circular No. 10-14 was published, mandating the Philippine Depository and Trust Corporation (PDTC) to prepare an alphalist of all depository account holders and their total shareholdings upon dividend declaration.

    With regard to these issuances of the BIR and the SEC on the disclosure of PCD Nominees, the Supreme Court (SC), through GR No. 213860 dated September 9, 2014, issued a Temporary Restraining Order (TRO) against BIR Commissioner Kim Henares, Finance Secretary Cesar Purisima and SEC Chair Herbosa following the en banc session. The Court believes that disclosing the identity of the beneficial owners of shares goes against the confidentiality agreement between the securities brokers and their investors.

    Moreover, in requiring listed companies and broker dealers other than PCD nominees to disclose the payee of the dividend payments, the disputed issuances run contrary to the stated policies under the SRC, the Tax Code, and the Data Privacy Act. It is worth mentioning that Section 43.1 of the SRC expressly states that listed corporations may issue shares to, or record the transfer of some or all of its shares into, the name of shareholders, investors, or securities intermediaries in the form of uncertificated securities.

    As a swift action by the tax office, RMC No. 73-14 was released on September 12, 2014, three days after the release of the said TRO. The RMC specifically aimed to clarify the withholding tax rates on dividend payments to PCD nominees. According to the rules, in the case of Filipino beneficial owners, the final withholding tax rate applicable is 10 percent pursuant to Section 24 (B) (2) of the Tax Code.

    In the case of foreign equity investors, unless proven satisfactorily that they are resident aliens, non-resident aliens whether or not engaged in trade or business in the Philippines, or resident foreign corporations, the income shall be deemed received by a non-resident foreign corporation subject to a final withholding tax of 30 percent as imposed in compliance with Section 28 (B) (1) of the Tax Code.

    The complication here now rests on the latter rule.

    In order to prove that the income recipient is entitled to lower or preferential tax rate, the income recipient has to establish that he is indeed a resident alien or a corporation, or a non-resident alien engaged or not engaged in trade or business in the Philippines, which would require presentation of information and documents such as Articles of Incorporation, Certificate of Non-Registration with the SEC, Certificate of Residency, etc. Evidently, these will reveal the identity of the income recipients.

    Under the current situation, dealers/brokers are obliged to divulge the names of the beneficial owners, particularly non-resident investors, to avail of the preferential tax rate benefits under the tax treaty. Meanwhile, others who value their privacy more than the lower tax rate can opt to pay higher withholding tax applicable to non-resident foreign corporations, i.e. 30 percent, to avoid divulging their names.

    Despite the TRO challenging the issuances of both the BIR and the SEC, noncompliance on the part of taxpayers will likely result in a penalty and/or higher withholding tax rates on dividends. Even with the TRO against the BIR and the SEC’s memorandum for disclosure of names of beneficial owners of shares, the BIR still managed to circumvent the decision of the SC. Hence, the BIR and the SEC can still secure the information they demand (i.e., the names of beneficial owners) through RMC 73-14.

    With regard to the disclosure requirement, taxpayers who continue to use “PCD nominee” as a collective name for beneficial owner of shares in their alphalists cannot be penalized on account of the TRO issued by the SC in 2014. To date, said TRO has not been lifted.

    So, what are the implications of these issuances to the brokers/dealer, shareholders/investors? On a practical level, mapping the hierarchy from the shareholders to the ultimate beneficial owners will require considerable time, involving a long list of names. Thus, strict compliance with the disclosure of PCD nominees in the alphalist may be troublesome for stock dealers/brokers. This may also pose issues of confidentiality especially to foreign investors who do not wish to expose their identities to the public. Ultimately, this may discourage foreign investors from assigning their investments to the Philippines.

    The author is an Assistant Manager with the Tax & Corporate Services division of Navarro Amper & Co., the local member firm of Deloitte Southeast Asia Ltd., a member firm of Deloitte Touche Tohmatsu Limited comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.


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