PHL banks ask SC: Stop BIR from imposing 20% withholding tax on PEACe bonds

Eight of the country’s major banks on Monday asked the Supreme Court to stop the Bureau of Internal Revenue (BIR) from imposing a 20-percent final withholding tax on maturing Poverty Eradication and Alleviation Certificates or PEACe bonds issued by the previous administration in 2001. The banks — all heavily invested in the PEACe bonds — include Banco de Oro, Bank of Commerce, Philippine National Bank, China Bank, Metrobank, Philippine Bank of Communication, Philippine Veterans Bank, and Planters Development Bank. Named respondents to the petition are the BIR, Department of Finance, Bureau of Treasury, and their respective heads. The banks in a 66-page petition for certiorari and prohibition and/or mandamus nixed BIR Ruling no. 370-2011 which imposed the 20-percent withholding tax on government bonds and directed the Treasury Bureau to withhold the final tax from the payments on the PEACe bond’s face value. The PEACe bonds will mature on Tuesday, Oct. 18, and are thus redeemable. The Treasury Bureau will have to pay bondholders a total of P35 billion, including P24.3 billion in interest income or discount. Code-NGO bought the bonds on Oct. 16, 2001 through Rizal Commercial Banking Corp. (RCBC) at the discounted rate of P10.17 billion and at 12.75 percent interest. Expressing the urgency of the petition, the banks asked the high tribunal to include it during Monday’s case raffle, or to stage a special raffle for the petition to speed up the procedure for resolving the case and for the court to come up with the a temporary restraining order or TRO. According to the banks, the 2011 BIR ruling is a complete reversal of three BIR rulings (nos. 020-2001, 035-01 and DA-175-01) issued in 2001 prior to the issuance of the government bonds, which categorically declared these bonds to be exempt from the 20-percent FWT. The petitioners claimed that the BIR’s retroactive application of the final withholding tax on government securities sold to them in 2001 went against the 1997 Tax Code. The BIR ruling impairs the contract between the government and the petitioners, as well as other bondholders, in violation of the non-impairment of contracts provided under the Constitution. What the BIR did boils down to a unilateral amendment of a material term of the contract, which was the primary, if not sole, inducement and principal consideration for the petitioners in entering the contract with government. 'A violation of the contract' The newly imposed 20-percent final withholding tax on the PEACe bonds’ interests or discounts — practically on the eve of their maturity — was never agreed upon by government and the petitioners, thus a violation of the contract. What is happening amounts to a confiscation of the petitioners’ property without due process because there was never any prior consultation with them and other bondholders or without even a single hearing on the matter, the banks claimed. “Hence, the petitioners are by contract and law entitled to the payment of the face value of government bonds upon its maturity and without any deduction whatsoever, according to the petition. In holding that the PEACe bonds are subject to the 20-percent withholding tax on the interest income, the BIR conferred upon itself legislative power that exclusively belongs to Congress by amending the Tax Code on “deposit substitutes," the petitioners added. The banks warned that the imposition of the final withholding tax is damaging government’s credit reputation, and sends a strong message to local and international investors and financial institutions “that there is no certainty, predictability and stability in financial transactions with government. Inevitably, this will result to further erosion of investors’ confidence in government." In an auction in 2001, the Treasury Bureau offered the PEACe bonds to government securities eligible dealers or GSED. RCBC won the bid and was awarded P35 billion worth of government bonds for only P10.17 billion at a yield-to-maturity rate of 12.75 percent. RCBC then sold the bonds in the secondary markets at P11.9 billion. The petitioners said they bought the bonds relying on various BIR memoranda that the PEACe offering shall not be subjected to the 20 percent final withholding tax. — VS, GMA News