A couple of months before the much-anticipated Capital Markets Efficiency Promotion Act (CMEPA) took effect, my friend Carmen got in touch about a five-year-plus-one placement offered by a publicly listed universal bank, promising a pretty good yield.

Considering and understanding that transaction tax changes were imminent this month, my suggestion, based on advice from bank treasurers, was to subscribe to the offered placement.

Yes, Virginia, one of CMEPA's provisions that, to my mind, will significantly impact medium-term placements—five years and up—is the removal of the tax exemption on certain types of fixed-income securities.

Prior to CMEPA taking effect, certain government securities (GS) and bank-issued bonds with tenors of five years plus one were considered tax-exempt. Now, there will be a uniform 20 percent withholding tax across all interest-bearing securities.

This is precisely where Carmen's May placement, if she accepted the offer, makes a significant difference, as CMEPA is not applicable to previously issued bonds/GS or time deposits of five years plus with a tax-exempt feature.

That's right, Virginia! This provision is only applicable to prospective issues/placements from July 1st onwards. Market players and market makers had already informed their respective clients about CMEPA's impact on the yield of their five-year-plus-one placements as early as February this year.

Let's break this down for more clarity. GS, which to me is the most acceptable investment because it’s risk-free, with a tenor of five years plus one, typically yield six percent gross.

With the removal of their tax-exempt feature, the yield to investors will drop to 4.8 percent due to the imposition of the 20 percent withholding tax. Previously, a ₱10 million tax-free placement at a five percent interest rate would give the holder ₱125,000 in interest yield per quarter.

All things considered and under the current CMEPA environment, I believe any corporations issuing investment bonds should offer a yield better than risk-free GS to attract investors.

Another salient provision in the newly enforced law is the five percent increase in taxation on foreign currency-denominated deposits (FCDU), raising it to 20 percent from the previous 15 percent. This will be imposed on all new placements, including rollovers, with the bank counterparty responsible for withholding the taxes.

This will influence or impact the FCDU level of banks, which, based on the latest Bangko Sentral ng Pilipinas (BSP) data, went up to an all-time high of $58.92 billion as of the first quarter of the year. Meanwhile, outstanding FCDU loans dropped by 0.2 percent to $15.78 billion, representing a 1.8 percent dip year-on-year.

Regarding the Stock Transaction Tax, CMEPA lowers the tax on equities sale transactions to 0.1 percent from the previous 0.6 percent, which was described as the highest in the region.

The lowering covers all sell transactions for equities—common, preferred, and REITs. And, it effectively translates to higher net sales proceeds for both you and me.

I'm curious, however, about the change in the taxation of shares of stocks listed and traded through foreign stock exchanges, which will now be subject to the STT. Previously, earnings from such transactions were either subject to regular income tax or capital gains tax. Under CMEPA, the sale of foreign-listed shares will be slapped with 0.10 percent.

First Metro Securities Brokerage Vice President and Head of Business Development & Market Education Department, Andro Leo Andoy Beltran, refers to it as friction cost.

He does admit, though, that a careful study needs to be undertaken to determine the impact of this friction cost on local companies aspiring to enlist in the foreign exchange market.

A case in point here is the shares of Hotel101 Global Pte. Ltd., a subsidiary of Double Dragon Corp. chaired by Edgar Injap Sia II, which was listed and is now traded at the Nasdaq Stock Exchange. The Nasdaq debut was historic and a milestone, but will the friction cost be a deterrent for other local firms to follow Hotel101?

All things considered, it's too early to tell how CMEPA will reshape and influence the country's new investment environment. Meanwhile, happy Fourth of July.