Every once in a while, a friend asks me about investing in foreign stocks. Which stockbroker do you use? How do you send money? Is it hard to open a dollar account?
A couple of weeks ago, my friend Gilbert (not his real name) asked me these very questions.
“Recommended stockbroker?” Many people like Interactive Brokers.
“How do I send money?” You can wire transfer from a local dollar bank account.
“How about opening a dollar account?” It's similar to opening any other bank account. Your preferred bank branch can probably help you with that.
Curious about his plans, I asked him a couple of questions of my own.
“Where are you thinking of putting the money?”
Gilbert heard that the Vanguard S&P 500 ETF, commonly known as “VOO, was a great long-term investment. He'd learned about it from a YouTube financial influencer and wanted to invest in it for his retirement.
“Have you tried looking at local stocks?”
Gilbert wasn't interested. He was under the impression that Philippine stocks are far more volatile and unsafe compared to international stocks.
This was a shame, in my opinion. I tried to convince him that our local markets can be very promising for the average Filipino investor, but I couldn't sway him. He ended up putting all his money in foreign stocks.
I've found that most of my friends think foreign stocks—particularly American ones—are always superior to Filipino stocks. Most investment news revolves around international stocks like GameStop and Tesla. You're more likely to hear about them on social media like TikTok, YouTube, and Reddit than companies on the Philippine Stock Exchange.
However, investing in the Philippine stock market has its perks. Aside from having great local companies like Jollibee, Metrobank, and Meralco, the Philippine Stock Exchange has one significant advantage that Filipinos cannot ignore: transactions are taxed at just 0.6 percent of the transaction value.
This contrasts with how foreign capital gains are usually taxed. According to accountants I've consulted, the most common method is to treat foreign capital gains as part of your income tax in the Philippines. (This is a gray area in the tax code, so make sure to get professional tax advice for your situation.)
For example, let's say you invested P100 in CNVRG—one of the hottest Filipino stocks of the year. So far, in 2024, the stock has gone up by around 100 percent. This means that your P100 investment would have turned into around P200. Let's say you sold your CNVRG stock at that price.
If we pretend that CNVRG is a foreign investment and assume you'll be charged 15 percent income tax, you'll be taxed 15 percent on the P100 gain, for an income tax of around P15.
As an investment on the Philippine Stock Exchange, you will only be taxed 0.6 percent of the total P200 selling price. This amounts to a sales tax of around P1.2.
This means that even if you expect a foreign investment to grow faster, you will have a larger tax hurdle to overcome before matching the gains you would have gotten in a Philippine Stock Exchange investment.
Even if famous stocks like Apple, Microsoft, and Google end up growing faster than our local stocks, their growth will need to be significant to offset the higher taxes relative to our local stock market. There are cases where investing in the Philippine Stock Exchange can be advantageous due to our lower taxes.
While the idea of investing abroad may be appealing, as Filipinos, we also enjoy some great benefits from investing locally. Don't discount our local stock market—you just might find local stocks a great addition to your portfolio due to the tax advantages we enjoy.
Disclaimer: The information in this article is for informational purposes only and should not be considered tax advice. Please consult a tax professional for personalized guidance regarding your specific tax situation.
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Keith Lim writes about personal finance and making money through the stock market. He blogs at keithblim.com.