TRO issued vs tax on Peace bonds

MANILA, Philippines - The Supreme Court (SC) temporarily stopped yesterday the imposition of final withholding tax on the controversial P35-billion Poverty Eradication and Alleviation Certificates (PEACe) bonds. The SC order came on the day of the bonds’ maturity.

In full-court session, the magistrates issued a temporary restraining order (TRO) on the Bureau of Internal Revenue (BIR)’s Ruling No. 370-2011 imposing a 20-percent final withholding tax on the bonds sold in 2001.

“A revised resolution is being circulated on the PEACe bonds case. A TRO is being issued enjoining the implementation of BIR Ruling No. 370-2011 against the PEACe bonds subject to the condition that the 20 percent final withholding tax on interest income therefrom shall be withheld by the banks and placed in escrow pending resolution of the petition,” SC spokesman Midas Marquez said in a press briefing.

“This is to protect the government in case the court later on rules that these bonds are indeed taxable,” he explained in a news briefing.

Marquez said the respondents in the case – BIR, Bureau of Treasury and the Department of Finance – were given 10 days to answer the petition filed last Monday by 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.

The petitioners argued that imposing tax on the bonds would violate the 1997 Tax Code “for being extremely prejudicial to the bondholders, including petitioners who relied in good faith on the BIR declaration that the bonds are exempt from final tax.” They argued the BIR decided to implement its order without consulting them or other bondholders.

“Such unilateral imposition of the 20 percent final withholding tax on the interest/discounts 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,” petitioners said.

“Threatened refusal of the government to pay the full face value of the government bonds to its contractual undertaking and material representation at the time of their issuance, operates as a fraud on investors to their grave or irreparable injury or prejudice, which, in turn, adversely affects their perception of the Philippines as an investment destination,” they argued.

The government issued the bonds in 2001 upon the proposal of Code-NGO.

Code-NGO bought the bonds through the Rizal Commercial Banking Corp. on Oct. 16, 2001 for P10.17 billion, a discounted rate, with interest of 12.75 percent.

Under the proposal, Code-NGO would purchase the notes and sell them to investors. The estimated net proceeds of P1.45 billion would be used by Code-NGO for anti-poverty projects.

But then National Treasurer Sergio Edeza questioned the propriety of issuing bonds directly to Code-NGO, saying the latter was not a Government Securities Eligible Dealer (GSED). Edeza said bond float should be done through an auction.

Review

President Aquino vowed yesterday to review the PEACe bonds’ withholding tax.

He also said there was no need to make Social Welfare and Development Secretary Corazon Soliman explain her possible role in the controversial bond issue. Soliman had said the PEACe bonds offer was made after she had left Code-NGO to join the Arroyo administration as social welfare secretary.

“Maybe the DSWD does not have anything to do with it,” he said.

Aquino said it is Finance Secretary Cesar Purisima and BIR Commissioner Kim Henares that he has to meet because “we are talking about taxes.”

“The way I understood it, the BIR issued rulings in 2004 – long before we assumed office – saying the (PEACe bonds) are subject to withholding tax. I’ll be meeting both the secretary of finance and the commissioner of the BIR, or the chair, to discuss this particular issue and then we will review this specifically to address the complaints of those who undertook the PEACe bonds,” Aquino told reporters in an ambush interview at the Philippine Coast Guard headquarters in Manila where he led its 110th anniversary celebration.

“There are also certain members of the NGO community who benefited from this who also have asked for a meeting. I think I’ll be meeting some of them today (Tuesday) or at least within the week,” Aquino said.

Henares said on Monday there’s no stopping the BIR from implementing Ruling No. 370-2011 because “there is no breach of contract with bondholders.”

She said the BIR would merely be implementing the “plain and unequivocal provisions of the Tax Code on the taxation of interest income from deposit substitutes.”

Henares said she was merely reaffirming a BIR ruling issued in 2004 stating that the PEACe bonds were not exempt from withholding tax.

Henares said former BIR commissioner Rene Bañez committed an error when he ruled in 2001 that the PEACe bonds were not considered deposit substitutes and not subject to 20 percent final withholding tax.  

Suspend payment

With the withholding tax issue still unresolved, Rep. Teddy Casiño of the party-list group Bayan Muna said the government should withhold payment to PEACe bond holders.

“Considering the controversy on who should pay the 20 percent withholding tax (on interest), the DOF (Department of Finance) should stop payment until the matter is clarified,” he said.

He said the issue is whether it is the Code-NGO or the bond holders who should pay the tax.

Casiño said the proponent NGO made more than P1.4 billion in commissions, while investors are making a total of P25 billion in interest income.

He added that another issue is “whether Code-NGO and officials of the Arroyo administration are liable for incurring a behest loan and making a huge profit at the people’s expense.”

He noted that DSWD’s Soliman and Marissa Camacho, a sister of former finance secretary Jose Isidro Camacho, were involved with Code-NGO at the time the group proposed the bond float.

He said Filipino taxpayers are paying P35 billion or P25 billion more than the P10 billion offer after a decade, or roughly P2.5 billion a year in interest, he said. -With Aurea Calica, Jess Diaz