PEACe bonds dispute may widen DoF, creditors rift

(Conclusion)

“Done.”

In the fast-paced world of finance, this simple, one syllable word holds a special and powerful meaning.

Workers in the financial industry, especially traders, utter the word “done”—sometimes in transactions worth billions of pesos agreed upon only over the phone—as a rock-solid verbal signature on the dotted line.

Among people engaged in this business, the word is sacred, said Bank of Commerce president Sergio Edeza.

“A trader’s word is a trader’s bond,” he told the Inquirer in an interview. “Once you commit, you don’t renege on it. Doing so destroys the credibility of the transaction and your own.”

Edeza should know—and more so on the issue of the PEACe bonds, because he is uniquely positioned, having been the national treasurer that oversaw its issuance a decade ago, and now the head of one of the banks opposing the Department of Finance’s move to suddenly impose a 20-percent withholding tax on them.

“Investors won’t look at it as proper when parties change the terms [of the transaction belatedly],” Edeza said. “It’s a question of professional ethics, and in this case, whether the government exercised professional ethics [or not].”

It is this change in the terms of the PEACe bonds that has the local banking community—one of the biggest lenders that help the national government cover its annual cash shortfall—up in arms.

According to Internal Revenue Commissioner Kim Henares, whatever exemption the P10-billion bond issue enjoyed in 2001 was overturned by subsequent BIR rulings that re-imposed the withholding tax requirement.

Henares seemed to be caught in the middle of a clash between her boss, Finance Secretary Cesar Purisima—a staunch critic of many transactions entered into by the previous administration—and the banking community, which is harping on the “sanctity of contracts” principle to get its way.

“This is the law,” she said, stressing her point about the latest BIR rulings on the issue. “A contractual obligation is not superior to the law.”

Then there is also the debate about whether the Department of Finance (DoF) disobeyed the Supreme Court by withholding taxes from the PEACe bonds’ payment despite the high tribunal’s injunction issued as the securities matured.

DoF officials contended that they received the Supreme Court’s order only on the following day, after the Bureau of the Treasury had already repaid the bonds, sans the 20-percent tax.

Several lawyers polled by the Inquirer pointed out, however, that a Supreme Court injunction has the nature of a “continuing order” that must be complied with even after the act it prevented has been consummated.

“In other words, if they withheld the taxes today and received the order tomorrow, they should still release the tax component back to the banks to allow [the latter] to comply with the Supreme Court order [of putting the funds in escrow pending the resolution of the issue],” said one lawyer. “They could be cited for contempt [of court].”

So far, however, none of the arguments have managed to sway the DoF.

Because of this, banks are preparing for a new tack should the confrontation continue — the possibility of suing the DoF for fraud under the provisions of the Securities Regulation Code.

“What the concerned officials do not realize is that they are exposing themselves and the government to triple the amount of the transaction or P105 billion, on top of actual damages, by way of civil liability, to the bondholders,” said the banks’ lawyer, Francis Lim. “This is an express provision of the SRC to protect investors in the capital markets from any act or omission that operates as a fraud on them.”

Ironically, this provision of the law was included by lawmakers in order to protect the financial system from large-scale violations of securities contracts, not knowing the government would one day be involved for probable violation.

“This is not an issue in the Supreme Court case, but this legal option is available to the bondholders at the appropriate time in the future,” Lim said.

Speaking for herself, the BIR chief took a somewhat ambivalent tone when asked about the taxation issue, saying her main thrust was to collect as much taxes for the government.

“I don’t really mind however it turns out,” she said in a telephone interview. “I’m here to implement the law, and I’ll be glad to implement whatever the Supreme Court decides on.” “Para matapos na (to get it over with),” she added.

In the meantime, the financial community waits with bated breath for the Supreme Court’s decision — with the threat of an escalation of the conflict and the resulting chaos hanging over the local financial community.