PEACe bonds debate is about sanctity of contracts
(First of two parts)
TAX DEBATE Members of the executive committee of the Freedom from Debt Coalition express their opposition to PEACe funds, claiming that Filipinos are P35-billion deeper in debt because of these. A tax issue has emerged with the bonds’ recent maturity involving bankers on the one hand, and the government, on the other. CONTRIBUTED PHOTO
“We fought for honor and if only for honor, we shall pay.”
Thus said President Corazon Aquino in her speech before the US Congress in 1986, committing the Republic of Philippines to paying every cent of what was then a heavy foreign debt burden, the bulk of which supposedly did not benefit the Filipino people.
Some veterans of the first Aquino administration remember the contentious debates that raged then about whether the government should recognize the foreign debt accumulated by the Marcos administration.
“The banks will never lend to us again,” was the warning often heard from Palace advisers who convinced the President to honor the country’s debts.
“They will never trust as again if we don’t pay up,” was the other commonly heard warning.
A quarter of a century later, the administration of her son, President Benigno Aquino III, seems to have chosen a different path. Or at least this different path is the one the President’s advisers want to administration to take.
To be sure, the debate about $26 billion in foreign debt is not exactly the same as the debate over whether P5 billion in supposed taxes should be withheld by the government from creditors’ profits. But there are parallels in principle.
However, no less than Finance Secretary Cesar Purisima has advocated the imposition of a 20-percent final withholding tax on the proceeds of the Poverty Eradication and Alleviation Certificates, more commonly known as the PEACe bonds.
The de facto head of the administration’s economic team has been at the forefront of the Aquino administration’s crusade against perceived anomalous deals of the previous Palace tenants and insists that the government did not change the rules in the tax treatment of the PEACe bonds.
According to him, it was Code-NGO that had changed the rules when it convinced the government in 2001 to issue bonds that were exempt from the customary 20-percent final withholding tax.
But convince the government Code-NGO did, and the Bureau of the Treasury sold off the bonds to buyers then, specifically saying that they were exempt from the 20-percent final withholding tax.
As such, a consortium of banks, which had bought the PEACe bonds, is now questioning the integrity and the trustworthiness of the government’s word.
“What my clients relied upon was the contractual undertaking of the government that the PEACe bonds were not subject to the 20-percent final withholding tax,” the banks’ lawyer, Francis Lim, told the Inquirer.
The Department of Finance has since said that the tax features of the PEACe bonds were modified by a subsequent Bureau of Internal Revenue ruling that stripped them of their exemption from the final withholding tax.
But for Lim—an expert on capital markets—“whether or not the subsequent rulings were correct is not as important as the sanctity of the contractual commitment.”
Amid this debate, however, the clock is ticking and time is running out for the banks.
According to a ranking government source, the Bureau of the Treasury—which withheld P5 billion in taxes from the PEACe bonds when they matured last month—remits its collections to the BIR every 10th of the month.
Thus, on Thursday (November 10), it is scheduled to turn over these tax collections to the tax bureau, after which the funds will become part of the national coffers.
“Once this happens, it will take an act of Congress for these funds to be returned to the banks, even if they secure a favorable ruling from the Supreme Court,” according to an Inquirer source.
“For the money to be returned to them, Congress will have to make an appropriation for it in the national budget, and the national budget for next year has already been finished,” the source explained. “So the earliest they can get their money back is 2013, if they can convince Congress to make an appropriation.”
It now remains to be seen whether the Treasury would remit these funds to the BIR on Thursday—and risk being cited by the Supreme Court for being in contempt of its injunction on the case.
(To be concluded)
