Legal battle looms on FCDU tax issue

Foreign banks are prepared to wage war with the Bureau of Internal Revenue (BIR) should the government revenue collecting agency decide to impose taxes on the foreign currency deposit unit (FCDU) transactions.

In the first quarter of the year, FCDU loans reached $4.66 billion. FCDU deposit liabilities reached $14.33 billion in the same period.

"It is a multi-billion dollar issue which will have severe ramifications for foreign banks if not resolved on a common manner," Simon Morris, Standard Chartered Bank of the Philippines (SCBP) chief executive officer said.

Unofficial estimates place the transactions to over $25 billion in transactions.

The BIR had said that they would be slapping gross receipt taxes and value-added taxes on FCDU transactions. Foreign banks, local commercial banks and even thrift banks raised a howl saying it will not help the economy and actually serve as a disincentive to foreign investments and transactions.

The Bankers Association of the Philippines (BAP) took the cudgels for the commercial banks but the issue uniquely galvanized foreign banks against the host country.

But the BIR stood firm in its decision prompting banks to threaten to go to court.

"There seems to be no basis for amicable solution to the FCDU tax issue, and it is totally unacceptable," foreign banks said. "It will be a ugly battle if we will be forced to take legal action."

And when the foreign banks go to court, what kind of message is the Philippines sending to the other countries and foreign banks and investors? they asked. "If a country is not harmonizing regulations, then foreign banks will find it hard to do business, or consider doing business in the Philippines."

They urged the national government to review its taxation systems adding that there must be absolute clarity in the tax system especially those that affect investments.

Morris said that SCBP would not pull out of the country on the issue of the FCDU tax. But he added that foreign banks are very competitive and other Asian countries are pushing each other or making offers for foreign banks to set-up shop in their respective countries.

"We are happy and prepared to pay taxes," the SCBP chief executive said. "But when a tax form did not exist but in restrospect, the state decides to impose such a new tax that should not have been there, that is totally unacceptable."

Taxes on FCDU transactions have been exempt from the gross receipt tax (GRT) and the value-added tax (VAT) for the past 20 years. – Ted Torres