Abolish Documentary Stamp Tax
Posted by butalidnl on 14 November 2010
The Philippine government collects a Documentary Stamp Tax on a wide range of documents, from sales receipts to checks, to transfer of stocks, land and other assets, etc. While the percentage of the tax is small – usually about 1% of the value of the transaction, it is in fact a heavy burden in terms of running a business.
The Documentary Stamp Tax includes taxes on things like:
- certificates of indebtedness – 0.75%
- issuance of shares of stocks – 1%
- sales of stocks or obligations – 0.75%
- bank checks and drafts – Php 1,50 per check/draft
- foreign bills of exchange or letters of credit – 0.15%
- life insurance policies – 0.25%
- property insurance premiums – 12.5%
- pre-need plans – 0.10%
- warehouse receipts – Php 15/receipt
- jai alai, lotto, or lottery tickets – 10%
- bills of lading – Php 15/bill of lading
- sale of land – 1.5%
The Documentary Stamp Tax is also collected in other (primarily English-speaking) countries but they are mostly limited to the transfer of land and stocks. It seems that it is only the Philippines which has such a wide range of application of the Documentary Stamp Tax. Also, the countries which have a Documentary Stamp Tax are on the way to phasing it out. It is, in reality, an archaic tax that was invented in the days when business was done in a more leisurely pace. When the time taken to pay a tax on documents did not matter much in terms of the speed in which a transaction is made.
Impediment to Business
Much more than being a burden in financial terms, the documentary stamp tax is a burden in the sense that it slows down the way Filipinos do business. If you have to pay a tax for every check you issue and every receipt you make, for every stock you or sell, etc., you loose precious time in each transaction, and this would mean a lot eventually in terms of the profitability of business. In fact, you even stand to lose business. Some Philippine stocks could be bought or sold in other stock exchanges, and insurance could be bought in other countries. In these cases, the concerned businesses will simply do these transactions elsewhere. But we also have to take into account the sheer amount of time and effort it takes to administer such a small tax.
The documentary stamp tax is an additional step that needs to be taken when registering a business, and is also means that the business needs to pay that tax a number of times during the year. This slows down the business process, and these are factors that contributed to the Philippines ranking only Nr 144 (out of 183 countries, which I think is quite low) in the survey on the “Ease of Doing Business in 2010”. Philippine businesses are shackled by the fact that they have to devote time and money to paying the Documentary Stamp Tax, and this lessens their efficiency, at a time when competition has grown more global. Take note that we are the only country that charges Documentary Stamp Tax for all business receipts, for every Bill of Lading, and for every check written. No wonder that we are not that competitive in the world – the additional paperwork needed alone increases the time needed for business transactions.
In addition to the paperwork, the Documentary Stamp Tax makes payments by check or bank transfer more expensive than cash payments (from the customer’s point of view). This skews the payment pattern towards cash payments. In developed economies, they try to make it cheaper and more convenient to avoid paying cash, and thus bank charges and taxes for checks and bank transfers are minimal or nonexistent.
The documentary stamp tax also lengthens the time needed to process the sale and transfer of land; and this means that that market is also not operating as efficiently as it should.
Abolish the Tax
I think that the government should simply abolish the tax. If they worry about the loss of tax revenue, I think it will be entirely possible to simply increase related taxes like the corporate tax or property taxes by something like 1%. You will then end up with having less number of taxes, but the same amount of income. The Documentary Stamp Tax itself does not raise a lot of money for the government – perhaps less than Php 3 billion (something like Euro 60 million) a year, but it takes up a lot of time to administer, both by businesses and by the tax authorities.
I think that it is entirely possible that a large part of Documentary Stamp Tax due today is simply not paid by companies. And this is rather difficult for the government to collect, especially in the case of receipts or checks. So, integrating the Documentary Stamp Tax with the corporate tax will not only simplify the administration, it may also raise tax collections.