SC stops 20% tax on PEACe bonds, orders amount held in escrow

The Supreme Court has issued a temporary restraining order (TRO) against BIR Ruling No. 370-2011 which imposed tax on the ten-year government bonds and directed the Treasury Bureau to withhold the final tax from the payments on the PEACe bonds’ face value. “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 Court Administrator Midas Marquez said on Tuesday. While 20 percent will be held in escrow, the remaining 80 percent of the controversial bonds should be released to investors, Marquez said in a press briefing at the Supreme Court. “That is of course to protect the government in case, later on, the court will rule that these bonds are taxable," Marquez said. Eight of the country's major banks – namely, Banco de Oro, Bank of Commerce, Philippine National Bank, China Bank, Metrobank, Philippine Bank of Communication, Philippine Veterans Bank, and Planters Development Bank – on Monday filed a petition for certiorari and prohibition and/or mandamus, as well as for a TRO. The banks said imposing a 20-percent final withholding tax on the PEACe bonds' interests would be in violation of the 1997 Tax Code, as well as the “non-impairment of contracts" clause under the Constitution. “The change in regulation may have implications on the capital market as investors may view this as another form of regulatory risk," the petitioners added. Former Philippine Stock Exchange president Francis Lim, legal counsel for the consortium of the banks, said in the petition that the “situation has devastating implications on the credibility of our country and will definitely be viewed as exemplifying lack of credibility, predictability and stability in our markets." Former National Treasurer Sergio Edeza also defended the “tax exempt" 2001 ruling, which the BIR overturned this year. He explained: “The intention of the issue was not to subject it to a 20-percent [final withholding tax] consistent with rules for issues covering 19 lenders. We made sure that we complied with those rules." But in support of the BIR’s move to collect taxes on the PEACe bonds, the Freedom from Debt Coalition (FDC) put the blame on the banks for buying the “controversy-ridden bonds." “These banks want super profit and risk-free and no-tax investments, and expect government to bail them out in case of default, using public money," said FDC secretary general Milo Tanchuling. Caucus of Development NGO Networks (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. It then sold the bonds for P1.83 billion. Since then, the bonds have already been resold, mostly to banks and insurance companies. The 10-year bonds matured today (Tuesday), Oct. 18, and thus became redeemable. The Treasury Bureau will have to pay bondholders a total of P35 billion, including P24.3 billion in interest income or discount. — MRT/VS, GMA News