"If the tax department goes ahead with the move it will virtually kill the offshore banking business in this country," Leonilo Coronel, executive director of the Bankers Association of the Philippines, told Agence France Presse.
Depositors with foreign currency accounts in the Philippines currently pay 7.5 percent tax on interest income and 10 percent on withholding tax on interest payments for loans financed by foreign currency deposit units (FCDU).
However, the tax department claims a revision of the Tax Reform Act seven years ago when the words "exempted from all taxes" were removed allows it to collect additional taxes such as stamp duty on foreign currency deposits.
The attempt to claim new taxes, estimated at P39 billion, has outraged bankers and the country’s new finance secretary, Margarito Teves, is said to be looking into the issue.
According to the central bank some $15 billion is tied up in foreign currency accounts in the Philippines as of Dec. 31, 2004.
Bankers association president Cesar Virata, who is also chairman of the Rizal Commercial Banking Corp., earlier this week warned the country could lose most of its foreign currency deposits if the disputed tax is collected.
And Kim Jacinto Henares, the deputy tax commissioner told a business newspaper this week that the dispute had come down to a "battle of wills" between the tax department and the banks.
In 1976 banks were permitted to establish FCDUs allowing local banks to lend in foreign currency, take foreign currency deposits and conduct foreign currency transactions with clients.
Coronel said when the FCDUs were established they were subject only to income tax and it was currently still the case. — AFP