Tax on PEACe bonds:
Supreme Court TRO fails to restrain

Was it a case of much ado about nothing?

At a press conference of its spokesman on Tuesday, the Supreme Court was said to have issued a temporary restraining order barring the Bureau of Treasury from withholding the 20 per cent final tax on interest gains on the P35-billion PEACe bonds due October 18.

The high court instead ordered the banks holding the bonds for themselves or for clients to hold in escrow the disputed amount, estimated at around P5 billion, until after the dispute is settled.

The high court’s decision was swift and seemed fair. It addressed the concerns of the eight banks that filed the petition just the day before that wanted to restrain the Bureau of Treasury from keeping the withholding tax. The Bureau was to pay out the proceeds of the bonds by the end of the business day Tuesday.

At the same time, the decision also addressed the Bureau of Internal Revenue’s concern that it may no longer be able to recover the disputed amount, if it is restrained from withholding the tax today and its position is eventually upheld by the judiciary.

But here’s the catch: The Supreme Court order had not reached the Bureau of Treasury or Bureau of Internal Revenue by the close of office hours at 5 pm Tuesday. “We didn’t receive any order from the Supreme Court,” said BIR Commissioner Kim Jacinto-Henares at around 6:30 pm. She repeated the same statement hours later when she appeared in a television talk show on ABS-CBN News Channel.

Henares said the Bureau of Treasury more likely withheld the 20 per cent final tax on interest gains on the PEACe bonds, in the absence of an official copy of the TRO. “The Bureau of Treasury has no choice but (to) withhold it,” she said. The bureau chief, National Treasurer Roberto Tan, has not responded to mobile phone messages requesting confirmation.

Sources in the banking industry said they still expected the Bureau of Treasury to turn over the withheld amount to the banks in the next few days after it gets a copy of the TRO. However, a lawyer familiar with the situation said that by its failure to send a copy of the TRO before the close of office hours Tuesday, the Supreme Copirt may have rendered its own order moot. It may need, the lawyer said, to issue a new order to instruct the Bureau of Treasury to turn over the money to the banks.

On Monday, a consortium of eight banks led by the country’s two biggest banks, Banco de Oro and Metropolitan Bank and Trust Co., filed a petition with the Supreme Court seeking a temporary restraining order against the implementation of a recent BIR ruling imposing a 20-percent withholding tax on accumulated interest income on the 10-year bonds that fell due October 18.

Last week, Rizal Commercial Banking Corp., a bond holder and underwriter of the bond when it was sold to other banks and financial institutions in the secondary market, filed a petition with the Court of Tax Appeals for a review of the BIR ruling issued Oct. 7, or just 10 days before the bond was to mature.

Both petitions – in the Court of Tax Appeals and in the Supreme Court – have assailed the Oct.7 BIR ruling for retroactively applying a change in tax policy. The bond, they averred, supposedly enjoyed exemption from the 20-percent final withholding tax when it was first tendered and sold in 2001.

The BIR’s ruling in 2001 issued by then Commissioner Rene Banez had granted the bond tax exemption on the assumption it was not a quasi-deposit, which refers to financial instruments sold to more than 19 lenders. The Philippine tax code exempts non quasi-deposits from the final withholding tax.

The Poverty Eradication and Alleviation Certificates or PEACe bonds were part of a complex and highly controversial fund-raising venture by the country’s biggest network of non-government organizations called CODE-NGO (Caucus of Development NGOs) to generate money to endow an anti-poverty foundation. The attractiveness of the bond as an investment instrument was enhanced by tax exemptions and other generous features granted by government agencies on the special request and representation with various officials of CODE-NGO.

CODE-NGO has come under fire from other NGOs for lobbying for these enhancements to the bond. It allegedly employed the connections and influence of some of its leading members who had just been rewarded government posts for their role in helping then President Gloria Macapagal Arroyo oust her predecessor, Joseph Estrada, who was impeached for plunder.

The BIR changed its mind in 2004 when it realized that government securities are inherently quasi-deposits because these are freely traded in the secondary markets where they could be sold to more than 19 investors. It issued a new ruling that superseded and modified the 2001 ruling, and subjected government securities previously considered non-quasi deposits to the final withholding tax.

The BIR’s ruling on Oct. 7, 2011 was issued in response to a query from the Department of Finance (DOF). It explicitly stated that the 2004 ruling will be applied to the PEACe bonds though these were issued way back in 2001.

The BIR said the tax code allows the retroactive application of rulings in cases where there is misrepresentation of facts, discovery of new information, or bad faith on the part of the taxpayer.— PCIJ, October 2011