SC asked to reconsider ruling on peace bonds

MANILA, Philippines - The Bureau of Internal Revenue (BIR) yesterday asked the Supreme Court (SC) to reconsider its decision last Jan. 13 voiding two of its rulings imposing a 20 1percent final withholding tax on the P35-billion government-issued Poverty Eradication and Alleviation Certificates (PEACe) bonds that eight banks had bought.

Solicitor General Florin Hilbay urged the SC to dismiss for lack of merit the petition of 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 BIR sought to clarify the high court’s ruling on tax treatment of government securities and identification of withholding agent for government securities.

“There is a need to clarify the proper interpretation of the foregoing substantive pronouncements, the misinterpretation of which may have far reaching negative consequences on government securities currently issued and outstanding, government securities that are yet to be issued, the capital markets in general and the withholding tax system,” the BIR said.

“All treasury bonds, regardless of the number of purchasers/lenders at the time of issuance, are considered deposit substitutes.”

The BIR said imposing a tax based on this SC ruling would be difficult due to impossibility to determine the actual number of registered holders of issued securities given the rules under Republic Act No. 1405, the Bank Secrecy Law.

“A strict application of the ruling of the honorable court would result in a large number of withholding agents, i.e. sellers of these government securities,” the BIR said.

“For the tax authority (BIR), access to verifiable records on government securities are effectively barred by the Bank Secrecy Law.”

The BIR asked the SC to clarify its ruling as to applicability to all government offices and on the proper tax treatment of amounts to be paid out by issuer of securities to the holders.

It urged the SC to instead modify its decision and confirm the authority of the government to determine the tax treatment of government securities based on intended distribution plan.

The BIR said the phrase “at any one time” should mean “at any time” during the term of the government security, and that the withholding agent for any bond issuance should be the Bureau of Treasury.

The BIR also sought clarification on the procedure for refund of taxes withheld and insisted that it should be based on the National Internal Revenue Code.

In its ruling, the SC held that the sellers of securities should be the ones to withhold 20 percent in final tax when there are 20 or more lenders in a transaction for a specific bond issue.

The BIR’s interpretation of the law “completely disregarded the 20 or more lender rule added by Congress in the 1997 Tax Code,” and “also created a distinction for government debt instruments as against those issued by private corporations when there was none in the tax law,” the SC said.

Citing the NIRC, the SC said only monetary benefits from deposit substitutes – defined by law as an alternative form of obtaining funds from the public other than deposits, through the issuance, endorsement or acceptance of debt instruments for the borrower’s own accounts – are subject to a 20-percent final withholding tax.

The bonds were issued only to one lender – Code-NGO through Rizal Commercial Banking Corp. (RCBC) – so they cannot be considered deposit substitute, the SC said.

The SC said the subsequent sale and distribution of the PEACe bonds to 20 or more lenders/investors would oblige RCBC Capital and Code NGO to withhold the 20 percent final tax on the interest/discount from the bond.

Should the PEACe bonds be found to be within the coverage of deposit substitutes, the Bureau of Treasury should pay the face value of the PEACe bonds to the bondholders and the BIR collect the unpaid final withholding tax directly from RCBC Capital/CODE-NGO within 10 years after discovery of the omission, the SC said.

The government, through the national treasury, is set to pay bondholders some P35 billion, including P24.3 billion in interest income or discount.

The SC also directed the Bureau of Treasury to turn over to the banks the tax amounting to about P5 billion that the government withheld upon maturity of the bonds on Oct. 28, 2011 despite a temporary restraining order.

It reprimanded the Bureau of Treasury for continuing to hold the amounts withheld despite an order enjoining it from taking such action.

The bureau’s continued failure to release from an escrow account to petitioners the amount corresponding to the 20-percent final withholding tax is a defiance of the TRO, the SC said.

Records showed that Code-NGO, through RCBC, bought the bonds on Oct. 16, 2001 at the discounted rate of P10.17 billion and at 12.75 percent interest.

The government had expected to collect about P4.83 billion in tax from the matured bonds.

In 2001, the Bureau of Treasury offered government bonds to the government securities’ eligible dealers through an auction.