SC reaffirms tax-free status of Peace bonds
MANILA, Philippines–The Supreme Court has ordered the Bureau of the Treasury to refund bondholder banks and an NGO linked to former President Gloria Arroyo nearly P5 billion in taxes as it ruled that the Bureau of Internal Revenue (BIR) had illegally imposed a 20-percent final tax on the controversial Poverty Eradication and Alleviation Certificates (Peace) bonds issued almost 14 years ago.
In a 45-page ruling, the high court also reprimanded the Treasury for holding on to the withheld amount despite a temporary restraining order (TRO) it issued on Oct. 18, 2001.
The court said that while the government officially received the TRO on Oct. 19, a day after the order was issued and the Peace bonds matured, it was obligated to return the illegally collected tax.
“Respondent Bureau of [the] Treasury is reprimanded for its continued retention of the amount corresponding to the 20-percent final withholding tax despite this court’s directive in the TRO and in the resolution dated Nov. 15, 2011, to deliver the amounts to the banks to be placed in escrow pending resolution of this case,” read the decision penned by Associate Justice Marvic Leonen.
In a decision that might prove to be another setback for the BIR, the high court nullified the tax bureau’s rulings 370-2011 and DA 378-2001, which imposed a 20-percent final tax on Caucus of Development NGOs Networks (Code-NGO), Rizal Commercial Banking Corp. and “all subsequent holders” of the Peace bonds.
It was Code NGO, an organization instrumental in installing the now detained former President Arroyo through the second People Power in 2001, that first pitched the idea of the Peace bonds to the government as a novel way to raise funds for poverty-reduction efforts.
Proceeds from the sale of the bonds were to be used “to endow a permanent fund to finance meritorious activities and projects of accredited non-government organizations throughout the country.”
On Oct. 16 of the same year, the Arroyo government sold P35 billion worth of the special 10-year bonds to Code-NGO, through RCBC, for P10.17 billion, or a discount of P24.83 billion.
On the same day, Code-NGO partnered with RCBC Capital to distribute and sell the bonds to the secondary market, including banks and insurance firms.
The BIR then imposed a 20-percent final tax on all bond-holders, saying the bonds were classified as “deposit substitutes” taxable under the law.
The petitioners then went to court to complain about the BIR’s imposition, impleading the bureau and its head, Commissioner Kim Henares, the Department of Finance and its secretary, Cesar Purisima, and the Treasury.
Other bondholders joined the petition, including Banco de Oro, Bank of Commerce, China Bank, Metrobank, Philippine Bank of Communications, Philippine National Bank, Philippine Veterans Bank and Planters Development Bank.
In its decision, the high court found that the BIR’s rulings deeming the Peace bonds taxable were “erroneous insofar as it stated that all treasury bonds regardless of the number of purchasers/lenders at the time of origination/issuance are considered deposit substitutes.”
The court said only one lender was involved in the transaction: RCBC, on behalf of Code-NGO to whom the bonds were issued.
Under the tax code, deposit substitutes are “an alternative form of obtaining funds from the public … other than deposits, through the issuance, endorsement or acceptance of debt instruments for the borrower’s own accounts …”
The “public,” as defined by law, meanwhile refers to “20 or more” individual or corporate lenders at any one time,” the ruling cited.
“Hence, the number of lenders is determinative of whether a debt instrument should be considered a deposit substitute and consequently subject to 20-percent final withholding tax,” the decision said.
“At the time of original issuance, the Peace bonds are not deemed deposit substitutes within the meaning of Section 22 (Y) of the 1997 Tax Code, since there is only one lender—RCBC on behalf of Code-NGO—to whom the bonds were issued,” the ruling said.
The high court voided the BIR’s ruling, saying the tax bureau “had completely disregarded the 20 or more lender rule added by Congress” in the 1997 Tax Code.
Through their counsel Francis Lim, the petitioner banks hailed the decision, calling it a “victory for investors who rely in good faith on government issuances relating to their investments.”
“It is a strong and powerful message from the Supreme Court that it is ready to step in at any time when the rights and interests of the investors are trampled upon. It should reassure the business sector and the investing public that we have a Supreme Court that is ready to enforce the rule of law even against the government when circumstances so warrant,” Lim said in a statement.
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