JAN.

11, 2012 DATE

NR # 2645
REF. NO.

Solon seeks inquiry into disputed taxation of PEACe bonds

A House member is seeking an inquiry into the controversial taxation of the Poverty Eradication and Alleviation Certificates (PEACe) bonds to determine who are accountable for this crisis and for the House to enact remedial legislation. Rep. Giorgidi Aggabao (4th District, Isabela) sought the inquiry through House Resolution 1949 saying an investigation by the House Committee on Ways and Means would determine if there was an anomaly relative to the PEACe bonds transaction and establish whether their issuance had caused injury to the government or to the private sector. There is a necessity to revisit the circumstances surrounding the PEACe bonds transaction so as to prevent irregular issuance of government debt instruments in the future, he said. He said the countrys top financial companies that assisted the government in times of budget constraints by investing in its long-term treasury bonds are now at a loss because they painstakingly waited for a decade-long commitment that never fullymaterialized. Aggabao, Senior Vice Chairman of the House Committee on Ways and Means, said it is clear from the following facts that there is a crisis arising from the conflicting interpretations between the BIR ruling of October 2001 and the BIR ruling of October 2011. Adding up to the crisis is the failed coordination between the executive branch (Bureau of Internal Revenue, Bureau of Treasury and Department of Finance) and the judiciary. The current crisis magnifies devastating implications on the credibility of the government in handling its contractual commitments and will definitely be viewed as exemplifying lack of credibility, predictability and stability in the markets and the countrys overall economy, Aggabao said. On May 31, 2001, the Bureau of Internal Revenue issued BIR ruling 020-2001 specifying zero-coupon (Zeros), as tax-exempt bonds. This was reaffirmed under BIR Ruling 035-2001 on August 16, 2001. Then on October 3, 2001, the Bureau of Treasury (BoT) discussed the said Zeros tax-exemptions with the Government Securities Eligible Dealers (GSEDs) and proudly announced the upcoming offering of the countrys first-ever Zeros. The BoT discussed the tax exemptions with the Bankers Association of the

JAN. 11, 2012 DATE

NR # 2645
REF. NO.

Philippines and issued an official memorandum fortifying those exemptions on October 16, 2001. On October 18, 2001, more than P10 billion worth of 10-year Zeros or politicallytermed as PEACe bonds, were auctioned by the government. In the said auction, the Caucus of Development (Code-NGO) through its GSED (agent), the RCBC Capital Corporation, won the bid and was awarded P10.17 billion worth of government bonds. On the same day, RCBC traded the PEACe bonds to secondary markets, banks and insurance companies, where they were sold at P11.9 billion, thus creating a profit of almost P2 billion for Code-NGO. Last October 2011, after almost 10 years of waiting and only a few days before the maturity of the PEACe bonds, the BIR issued BIR Ruling 370-2011 specifying the imposition of a 20 percent final withholding tax on the PEACe bonds now worth P35 billion. After hearing the ruling of the BIR, demoralized bondholders from eight of the countrys biggest banks namely: Banco de Oro, Philippine National Bank, Bank of Commerce, China Banking Corporation, Metropolitan Bank and Trust Company, Philippine Bank of Communications, Philippine Veterans Bank and Planters Development Bank, filed a petition asking the Supreme Court to stop the tax imposition. In their Supreme Court petition, the petitioners said the BIR ruling, retroactively applied to the government bonds sold in 2001, is prohibited under the 1997 Tax Code for being extremely prejudicial to the bondholders, including petitioners who relied in good faith on the BIR declaration that the bonds are exempt from final tax. On the day of maturity of the PEACe bonds, the SC issued a temporary restraining order on the BIRs ruling imposing a 20 percent final withholding tax. The BIR said it upheld the 20 percent withholding tax of the PEACe bonds on the day of maturity and that the BoT had already collected the tax because it was not able to formally receive the TRO during the office hours of that day. The SC then ordered the BIR to explain why it should not be cited for contempt for its alleged failure to comply with an order stopping the taxing of the matured P35-billion PEACe bonds. (30) rbb