PEACe bonds payout to generate P4.86-B in withholding tax

The government is withholding P4.86 billion as 20-percent final tax when the National Treasury starts paying out the Poverty Eradication and Alleviation Certificates (PEACe) bonds amounting to P35 billion on Tuesday, which includes P24.3 billion in interest income or discount. Bureau of Internal Revenue (BIR) Commissioner Kim Henares clarified on Monday that the 10-year zero-rate coupon bonds are not exempt from the 20-percent withholding tax. In a separate statement also released on Monday, she cited a 2004 BIR ruling that supplanted an earlier 2001 ruling issued by then BIR Commissioner Rene Banez which did not consider the PEACe bonds as deposit substitutes and thus not subject to withholding tax. “The erroneous interpretation in BIR ruling 020-2001 was expressly superseded in 2004 by BIR ruling. 007-04 which provided that ‘mere issuance of government debt instruments and securities is deemed as falling within the coverage of deposit substitutes irrespective of the number of lenders at the time of origination’," the current BIR chief said. Henares said the Treasury is just implementing the “plain and unequivocal provisions of the Tax Code on the taxation of interest income from deposit substitutes." “There is no breach of contract with bondholders," she stressed. CODE-NGO’s eligibility issue The government issued the bonds in 2001 upon the proposal of the Caucus of Development NGO Networks (CODE-NGO) which, in turn, bought the bonds on Oct. 16 of that year at a discounted rate for P10.17 billion and an interest of 12.75 percent. CODE-NGO had originally proposed that government issue P15 billion worth of the 10-year zero coupon notes, to be purchased by CODE-NGO itself then to be sold to investors. CODE-NGO intended to use an estimated P1.45 billion in net proceeds generated from the transactions to establish a fund to finance anti-poverty projects. But then National Treasurer Sergio Edeza questioned the propriety of issuing the bonds directly to CODE-NGO, considering that it was not an eligible dealer in government securities. Edeza said that the PEACe bonds should have been issued through an auction instead, and that CODE-NGO should have first become a government securities eligible dealer in order to make a tender. — MRT/VS, GMA News