The Philippines plans to change the way it prices local-currency bonds by removing the impact of withholding tax, a shift that may saddle some existing investors in the nation’s $230 billion market with losses, according to people familiar with the matter.
The overhaul will be done in two stages, with the first expected by the end of the year, said the people who asked not to be identified because they are not authorized to speak publicly on the matter. Authorities will initially stop including the tax effects of bond premiums and discounts. They will then change how tax is collected on accrued interest so it is no longer withheld when the security is sold.
At present, bond prices in the Philippines include a 20% withholding tax because the levy is collected at settlement. The government wants to exclude that tax from bond pricing to bring the market in line with global standards, the people said.
“We have to be aligned with global standards,” said Robert Ramos, president of the Trust Officers Association of the Philippines, adding the goal is to boost the nation’s competitiveness for local and foreign investors.
The Philippines has been working on the changes as JPMorgan Chase & Co. prepares to add the nation’s local-currency debt to its widely followed emerging-market bond index early next year. The reforms are expected to help improve market liquidity and make it easier for overseas investors to access the debt market.
Still, the change may leave some investors with losses — if they don’t hold their bonds to maturity — because securities bought under the current pricing system will be priced differently under the new one, the people said. Some bankers worry the shift could lead to legal complaints from those who suffer losses after the new convention takes effect, they said.
Investors who hold bonds until maturity will not be affected because the contractual cash flows will remain unchanged.
The Philippines had about P14.1 trillion ($230 billion) of outstanding local-currency bonds at the end of March, according to the Asian Development Bank’s latest Asia Bond Monitor. The reform excludes treasury bills and central bank bills.
