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Press Conference: PEACe Bonds

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BIR Commissioner Kim S. Jacinto-Henares held a press conference earlier today 11AM at the BIR National Office Conference room regarding the controversial PEACE Bond.  BIR Commissioner focused on the issue on the collection of the 20% final withholding tax on interest income which would amount to a hefty 5 Billion pesos.

The Department of Finance (DOF) and the Bureau of Internal Revenue (BIR) are unable to cmment directly on reports that the Rizal Commercial Banking Corp. has file a case before the Court of  TAx Appeals (CTA) questioning the legality and propriety of BIR ruling No. 370-2011 which confirmed that the 20% final withholding tax is applicable to the so called PEACE Bonds.

Neither the BIR nor the DOF has received a copy of the supposed pleading by RCBC at this time.

Moreover, the BIRs determination that the Bureau of Treasure  (BTr) “shall withhold the Final Tax due on interest income derived from the PEACe Bonds prior to its payment on the date of maturity” cannot be interpreted as a breach of contract.

In the light of BIR ruling No. 370-2011 and 378-2011, the BTr still pays the full face value of the  PEACe Bonds to the investor(s) holder(s), although subject to the BTr’s legal obligation to withhold the 20% final tax. In doing so, the BTr is merely implementing the plain  provisions of the Tax Code on the taxation of interest income from deposit substitutes, as elucidated in the BIR Ruling Nos. 007-2007, 370-2011 and 378-2011.

The DOF further clarified that at issuance, Government Securities Eligible Dealers (GSEDs) were informed by the BTr that the PEACEe Bonds were subject to income tax.

However, at the time of issuance of the PEACe Bonds, the BTr relied on BIR ruling No. 020-2001 dated May 31, 2001, as clarified by BIR Ruling 35-2001 dated August 16, 2001. and BIR DA 175-2001 dated September 29, 2001, which (erroneously) held that, provided it was issued or less, the PEACe bonds were not considered deposit substitutes and were not subject to 20% final withholding tax.

-The erroneous interpretation in the BIR ruling No. 020-2001 was expressly superseded in 2001 by BIR ruling No. 007-04, which provided that “mere issuance of government debt instruments and securities is deemed as falling within the coverage of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.

The BIR further stated that here has been no material change in the tax laws.  Simply put, BIR ruling No. 370-2011 and 378-2011 merely makes it clear that the applicable tax on the PEACe Bonds is the final tax on deposit substitutes and not the ordinary income tax.  This clarification is in turn merely an application of the rulings made in 2004.

If  however, any taxpayer has erroneously paid the ordinary income tax on the interest or income from the PEACe Bonds pursuant to the now BIR ruling No. 020-2001, the BIR expressed willingness to refund this in accordance with the law.


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