I previously discussed how the US taxes dividends and interest income of non-resident aliens investing in the US stock market. In summary, 15% tax is withheld from interest income, 25% tax is withheld from dividend income, while no taxes are withheld from capital gains.
(NOTE: Check out the post – More questions on Philippine taxation of foreign capital gains and dividends – for my most recent thoughts on this topic.)
But how does the Bureau of Internal Revenue (BIR) in the Philippines tax these types of income? The short answer is: It’s not clear. The long answer is as follows:
Remember that for domestic stock market transactions, the BIR taxes the gross stock sales amount at a 0.6% rate rather than taxing the actual net capital gain. This lack of capital gains taxation on stock market transactions renders the concept of tax-loss harvesting irrelevant in the Philippine setting. On the other hand, dividend income is taxed at 10% while interest income is taxed at 20%.
What type of capital gains does the BIR actually tax? If you look at BIR’s page on capital gains tax, it applies this tax to transfer of real property and to transfer of shares of domestic corporations not listed in the stock market. For real property transfers, the so-called capital gains tax is 6% of the gross selling price. It is practically a sales tax so I believe the use of the term capital gains tax is misguided and only serves to confuse. On the other hand, for the transfer of shares of domestic corporations not listed in the stock market, the actual net capital gains are taxed at a rate of 15%. Losses can be used to offset gains to arrive at the taxable net capital gains. It does not say whether there is a tax benefit to having a net capital loss.
Would a 15% rate also be applicable to foreign capital gains, being that they are gains from stocks not listed in the local stock market. I would have thought so, but the rate only explicitly applies to domestic corporations.
Since there is no explicitly stated tax rate on foreign capital gains, some are saying that this income would then fall into the catch-all category of “non-business/non-profession income” which are then taxed like regular income based on a graduated tax rate table:
|Taxable Income||Marginal Rate|
|PHP 0 to 250,000||0%|
|PHP 250,000 to 400,000||20%|
|PHP 400,000 to 800,000||25%|
|PHP 800,000 to 2,000,000||30%|
|PHP 2,000,000 to 8,000,000||32%|
What about interest and dividend income from the US? Will they also be taxed in the same way?
I was also thinking about this in the context of locally available UITF feeder funds that invest in ETFs in the U.S. Are redemptions from these funds already net of taxes? Or are they still subject to the graduated tax table? If they are net of taxes, did the feeder fund pay a flat tax rate on capital gains? What rate did it use? I’ll write up a separate and more detailed post on these funds. As you can see, there are so many questions left hanging. In the end, as I said, the answer to the title of this post is: it’s not clear.