DOF decries report it defied TRO on collection of final withholding tax on PEACe Bond

November 4, 2011 10:02 pm 

MANILA, Nov. 4 -– The Department of Finance (DOF) on Friday denied news reports saying it, along with its attached bureaus, defied the court’s temporary restraining order (TRO) regarding the collection of final withholding tax of PEACe Bonds.

The Supreme Court (SC) issued on Oct. 18, 2011 a TRO to stop DOF, the Bureau of Internal Revenue (BIR) and the Bureau of the Treasury (BTr) from collecting the 20 percent final withholding tax on the 10-year Poverty Eradication and Alleviation Certificates (PEACe) bonds.

However, the DOF, in a statement, said they received the copy of the TRO on Oct. 19 – a day after the maturity of the PEACe bond, which is also the day when the tax was supposed to be withheld.

“Had the agencies received the TRO before the close of business on October 18, 2011, compliance would not have been a problem. However, since the TRO was received only on the day after the tax had been withheld, compliance with the TRO was no longer possible since Section 58 of the Tax Code provides that “The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the government until paid to the collecting officers,” it said in its Comment filed through the Office of the Solicitor General (OSG).

The Comment explained that the tax was withheld “inasmuch as: (1) no TRO was received enjoining the implementation of the 2011 BIR Rulings; (2) the 20 percent FWT had not yet been collected … and the period for the collection thereof had not yet expired … and (3) …. considering the stiff statutory penalties prescribed under Sections 251 and 255 of the Tax Code in case of willful failure to withhold a tax.”

DOF said that it was required by law to withhold the tax otherwise its officials can be imprisoned between one to 10 years or be slapped by a penalty of not less than P10,000 or a penalty equal to the amount of tax not withheld under Sections 251 and 255 of the Tax Code.

It, also cited that it cannot disburse the withheld taxes “in trust for the government to other persons” since this is a clear case of estafa.

“Considering the criminal and civil penalties for failure to withhold a tax, government officials waited until the very last minute for the reported TRO. Unfortunately, no TRO arrived in time,” it said.

The Comment also cited that it was CODE-NGO and RCBC Capital/RCBC which made unequivocal representations as to the supposed ‘tax exempt’ nature of the PEACe Bonds…” and not the Bureau of Treasury

“Without a law giving it such authority, the Bureau of Treasury, by itself, has no power to contractually grant a tax exemption in favor of the petitioners since such power is exclusively legislative,” the DOF statement added.

Banks namely Banco de Oro Unibank (BDO), Bank of Commerce, China Banking Corporation (Chinabank), Metropolitan Bank and Trust Co.(Metrobank), Philippine Bank of Communications (PBCom), Philippine National Bank (PNB), Philippine Veterans Bank and Planters Development Bank have asked the SC to issue TRO citing that DOF need not collect the final withholding tax because this was the earlier rule of the BIR.

However, Internal Revenue Commissioner Kim Henares said they would collect the P24.3 billion worth of interest income from the bond holders citing BIR Ruling No. 370-11, which explained that BTr would just be implementing provisions of Tax Code regarding the taxation of interest income from deposit substitutes.

Henares explained that when BTr issued the PEACe bond in 2001, it relied on BIR Ruling No. 020-2001 that estates that the said bond would not be considered deposit substitutes if it was issued to 19 lenders or less.

The zero-coupon bond was bought by Code-NGO, through Rizal Commercial Banking Corporation (RCBC), on October 16, 2011 for P10.17 billion at an interest rate of 12.75 percent. This was then resold to other investors like banks.

Holders of zero-coupon bond will not be given interest earnings annually as this would be given in lump sum when the debt instrument matures.

Henares, however, pointed out that the 2001 BIR Ruling on this bond was superseded by BIR Ruling No. 007-04, which estates that “mere issuance of government debt instruments and securities is deemed as falling within the coverage of deposit substitutes irrespective of the number of lenders at the time of origination.” (PNA) RMA/JS/rsm

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