by: Rey G. Panaligan 11/03/11

MANILA, Philippines — Solicitor General Jose Anselmo Cadiz said Thursday the temporary restraining order (TRO) issued by the Supreme Court (SC) on the case involving the P35 billion Poverty Eradication and Alleviation Certificate (PEACe) bonds issued in 2001 could no longer be implemented by the government.
 
In a comment, Cadiz told the SC that on October 18, the date the TRO was issued and also the day of the maturity of the PEACe bonds, the National Treasurer and the Bureau of Treasury effected settlement of the bonds and paid out the redemption proceeds net of 20 per cent final withholding tax (FWT) pursuant to the provisions of the National Internal Revenue Code of 1997 in relation to the BIR Ruling No. 370-2011.

 
“The act of withholding the amount equivalent to 20 per cent FWT was made by respondents National Treasurer and Bureau of Treasury on the bonds’ maturity date of October 18, 2011 in as much as no TRO was received enjoining the implementation of the 2011 BIR ruling on that day,”  Cadiz pointed out.
 
“As the TRO is already effectively moot, the same can no longer be implemented,” he added.
 
Financial lawyers said the development would place the banks that held the PEACe bonds in a dilemma since the money representing the 20 per cent FWT could have already been deposited with the general fund of the government and could have already been earmarked and released to finance certain projects.
 
Since only Congress can allocate funds for government expenditures and since the 2012 budget had been passed upon by the legislature, it would take banks which held the PEACe bonds another year to collect the 20 per cent FWT should the SC decide in their favor.
 
In the OSG’s comment, the SC was asked to dismiss the petition challenging the collection of 20 per cent FWT on PEACe bonds.
 
Earlier, the SC had stopped the Bureau of Internal Revenue (BIR) from collecting the 20 per cent FWT from the more than P35 billion worth of PEACe bonds issued in 2001.
 
In a TRO, the SC directed the deposit in escrow account the amount equivalent to the 20 per cent FWT.

Whatever amount deposited in escrow account would be disposed of once the petitions, filed by eight banks against the order of the BIR to collect the FWT, is resolved with finality by the SC.

The banks which filed the petition were Metropolitan Bank and Trust Co., Banco de Oro, Bank of Commerce, China Banking Corporation, Philippine Bank of Communications, Philippine National Bank, Philippine Veterans Bank, and Planters Development Bank which are holders of the PEACe bonds issued in 2001.

The banks claimed that they intend to lose some P7 billion with the collection of the FWT by the BIR.

In their petition, the banks told the SC that the government had assured investors in the PEACe bonds that the income derived would be exempt from the 20 per cent final withholding tax under the provision of the National Internal Revenue Code.

They cited various BIR issuances to the effect that the bonds are not subject to final withholding tax.

But they said that to their dismay, the BIR ruled last October 7, 2011 that PEACe bonds are not exempt from final withholding tax, and worse, the ruling would be made retroactive to 2001 when they agreed to invest in the bonds.

“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,” they said.

“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,” they also said.

“Inevitably, this will result to 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 stressed.

In its comment, the OSG said that the banks were not entitled to the issuance of a TRO due to lack of “a clear, unmistakable right,” “no material and substantial invasion of petitioners’ rights,” and that “there is no urgent need to prevent irreparable injury to petitioners.
 
The OSG explained that the petitioners have failed to show that they are entitled to exemption from the 20 percent FWT, whether under the Tax Code or any other law.
 
It stressed that the respondents could not have committed invasion of petitioners’ rights as BIR Ruling No. 370-2011 was issued only pursuant to what the law prescribes.
 
“Indeed, there could be not be a material and substantial ‘invasion’ of petitioners’ right/s, since with or without the challenged 2011 BIR Ruling, petitioner would still be liable to pay a 20 percent FWT because the PEACe bonds are legally in the nature of ‘deposit substitutes’ subject to a 20 percent a 20 percent under the NIRC,” it added.

Source: Manila Bulletin