Revised BIR ruling includes final PEACe Bond holders in tax coverage

THE Bureau of Internal Revenue modified on Monday its Oct. 7 ruling to include “all subsequent holders” of the PEACe Bonds, in addition to the original buyer, the Caucus of Development NGO Networks (Code-NGO), as liable to pay the 20 percent final withholding tax on the bonds that mature Tuesday.

The tax, which will earn government about P5 billion, is being contested before the Supreme Court by eight banks that are the final holders of the zero-coupon bonds called Poverty Eradication and Alleviation Certificates (PEACe).

Commissioner Kim Henares told a press conference on Monday that government will impose the tax unless stopped by the court.

She also cautioned tax planners against being “too creative” and “too aggressive” as designers of the PEACe Bonds.

Code-NGO proposed and designed the bonds in 2001 to President Gloria Macapagal Arroyo, whom it helped install that year, to raise money for the organization’s antipoverty programs.

It obtained three BIR rulings exempting the bonds from capital gains tax and the 20 percent final withholding tax. The rulings were overturned in 2004 and 2005 decisions that were upheld by Henares in her Oct. 7 ruling.

Although declared liable by the BIR, Code-NGO will not be paying the final tax because it unloaded the bonds on Oct. 16, 2001, the same day it bought them through RCBC for P10.17 billion, at a discount of P24.3 billion and 12.75 interest rate.

The bonds were sold to RCBC Capital and Code-NGO profited P1.83 million. RCBC Capital, in turn, resold the bonds through the secondary and tertiary markets, mostly to banks and insurance companies.

The bonds mature on Tuesday, and the Bureau of Treasury is paying bond holders P35 billion, including the P24.3 billion interest income that Henares’ rulings declare as subject to final tax. The Bureau of Treasury has been instructed to withhold the tax.

The eight banks that asked the Supreme Court to stop the BIR from enforcing the final tax are Banco De Oro, Bank of Commerce, China Banking Corp., Metropolitan Bank and Trust Co., Philippine Bank of Communications, Philippine National Bank, Philippine Veterans Bank and Planters Development Bank.
Bir Ruling No DA 378-2011