The paper seeks to examine the performance of the IPO tax and its impact on the decision of companies to go public.
IPOs are considered to be the lifeblood of any expanding and developing stock market. However, these have not yet contributed much to the growth and development of the country’s local stock exchange. Philippine Stock Exchange (PSE) insiders believed that the tax imposed on the sale of shares of stock through IPO discourages many companies to go public. Consequently, the growth and development of the capital market is adversely affected. However, the unimpressive performance of the capital market or stock exchange at present cannot be solely attributed to the IPO tax. There are other factors like peso depreciation, continuing political and economic problems which serve to discourage investors to invest in the Philippine domestic market.
Based on a study conducted on the matter, there is no direct relationship between the decision of companies to go public and the imposition of the IPO tax. In fact, the enactment of RA 8424 that led to the lowering of the IPO tax base did not, in any way, entice companies to go public. It is to be noted that any stock exchange in the world is susceptible to a number of internal and external factors that affect its performance as well as the confidence of investors. The prevailing price of the shares of stock in the market, the economic and political conditions of the country, the availability of cash reserves and the readiness of a company to go public, among others, are equally important considerations in venturing into IPOs. There is not one ingredient that can solve all of the problems besetting the PSE. Elimination of the IPO tax at the moment is seen to be impractical and irrational as this would not only affect the revenue effort of the government but may also bring back the old practice of company owners engaging in IPOs even if they will only offer a minimal portion of their shares of stock to the public just to escape the payment of the CGT, which is a much higher tax than the IPO tax. If the IPO tax is used in conjunction with other policy mechanisms (e.g., banning of short selling and insider trading, etc.), the concerns of insiders would, thus, be minimized. This in turn would lead to the growth and development of the country’s stock market.
In order to fully maximize the collection of the IPO tax, the following suggestions may be considered:
a. The PSE should not only keep track of issuing companies in primary offerings but also of sellers in secondary offerings and coordinate with the BIR in this regard in order for the latter to enhance its monitoring of the IPO tax;
b. The PSE, in coordination with implementing agencies like the National Telecommunications Commission (NTC), Board of Investment (BOI) and the Department of Energy (DOE) should enjoin profitable companies registered with them to go public, particularly companies mandated by specific laws to offer a percentage of their stocks to the public, not only to increase collection of the IPO tax but also to improve the supply side of the market with a more diverse menu of stocks available to the public; and
c. A review of the IPO requirements should be made to make the same simpler and less tedious for participating IPO companies including the simplification of the disclosure process. The simplification of the listing criteria for the IPO should also be carefully studied to make the listing process more investor-friendly without sacrificing public interest/welfare and to further encourage public participation. There is also a need to re-examine other factors that effect the interest of potential IPO traders by closely monitoring trading practices in the exchange and in foreign counterpart exchanges to boost the growth and development of the Philippine stock market and make it globally competitive.
Elimination of the IPO tax at the moment is seen to be impractical and irrational as this would not only affect the revenue effort of the government but may also bring back the old practice of company owners engaging in IPOs even if they will only offer a minimal portion of their shares of stock to the public just to escape the payment of the CGT, which is a much higher tax than the IPO tax. If the IPO tax is used in conjunction with other policy mechanisms, the concerns of insiders would, thus, be minimized. This in turn would lead to the growth and development of the country’s stock market.
