PEACe Bonds subject to P5-billion taxes, BIR insists

MANILA, Philippines - Unfazed by the ruling of the Supreme Court on the tax on the so-called PEACe Bonds, the Bureau of Internal Revenue (BIR) said it is defending its position that the bonds are subject to nearly P5 billion in taxes.

The Supreme Court had issued a temporary restraining order (TRO) barring the Bureau of the Treasury (BTr) from withholding from banks the 20- percent final tax on the PEACe bonds due Oct. 18.

Instead, the Supreme Court ordered the banks to put the money in escrow until the issue is resolved.

BIR Commissioner Kim Henares said yesterday the agency is preparing its reply to the High Court’s decision.

In a television interview, Henares said the Treasury did not receive the Supreme Court’s decision on time.

The BIR ruled that the PEACe Bonds or the Poverty Eradication and Alleviation Certificates are not exempt from withholding taxes, contrary to a ruling issued in 2001 when the government issued the 10-year zero coupon bonds.

Henares said that a BIR ruling issued in 2004 and reiterated yesterday through another ruling she issued this month, clarified that the PEACe Bonds are not exempt from withholding tax.

Henares said a 2001 ruling issued by then BIR Commissioner Rene Banez erroneously stated that the PEACe Bonds were not considered deposit substitutes and were not subject to 20- percent final withholding tax.

“The erroneous interpretation in BIR ruling 020-2001 was expressly superseded in 2004 by BIR ruling 007-04 which provided that mere issuance of government debt instruments and securities is deemed as falling within the coverage of deposit substitutes irrespective o the number of lenders at the time of origination,” the BIR said in a separate statement in Oct. 17.

The government issued the bonds in 2001 following a proposal of the CODE-NGO or the Caucus of Development NGO Networks.

CODE-NGO, through Rizal Commercial Banking Corp. brought the bonds on Oct. 16, 2001 for P10.17 billion, a discounted rate, with interest of 12.75 percent.

The so-called PEACe Bonds have been surrounded by controversy since day one. Originally, CODE-NGO proposed that the government issues 10-year zero coupon notes worth P15 billion. Under the proposal, CODE-NGO will purchase the notes and sell them to investors. The net proceeds, which were estimated at P1.45 billion would be used by CODE-NGO to establish a fund that will finance anti-poverty projects.

However, then National Treasurer Sergio Edeza questioned the propriety of issuing the bonds directly to CODE-NGO, saying that the latter was not a Government Securities Eligible Dealer.

Edeza said the issuance of the bonds should be done through an auction and that CODE-NGO should get a GSED to make a tender on its behalf.