Banks buck tax on PEACe bonds

Govt wants P5 billion as certificates mature today

THIS is one anniversary that parties to issuance of controversial bonds ten years ago would rather not offer a toast to, even the buyers of the certificates who made a windfall from the purchase.

Among the buyers were banks that on Monday asked the Supreme Court (SC) to restrain the government from imposing a 20-percent withholding tax on P35 billion in so-called PEACe (Poverty Eradication and Alleviation Certificates) bonds, which were pushed in 2001 by then-President Gloria Arroyo and then-Secretary Corazon Soliman of the Department of Social Welfare and Development (DSWD).

The PEACe bonds will mature today.

To stop the Aquino administration from collecting the estimated P5-billion withholding tax, eight banks—Banco de Oro, Bank of Commerce, China Banking Corp., Metropolitan Bank and
Trust Co., Philippine Bank of Communications, Philippine National Bank, Philippine Veterans Bank and Planters Development Bank—filed a 65-page petition for certiorari and prohibition and/or mandamus.

The banks sought the High Tribunal’s help in enjoining the government, particularly the Bureau of Internal Revenue and the Bureau of Treasury (BTr), from implementing BIR Ruling 370-2011, which imposed the 20-percent withholding tax.

They said that BIR Ruling 370-2011, through which the tax would be collected, was prohibited under the 1997 Tax Code “for being extremely prejudicial to the bond holders, including petitioners, who relied in good faith on the BIR declaration that the bonds are exempt from final tax.”

Payment set

The government, through the Treasury bureau, is set to pay bond holders P35 billion, including P24.3 billion in interest income or discount from which the government wants to collect P4.86 billion.

Code-NGO (Caucus of Development NGO Networks (Code-NGO), through the Rizal Commercial Banking Corp., first bought the bonds on October 16, 2001 at the discounted rate of P10.17 billion at 12.75-percent interest.

The Aquino administration was expecting to get about P4.83 billion in tax from the mature bonds.

Upon assumption of the Arroyo administration in 2001, the BTr offered government bonds to government securities eligible dealers, or GSED, through an auction.

The Rizal Commercial Banking Corp. won the bid and was awarded P35-billion worth of government bonds for P10.17 billion at 12.75 percent.

The bank, in turn, sold the bonds in the secondary markets for P11.9 billion.

Rizal Commercial Banking Corp. and other petitioners had bought the certificates, supposedly aware of memorandums from the BIR that the PEACe bonds shall be subject to the 20-percent withholding tax.

They, however, said that the recent BIR ruling, violated their constitutional rights.

“Such unilateral imposition of the 20-percent final withholding tax on the interest/discount realized on the government bonds only on the eve of its maturity with nary any prior consultation with the petitioners and other bondholders also amounts to confiscation of the petitioners’ property without due process,” it was pointed out.

The banks argued that deep and liquid capital markets are “the essential building blocks” for each country’s economy, supplying the funds for economic growth and job creation.

Face value

But, they said, the “threatened refusal of the government to pay the full face value of the government bonds… “adversely affects (investors’) perception of the Philippines as an investment destination.”

According to VERA Files put out by veteran journalists, it is unclear how the government will get the withholding tax it is seeking because the bonds are “no longer in the possession” of Code-NGO.

On the same day that the group once headed by Soliman, now the Social Welfare secretary of President Benigno Aquino 3rd, bought the bonds from the Treasury bureau, VERA Files, said, Code-NGO sold them, making a P1.83-billion profit.

The PEACe bonds, in turn, were “resold, mostly to banks and insurance companies.”

The BIR and the Department of Finance (DOF) also on Monday said that they did not breach any contract regarding BIR Ruling 370-2011, which confirmed that the 20-percent final withholding tax was applicable to the PEACe bonds.

In a joint statement, they clarified that the BIR’s determination that the Treasury bureau “shall withhold the final tax due on interest income from the PEACe bonds before its payment on the date of maturity” cannot be interpreted as a breach of contract.

The DOF and BIR were referring to reports that the Rizal Commercial Banking Corp. has filed a case before the Court of Tax Appeals questioning the legality and propriety of BIR Ruling 370-2011.

They, however, said that they had not received a copy of the supposed pleading by the bank at press time.

In the light not only of BIR Ruling 370-2011 but also BIR Ruling 378-2011, the Treasury bureau will still pay the full face value of the PEACe bonds to the investors/holders, although subject to the bureau’s legal obligation to withhold the 20-percent final tax, the DOF and BIR added.

According to them, the Treasury bureau was “merely implementing the plain and unequivocal provisions of the Tax Code on the taxation of interest income from deposit substitutes, as elucidated in BIR Rulings 007-2004, 370-2011 and 378-2011.”

The Finance department further clarified that at issuance, the government securities eligible dealers were informed by the Treasury bureau that the PEACe bonds were subject to income tax.

BIR rulings

But at the time of the issuance of the bonds, the BTr relied on BIR Ruling 020-2001 dated May 31, 2001, as clarified by BIR Ruling 35-2001 dated August 16, 2001, and BIR Ruling 175-2001 dated September 29, 2001, which erroneously held that, provided it was issued to 19 lenders or fewer, the PEACe bonds were not considered deposit substitutes and were not subject to 20-percent final withholding tax, the DOF said.

“The erroneous interpretation in BIR Ruling 020-2001 was expressly superseded in 2004 by BIR Ruling 007-04, which provided that “mere issuance of government debt instruments and securities is deemed as falling within the coverage of ‘deposit substitutes’ irrespective of the number of lenders at the time of origination,”” the Finance department also argued.

Meanwhile, the BIR stated that there has been “no material change in the tax laws.”

“Simply put, BIR Rulings 370-2011 and 378-2011 merely make it clear that the applicable tax on the PEACe bonds is the final tax on deposit substitutes and not the ordinary income tax. This clarification is in turn merely an application of the rulings made in 2004,” it noted.

If, however, any taxpayer has erroneously paid the ordinary income tax on the interest or income from the PEACe bonds pursuant to the now defunct BIR Ruling 020-2001, the BIR shall entertain any request for refund in accordance with law, the DOF and the BTr said.

On October 7, the BIR said that it would collect the final withholding tax from the P35-billion face value of the PEACe bonds. –Jomar Canlas, Reporter with report from Lailany P. Gomez, Manila Times