"In fact, the President signed into law Republic Act (RA) 9294 which made it clear the tax exemptions of FCDUs and OBUs (overseas banking units) during the drafting of the Comprehensive Tax Reform Act of 1997," CTB president Tomas V. Clemente Jr. said in a letter to Bureau of Internal Revenue (BIR) commissioner Guillermo L. Parayno Jr.
CTB member-banks have been receiving letters of notice and preliminary assessment notices from the BIR requiring them to pay assessment for GRT, documentary stamp tax (DST) and VAT on their FCDU income or transactions covering the years 2001 to 2003.
But Clemente said FCDUs were exempted from taxes before the 1997 amendment of the National Internal Revenue Code, and that it remained exempt under the new code.
When the BIR’s Revenue Regulation No. 10-76 was issued, it did not expressly state that FCDUs were no longer exempt from all taxes.
The FCDU was created under Presidential Decree 1035 to expand foreign currency lending authority to local commercial banks which then was operating as depository banks.
The law was seen as beneficial and advantageous to the country by increasing links with foreign lenders, facilitating the flow of desired investments into the country, creating employment opportunities, and expertise in international finance, and contributing to national development as a whole.
FCDUs were first taxed a uniform five percent on net income, or 10 percent on interest income. In 1981, it was declared tax-exempt although interest income from foreign currency loans under an expanded system was still slapped a 10-percent final withholding tax.
Banks thus argued that imposing taxes on FCDU transactions and income would only scare businesses since banks will pass on the tax burden to those dealing in foreign currency including those in manufacturing, trading, crude oil and other petroleum products, and international finance.
Bankers said that slapping tax burdens on instruments of investments that act as magnets for further business is not the proper way for government to plug its fiscal gap.
"They should stick to the original proposal of imposing the so-called sin taxes which are slapped on products detrimental to health, are not productive, and limited in scope," the bankers added.