Palace stands by BIR on PEACe bonds' final tax

While saying it is now for the courts to decide on the matter, Malacañang is standing by a Bureau of Internal Revenue decision to impose the 20-percent final withholding tax on the yield and discounts of government’s Poverty Eradication and Alleviation Certificates or PEACe bonds. The general rule is that all Treasury issuances are subject to the 20 percent withholding tax, presidential spokesperson Edwin Lacierda said at a press briefing Friday. "The issue of the PEACe bonds has been filed before the courts, so we will let the court decide on that," the Palace office noted. But “the PEACe bonds [were] the exception rather than the rule, so… [the banks] are fully aware that Treasury issuances are subject to 20 percent withholding tax." The Aquino administration is simply upholding the rules, “so, I don’t think it will lessen the appetite of the banks in entertaining Treasury issuances." But the Caucus of Development NGO Network or CODE-NGO, which bought and resold the bonds to the secondary market with its partner Rizal Commercial Banking Corp., issued a statement Friday, saying it was not case when the bonds were issued on Oct. 16, 2001. In a three-pronged argument, CODE-NGO belittled the Aquino administration’s stand on the PEACe bonds, saying that:

1. The proceeds from the PEACe bonds were not created out of nothing. CODE-NGO and our partner bank RCBC paid government P10.6 billion in 2001 — the net present value at that time of the P35-billion zero-coupon bonds sold by the government through a public auction where RCBC and 14 other banks/government securities eligible dealers submitted bids.
2. Government through the Bureau of Internal Revenue changed the rules on Oct. 17, 2011 — 11 days before the 10-year bonds matured — when it reversed three BIR rulings in 2001 and declared that the PEACe bonds were not subject to the 20 percent final withholding tax.
3. It was not only the PEACe bonds that were not subjected to the 20 percent withholding tax. For example, the National Food Authority also issued Treasury notes, which were exempted from the 20 percent withholding tax.

'What is the general rule...' “In sum, we reiterate that the PEACe bonds were non-traditional in the sense that it was an innovative measure to raise funds for poverty reduction and development projects of civil society organizations, the process was transparent and legal and the bonds were beneficial for both government and the Filipino people," said CODE –NGO. The group was reacting to reports citing Finance Secretary Cesar Purisima as saying that the PEACe bonds “would not have reached first base under the Aquino administration…" and that, “You cannot create something out of nothing. Everything has been subject to the 20 percent withholding tax except for the PEACe bonds." During the Palace briefing, Lacierda said, “Just to remind you, these PEACe bonds were given in the past administration. So, what we are upholding is what is the general rule — all Treasury issuances are subject to 20 percent withholding tax, and this is a regulation that banks are fully aware of." The bonds matured on 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. In BIR Ruling No. 370-2011, the bureau imposed tax on the PEACe bonds and directed the Treasury Bureau to withhold the final tax from the payments on the PEACe bonds’ face value. But the Supreme Court issued a temporary restraining order against the BIR ruling as petitioned by eight banks — Banco de Oro, Bank of Commerce, Philippine National Bank, China Bank, Metrobank, Philippine Bank of Communication, Philippine Veterans Bank, and Planters Development Bank. The banks said imposing a 20-percent final withholding tax on the PEACe bonds' interests was 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. — VS, GMA News