BANKS ASK SC TO STOP 20% TAX ON PEACe BONDS / NOY REJECTS CODE NGO
MANILA, OCTOBER 19, 2011 (TRIBUNE) By Benjamin B. Pulta - Some of the country's biggest banks sought the Supreme Court's (SC) intervention in issuing an order to restrain the Bureau of Internal Revenue (BIR) from imposing a 20 percent final withholding tax on the Poverty Eradication and Alleviation Certificate Bonds or the so-called PEACe bonds 10 years late and when the government debt papers are scheduled for payout today, a move which could mean potential losses of income amounting to P5 billion for bond investors.
Banks involved in the float are asking the SC to issue a temporary restraining order (TRO) to stop Malacañang from imposing and collecting a 20 percent final withholding tax (FWT) on P35 billion worth of government bonds which will mature today.
The banks noted that the government had assured investors including them that the income derived from these bonds are exempt from 20 percent tax under section 27 of the National Internal Revenue Code.
The banks' argument got support from Sen. Edgardo Angara saying whatever were the defects in the issuance of the bonds, these remained an obligation of the government.
"My understanding is that this has a no interest coupon. The accumulated interests are paid at the end of the 10-year period. If the government committed that the debt papers are exempt from tax and then it would change its mind later on, that is a problem. There is a breach of contractual commitment," Angara said.
Whether or not its a sweetheart deal is another issue, Angara added.
The government issued P10 billion worth PEACe bonds in 2001 which the BIR said that based on its ruling on 2004 and 2005 should be levied a 20 percent tax.
The BIR said its previous rulings held that all government securities issued by the Treasury are "deposit substitutes" and therefore subject to the 20 percent withholding tax.
Prior to the sale of the bonds by the Bureau of Treasury, however, the BIR issued three rulings in May, August and September 2001 declaring that the said bonds are not subject to the 20 percent FWT.
Some of the more prominent officials of the Aquino administration including Social Welfare and Development Secretary Corazon "Dinky" Soliman and Office of the Presidential Adviser on Peace Process Secretary Teresita "Ging" Deles, were former officials of Code NGO which conceptualized the zero-coupon PEACe bonds float.
At the time of the float, the head of Code-NGO was Maria Socorro Camacho, the sister of former President Arroyo's erstwhile Finance Secretary Isidro Camacho.
Code-NGO, through the Yuchengco group's Rizal Commercial Banking Corp. bought the bonds on Oct. 16, 2001 at a discount and at 12.75 percent interest rate. The bonds were then resold mostly to banks and insurance companies.
The group earned an estimated P1.8 billion in profits from the resale of the bonds in the secondary market. Code NGO said that the money was used as an endowment fund to finance anti-poverty projects.
The petitioners, Banco de Oro, Bank of Commerce, China Banking Corporation, Metropolitan Bank and Trust Company, Philippine Bank of Communications, Philippine National Bank, Philippine Veterans Bank, and Planters Development Bank, are holders of bonds issued by the government. The treasury bonds with a 10-year tenor that will mature on Oct. 18, 2011.
Banks took the matter to the high tribunal citing that several days before the maturity of the bonds, the BIR upon the request of the Department of Finance, issued a ruling on October 7, 2011 stating that the government bonds are not exempt from the withholding tax.
Senate President Protempore Jinggoy Estrada said the Senate should revisit the case. "I favor the reopening of investigation to determine if the government did benefit from the bonds float or not," Estrada said.
"I would appeal to the chairman on the committee on banks, and financial institutions to re-examine or to hold a hearing regarding this anomalous transaction. Its really anomalous and that is disadvantageous to the government," Estrada added.
Sen. Ralph Recto raised suspicions that the bonds issue was the result of a sweetheart deal between Code NGO and the Arroyo government. "The reason for the high interest rates the bonds earned was that it was a sweetheart deal. There was no bidding held for it," he said.
The government borrowed P10 billion, after 10 years the payment would be P35 billion, that means P25 billion in interest, Recto added.
"Having voluntarily entered into contracts with the investors that relied on its representations, the government cannot belatedly and arbitrarily withdraw such representation, as the same amounts to, among others, a confiscation of property without due process of law, a violation of the principle of inviolability of contracts… and a contravention of the principle of equitable estoppels," the petitioners said.
The banks noted that they stand to lose an approximate amount of P5 billion due to the imposition of 20 percent FWT from the payment of the P35 billion face value of said bonds.
The banks warned that government's refusal to fulfill its obligation will result in "heightened perception" that the country's capital markets are shaky.
The banks claim the government will also be perceived as inutile in protecting investors from regulatory risk, which is likely result in an increased interest rate for government-issued instruments.
"The imposition of the 20 percent FWT, which is no more than the government's way of legitimizing its default, will be damaging to its credit reputation. It will send a strong message to both local and international financial institutions and investors and that there is no certainty, predictability and stability in financial transactions with the government," the banks argued.
"Inevitably, this will result in further erosion of investors' confidence in the government. It will reinforce investors' perception of the Philippine government as a credit risk. When this happens, the Philippines will be in grave danger of being excluded from capital markets," they added.
The government's refusal to pay the full face value of the government bonds, according to the banks, is "an evident scheme to evade a validly contracted obligations with its investors."
