Banks warn of massive withdrawals if foreign currency deposits are taxed

Foreign and domestic banks in the Philippines have warned the government of massive withdrawals of foreign funds if the government goes ahead and taxes foreign currency deposits, an official of an industry association said yesterday.

Bankers Association of the Philippines (BAP) executive director Leonilo Coronel told AFP: "If the tax department goes ahead with the move it will virtually kill the offshore banking business in this country."

According to data from the Bangko Sentral ng Pilipinas (BSP) some $15 billion are tied up in foreign currency accounts in the Philippines as of Dec. 31, 2004.

Finance Secretary Margarito Teves is said to be looking into the issue.

BAP president Cesar Virata, who is also chairman of the Rizal Commercial Banking Corp. (RCBC), earlier this week warned the country could lose most of its foreign currency deposits if the Bureau of Internal Revenue (BIR) insisted on collecting an estimated P39 billion in disputed tax.

The dispute centers on just four words "exempted from all taxes" that were omitted from the revised Tax Reform Act in 1998.

In 1976 banks were permitted to establish foreign currency deposit units (FCDUs) which allowed local banks to lend in foreign currency, take foreign currency deposits and to conduct foreign currency transactions with residents, non-residents, offshore banking units located in the Philippines and other FCDUs.

According to Coronel when the FCDUs were established they were subject only to income tax rates in lieu of all other taxes.

"This was pointed out in the tax code of 1997 and all subsequent modifications since then.

"The code specifically says that FCDUs will be exempt from all taxes," he said.

For its part the tax department says under the 1998 Tax Reform Act it is entitled to collect all taxes which include stamp duty, gross receipts and branch profits remittance taxes.

Depositors with foreign currency accounts in the Philippines currently pay 7.5-percent tax on interest income and 10 percent on withholding tax on interest payments for loans financed by FCDUs.

It is estimated that over 90 percent of the foreign currency accounts in the Philippines are held by individuals.

The head of one major international bank, who did not want to be named, said if the government "goes ahead with this tax foreign deposits will disappear overnight." — AFP