Philippines Banks Fight Bond Tax

October 18, 2011 Taxation in Philippines

FlagMANILA – Banks in the Philippines are standing up against a controversial new ruling by national tax authorities to impose a tax on government issued “tax free” bonds.

On October 17th the eight largest banks of the Philippines submitted a petition to the country’s Supreme Court over a recent ruling which, if passed, will see taxes imposed on interest earned from government Poverty Eradication and Alleviation Certificates (PEACe).

The PEACe bonds were issued in 2001, and are set to mature on October 18th. The instruments were originally aimed at raising funds for economic and social projects for the purpose at poverty reduction projects and the development of national welfare infrastructures. On October 7th the Bureau of Internal Revenue (BIR) released a new ruling stating that the PEACe bonds would be subject to a 20 percent withholding tax at maturity.

The banks claim that at the time that the bonds were created the government assured investors that incomes derived from the instruments would be exempt from the standard 20 percent withholding tax on bond incomes. According to the banks, the bondholders were only given 11 days notice regarding the implementation of the new tax, despite having held the bonds for almost 10 years.

The government was set to pay out PHP 35 billion to PEACe bond holders, with approximately PHP 24.3 billion consisting of interest. However, under the BIR’s ruling approximately PHP 5 billion of withholding tax would be deducted from the total payments.

The banks asserted that the newly imposed tax “amounts to an oppressive and arbitrary confiscation of the property of the bondholders…” They claimed further that the tax ruling will be very damaging to the credibility of the current Philippines government, and will serve to erode investors’ confidence in the current administration.

Photo by Maerks