The petitioners asked the Court to conduct a special raffle yesterday for their petition to expedite its resolution of their petition for certiorari with, prohibition and/or mandamus.
Internal Revenue Commissioner Kim Henares insisted that the government should collect a 20 percent withholding tax on the interest income of the 10-year bonds.
Henares told reporters the BIR will impose a withholding tax on the P24.3 billion in interest income once paid by the National Treasury today when the bonds mature. "We don't have the list of the banks holding the PEACe bonds. Supposedly under the bank secrecy law, it is supposed to be confidential. The instruction is to hold the 20 percent of the P25 billion," she said.
She said that if banks have been paying income taxes on the PEACe Bonds, these would be refunded or credited to the 20 percent withholding tax.
Noynoy rejects Code NGO By Virgilio J. Bugaoisan 10/19/2011
While debates raged yesterday over the Bureau of Internal Revenue's (BIR) belated decision to slap a 20 percent tax on the controversial Poverty Eradication and Alleviation Certificate (PEACe) bonds that matured yesterday needing the government to shell out P35 billion to pay for the P10 billion borrowings 10 years ago, the architect of the so-called zero bond float that counts among key figures in the Aquino administration appeared to be let off the hook.
President Aquino insisted that the bond holders will have to pay the 20 percent percent final withholding tax on the total P25 billion payout but rejected suggestions to explore the liability of key personalities in his administration that include Social Welfarte and Development Secretary Dinky Soliman and Peace Adviser Teresita "Ging" Deles who are officials of Caucus of Development NGO Networks (Code NGO) that conceptualized the bond issue.
The bond float was given full tax exemption when it was created in 2001 but subsequent rulings of the BIR removed such perks but the
BIR issued a ruling to implement the removal of the exemption only a few days prior to the maturity of the bonds.
In an ambush interview, Aquino shrugged off suggestions that he should discuss the issue with Soliman and Deles following the maturity of the 10-year PEACe bonds, which in effect gives investors the right to fully recover the value of their bond plus interests.
Aquino said the PEACe bond issue only involved the Department of Finance and the Bureau of Internal Revenue and insisted that Soliman and Deles no longer have anything to do with it despite their having engineered this scheme and convinced former President and now Pampanga Rep. Gloria Arroyo to sanction the float of the 10-year P10 billion PEACe bonds that guaranteed investors a 12.75 percent interest payout.
Commercial banks involved in the PEACe bonds transaction sued for a temporary restraining order (TRO) with the Supreme Court on the imposition of the 20 percent tax and Sen. Edgardo Angara warned that the BIR's belated decision to impose a tax on the issue constituted a breach of contractual agreement.
The Freedom from Debt Coalition stated its support for the imposition of taxes on the PEACe bonds while at the same time comparing the bonds issue to the financial scams by huge Wall Street banks, which triggered the 2008 financial crisis that led to the collapse of major world economies, stealing ordinary people's pensions and life savings, putting them out of their homes and schools, and causing them to lose their jobs.
"These banks want super profit and risk-free and no-tax investments, and expect government to bail them out in case of default, using public money," FDC secretary-general Milo Tanchuling said.
"This is the same with the PEACe bonds case. The banks who bought the bonds know of the taxes, but because of greed they still bought the controversy-ridden bonds. These banks are as greedy as the major banks in Wall Street," Tanchuling added.
Bayan Muna Rep.Teddy Casino (photo) said the liability of who should pay the taxes for the P35-billion transactions should be determined first.
"Today, the P35B Code-NGO Peace bonds mature and gov't is supposed to pay the bond holders their P25B profit from interest. Considering the controversy over who should pay the 20 percent withholding tax, which Code-NGO is liable but which the present bond holders will unjustly pay, the DoF should stop payment first until the matter is clarified, including whether Code-NGO and officials of the GMA administration are liable for incurring a behest loan and making huge profits at the people's expense," Casino said.
"The DoF should not redeem those bonds today until the matter is cleared," Casino stressed.
The P10-billion 10–year treasury zero coupon notes was awarded in October 2001 by the former Arroyo government to the Rizal Commercial Banking Corporation in behalf of Code-NGO which had Soliman and Deles, who were then ardent allies of Arroyo as former officials.
Soliman denied any involvement in the transaction, saying she was no longer the head of Code-NGO or the group that purportedly received the P1.4 billion of the total commission from the PEACe bonds during the time when the transaction happened.
But Soliman's husband, lawyer Hector Soliman was then the corporate secretary and one of the board of directors of the Peace and Equity Foundation (PEF) or the foundation that received the P1.3-billion out of the P1.4-billion commissions from the Code-NGO at the time of the controversial transaction materialized.
In one of the hearings by the House committee on good government and public accountability, Anna Marie Karaos, chairman of Code-NGO, replied in the affirmative when asked by House Deputy Minority Leader and Zambales Rep. Milagros Magsaysay that Soliman's husband was part of the board of directors of the PEF which got 90 percent of the P1.4 billion earned by the Code-NGO.
Reports said that the transaction allowed the Code NGO to earn a P1.4-billion commission on a government bond flotation in 2001 and was allegedly engineered by Marissa Camacho-Reyes, the sister of Arroyo's former Finance Minister Jose Isidro Camacho.
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