8 banks oppose bond tax

Eight banks have asked the Supreme Court to stop the government from imposing and collecting a 20-percent final withholding tax on P35 billion worth of PEACe Bonds due today.

Banco de Oro Unibank Inc., Metropolitan Bank and Trust Co., Bank of Commerce, China Banking Corp., Philippine Bank of Communications, Philippine National Bank, Philippine Veterans Bank and Planters Development Bank sought a temporary restraining order and a subsequent injunction against the Bureau of Internal Revenue and the Bureau of the Treasury.

The government expects to collect almost P5 billion in taxes from the bonds.

BIR Commissioner Kim Henares said the government was ready to defend its position if the banks sought legal remedies.

She told representatives of the Bankers Association of the Philippines on a meeting Monday that imposing the final withholding tax on the PEACe bonds was government’s legal position.

“If they want to take us to court, that’s fine. It’s their right. But at the end of the day, this is what we believe is the right legal position. As far as the BIR is concerned, we have to collect the 20-percent withholding tax on the interest income,” said Henares in a press conference.

Rizal Commercial Banking Corp. also filed a case before the Court of Tax Appeals “questioning the legality and propriety” of a BIR ruling that confirmed the 20-percent final withholding tax was applicable to the PEACe bonds.

Neither the BIR nor the Finance Department has received a copy of the RCBC’s request as of press time.

The Treasury issued the PEACe Bonds, also known as “Poverty Eradication and Alleviation Certificates,” in 2001 for P10 billion. The 10-year debt paper is falling due and the government is required to pay the bondholders the total face value of P35 billion on Oct. 18.

Henares said the BIR’s ruling for the Treasury to withhold the final tax due on interest income from the PEACe bonds prior could not be interpreted as a breach of contract.

The Treasury still pays the full face value of the PEACe Bonds to the investors, although subject to its legal obligation to withhold the 20-percent final tax.

The Treasury said it was is merely applying the provisions of the Tax Code on the taxation of interest income from deposit substitutes.

The Finance Department also clarified that government securities dealers were informed by the Treasury about the income tax when the bonds where issued.

However, at the time of the issuance of the PEACe Bonds, the Treasury relied on an earlier BIR ruling, which erroneously stated that the debt was not considered deposit substitutes and not subject to 20-percent final withholding tax if issued to 19 lenders or less. –Elaine R. Alanguilan with Bloomberg