8 local banks ask SC to stop tax on PEACe bonds
Several of the country’s top banks on Monday asked the Supreme Court to stop the government from imposing a 20-percent withholding tax on the maturing and supposedly tax-free “PEACe bonds.”
Industry leaders Banco de Oro Unibank and Metropolitan Bank and Trust Co. led other lenders in asking the high tribunal to issue a temporary restraining order (TRO) to stop the Bureau of Internal Revenue (BIR) from collecting as much as P5 billion in taxes from the Poverty Eradication and Alleviation Certificates (PEACe bonds).
Also named petitioners were Bank of Commerce, China Banking Corp., Philippine Bank of Communications, Philippine National Bank, Philippine Veterans Bank and the Planters Development Bank.
In their 66-page petition, the banks accused the BIR of “grave abuse of discretion amounting to lack or excess of jurisdiction” when it issued Ruling No. 370-2011 last October 7, which said the controversial PEACe bonds maturing Tuesday were subject to a 20-percent final withholding tax.
Aside from a TRO, the banks also asked the high tribunal to issue a permanent injunction on the withholding tax on the PEACe bonds.
The government is set to pay out a total of P35 billion to investors that acquired the securities. But P5 billion of this would return to state coffers in the form of taxes, if the BIR’s ruling is implemented.
The PEACe bonds are considered zero-coupon debt paper, or a security that does not pay interest but is sold at a deep discount, giving a profit at maturity when the bond is redeemed at its full face value.
The PEACe bonds were sold by the government during an auction on Oct. 16, 2001, raising P10.17 billion to fund poverty-alleviation efforts.
When the bonds were first issued, “the government assured the investors that the income derived from these bonds [would be] exempt from the 20-percent final withholding tax” under the National Internal Revenue Code, the joint petition read.
This was backed by three separate rulings issued by the BIR in May, August and September 2001, before the bonds were issued. These rulings “categorically [declared] that said bonds would not be subject to the withholding tax.”
Subsequent rulings in 2004 and again in 2005 by the BIR ruled that government securities, including the PEACe bonds, would be subjected to taxes—overturning the 2001 decisions.
“Relying on good faith on this contractual undertaking of the government, investors bought the bonds in varying amounts in the secondary markets,” the banks’ petition said.
Granting that the latest BIR ruling was legal, it was issued 11 days prior to the maturity date of the PEACe bonds, October 18, without any prior notice being sent to bondholders.
“This case is a clear example of regulatory risk—a very big issue of investors against the Philippines—where investors do not get what the government has contractually committed to them because of a change in regulation,” the petition said.
The banks said the government’s move would have “devastating” implications on the credibility of the Aquino administration and be viewed as an example of the lack of predictability and stability of the country’s markets.
The petition said taxing the bonds appeared to be a “scheme to evade its validly contracted obligations with its investors.”
The banks said the threatened withholding of the 20-percent tax from the face value of the government bonds “amounts to an oppressive and arbitrary confiscation of the property of the bondholders, including the petitioners, without due process.”—With a report from Philip C. Tubeza
