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SC issues TRO on PEACe bond tax

Posted at 10/18/2011 2:57 PM | Updated as of 10/18/2011 6:59 PM

Philippines (2nd UPDATE) - The Supreme Court has issued a temporary restraining order on the Bureau of Internal Revenue (BIR) ruling imposing a 20% final withholding tax on the government's Poverty Eradication and Alleviation Certificates (PEACe) bonds.

Supreme Court spokesman Midas Marquez said the banks have been ordered to put in escrow the withholding tax, equivalent to P5 billion, until the high court settles the case.

Marquez said this was to protect the government in case the court rules that the bonds are taxable.

The High Court acted on a petition filed by 8 banks Monday, asking it to nullify the Bureau of Internal Revenue (BIR) ruling because it went against the terms government set when it sold the bonds in 2001. The banks, Banco de Oro, Bank of Commerce, China Banking Corporation, Metropolitan Bank & Trust Company, Philippine Bank of Communications, Philippine National Bank, Philippine Veterans Bank and Planters Development Bank, are holders of the PEACe bonds maturing Tuesday, October 18.

The bonds were pushed by Code-NGO, an organization once headed by Social Welfare Secretary Dinky Soliman. Code-NGO and its bankers succeeded in getting government to exempt the bond from withholding tax.

Code-NGO made P1.8 billion from the transaction.

The bonds were exempted from tax obligations based on a BIR ruling in 2001.

However, on October 7, 2011, the BIR issued a ruling implementing a 20% final withholding tax (FWT) on the P35-billion worth of PEACe bonds. The BIR based its new ruling on its earlier rulings dated Sept. 13, 2004 and July 28, 2005 that stated that interest income of "deposit substitutes" are subject to the 20% withholding tax.

Deposit substitutes are defined in the National Internal Revenue Code as "an alternative form of obtaining funds from the public, other than deposits."

Sanctity of contract

Meanwhile, the banks said imposing withholding tax on the PEACe bonds will impair the sanctity of their contract with government, worsening investor concerns on regulatory risks in the country.

"The situation has devastating implications on the credibility of our country and will definitely be viewed as exemplifying lack of credibility, predictability and stability in our markets," said the banks' lawyer, Francis Lim.

In their petition to the SC, the banks claimed that investors who bought the bonds in 2001 relied on the representations of government that these were not subject to the 20% withholding tax based on the BIR rulings.

“It should be noted that the pricing of the bonds (lower than comparable issues that were subject to tax) at that time of issue reflected the status of the bond as not subject to 20% FWT," they said.

They said changing the rules midway through the bonds' tenor was illegal.

"Belatedly applying the 2011 ruling to investors who bought the bonds is prohibited by the Tax Code."

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