BIR slaps 20% tax on PEACe bonds

CODE-NGO TO COST GOV’T P35B BY OCT. 18 MATURITY

The Bureau of Internal Revenue (BIR) said it would impose a 20 percent final withholding tax on the controversial P35 billion PEACe Bonds, which the government will be required to pay on Oct. 18 when its 10-year maturity falls due, the Department of Finance (DoF) said in a statement.

In a statement the BIR yesterday said, the Bureau of the Treasury should withhold the applicable tax of an estimated P5 billion from the P35 billion face value of the bonds.

The PEACe Bonds, also known as “Poverty Eradication and Alleviation Certificates” were issued by the Treasury in 2001.

Responding to a query from the DoF, the BIR confirmed that BIR Ruling Nos. DA-491-04 and 008-05, dated Sept. 13, 2004 and July 28, 2005, respectively, applied to the PEACe Bonds. Some of the more prominent officials of the Aquino administration including Social Welfare and Development Secretary Corazon “Dinky” Soliman and Office of the Presidential Adviser on Peace Process Secretary Teresita “Ging” Deles, were former officials of Code NGO which conceptualized the zero-coupon bond float.

At the time of the float, the head of Code-NGO was Maria Socorro Camacho, the sister of former President Arroyo’s erstwhile Finance Secretary Isidro Camacho.

The group earned an estimated P1.8 billion in profits from the resale of the bonds in the secondary market. Code NGO said that the money was used as an endowment fund to finance anti-poverty projects.

The BIR said its previous rulings held that all government securities issued by the Treasury are “deposit substitutes” and therefore subject to the 20 percent withholding tax.

Sought for comment, Finance Secretary Cesar Purisima stated that the BIR Ruling merely confirmed existing rulings on the tax treatment of Treasury Bills and Treasury Bonds that applied to the PEACe Bonds and provides appropriate legal basis for the Treasury to withhold the tax.

He stressed that “the PEACe Bonds are very unique among government securities. They are the only outstanding government securities where there was some question as to the applicable tax.”

“Normally, deposit substitutes, like the forthcoming Retail Treasury Bond offering, are subject to the 20 percent final withholding tax,” Purisima explained.

“There was some question as to the proper treatment for the PEACe Bonds since there was a 2001 ruling making it subject to ordinary income tax instead of the 20 percent final withholding tax, which was then superseded by BIR rulings in 2004 and 2005,” he added.

“The recent BIR ruling makes it clear that the PEACe bonds are treated the same way as all other government securities for tax purposes,” he said.

Purisima said no other government borrowing would be affected by the BIR ruling.

Purisima, BIR Commissioner Kim Jacinto-Henares, and National Treasurer Roberto Tan, met yesterday with government securities eligible dealers to discuss this development and have agreed to coordinate on its implementation.

The Freedom from Debt Coalition (FDC) said it found that rules were relaxed and circumstances which tended towards rent-seeking took place which led to Code-NGO getting the endowment of P1.8 billion and a commission of P140 million.

At a time when the public is reeling from the negative impact of the unmitigated increase in the prices of goods and services, and the Aquino government’s unwarranted under-spending combined with the catastrophes brought about by the recent super-typhoons, to carve out P35 billion from the people’s coffers—which is bigger than the 2012 budget for the government’s Conditional Cash Transfer (CCT) program—is unacceptable, especially if the public will be paying for something whose regularity comes under serious question, the FDC said.

At its issue, the bonds has a face value of P10 billion and was awarded to the Rizal Commercial Banking Corporation ( RCBC ) in behalf of Code-NGO whose leaders were then close to the Government, and re-sold by the organization to RCBC Capital, the FDC said.

Despite attempts of Code-NGO to defend the transaction, they were hounded by the perception coming from many in the civil society community that this was nothing more than a political transaction, a “rent-seeking activity” that granted special privileges and benefits.

The House committee on good government and public accountability is expected to formalize a report on its inquiry into the PEACe bonds. FDC said the copy of the report being circulated among committee members for signing shows that the House body will come out with two findings, that the issuance of the PEACe bonds was regular and conformed to prescribed procedures, and that the government obtained a fair and reasonable value from the proceeds of its sale.

FDC said new questions have cropped up over the controversy. Last August 23, the House adopted Resolution 58, which was sponsored by Representatives Rufus Rodriguez and Maximo Rodriguez Jr., directing the House committee on good government and public accountability to conduct an inquiry into the PEACe bonds.

Unfortunately, despite the seriousness of the issues raised against the PEACe bonds, the huge debt burden the bonds imposed on our people and the wide public attention and participation it generated, the House committee inquiry conducted was devoid of transparency and all-sidedness and seriously wanting in thoroughness,, FDC said.

The group noted only two public hearings were conducted on the issue, one in November 24, 2010 and the other in March 16, 2011 with the committee deliberation terminated on the latter date.

It added oppositors to the PEACe Bonds like Freedom from Debt Coalition were not informed and were not invited to these hearings. Only those who have every reason to defend the bonds like CODE-NGO, RCBC Capital and Peace and Equity Foundation, apart from resource persons from government including the Department of Finance (DOF), Commission on Audit (COA) and the Bureau of Treasury (BTr) were asked to come to the hearings.

The House committee inquiry failed to go into how the funds created from the proceeds of the PEACe Bonds were spent, although this is mandated by House Resolution 58, FDC added.

Among the irregularities raised against the bond float included allegations that Code-NGO lobbied hard with the Arroyo government to sweeten the bond with tax exemptions and eligibilities.

It then tried to ensure its targeted P1 billion profit by keeping the deal all to itself in a negotiated sale, according to FDC.

When that was not possible, the ensuing bidding revealed features that would favor the most prepared – CODE-NGO had worked on the deal longer than anyone else, was intimately familiar with the details, and whose bank was prepared way ahead of its rivals, it said.

CODE-NGO kept the sweetest eligibility to itself — the security/statutory deposit eligibility and asset admissibility for insurance companies and sought its approval only after it had won the auction in its entirety.

It purchased the bonds with money it did not have and sold it to investors affiliated with the very bank that underwrote the deal, namely, the Rizal Commercial Banking Corporation (RCBC). For this, it earned a staggering amount of P1.8 billion in gross profits. CODE-NGO then distributed its windfall, paying its financial advisers and RCBC at least P400 million in fees.

Finally, it kept 10 percent of the P1.4 billion, roughly P140 million, for itself, then set up the Peace, Equity, and Access for Community Empowerment Foundation (Peace and Equity Foundation) with a permanent endowment of roughly P1.3 billion.  –Daily Tribune