MANILA, Philippines — The Yuchengco-led Rizal Commercial Banking Corporation (RCBC) has asked a court to review a government order that seeks to impose a 20 percent tax on bonds sold in 2001 that were supposed to be exempt from the levy.

Macel Fernandez-Estavillo, RCBC head of legal and regulatory affairs said that they are questioning the propriety and legality of a Bureau of Internal Revenue ruling that a final withholding tax is applicable on P35 billion of government bonds due October 18.

Fernandez-Estavillo explained that such ruling of the government’s main tax agency is in breach of contract because the bonds were originally not subject to a withholding tax based on a term sheet distributed to investors when the debt was issued in 2001.

The BIR, which accounts for about 70 percent of the state income, had estimated that the government would generate almost P5 billion in revenue from the levy.

Meanwhile, the Bankers Association of the Philippines, which represents the 36 commercial lenders, is also seeking a dialog with the government to discuss the issue.

“We are hoping the government will reconsider this ruling because this sets a bad precedent for future capital issues,” Nestor Tan, head of the association’s tax committee said.

“It will impact profits of banks in varying degrees,” said Tan, who is also president of Banco de Oro Unibank Inc. The BIR earlier said that the 20 percent tax on the bonds will be deducted by the Bureau of the Treasury at the time of redemption.

“This ruling came as a total surprise to all the banks,” Fernand Antonio Tansingco, Metropolitan Bank & Trust Company treasurer said. “Investors who in good faith bought the government bonds according to the term- sheet details will suffer.”

In a BIR ruling, the agency stated that the treasury bureau should withhold the applicable tax from the P35 billion face value of the bonds, which is set to be paid out on October 18, 2011.

The PEACeBonds, also known as ‘Poverty Eradication and Alleviation Certificates’ were issued by the Treasury in 2001 and are set to mature on October 18, 2011.

Responding to a query from the Department of Finance, the BIR confirmed that BIR Ruling Nos. DA-491-04 and 008-05, dated September 13, 2004 and July 28, 2005 respectively, applied to the PEACe Bonds.

These Rulings held that all Government Securities issued by the Treasury are ‘deposit substitutes’ and therefore subject to the 20 percent withholding tax.

The 2004 and 2005 rulings effectively reversed an earlier 2001 ruling of the BIR, which found that the PEACe Bonds were exempt from the 20 percent final withholding tax.

Sought for comment, Finance Secretary Cesar V. Purisima stated that the recent BIR ruling merely confirms that existing rulings on the tax treatment of Treasury Bills and Treasury Bonds apply to the PEACe Bonds and provides appropriate legal basis for the Treasury to withhold the tax.

He stressed that “the PEACe Bonds are very unique among government securities. They are the only outstanding government securities where there was some question as to the applicable tax.”

“Normally, deposit substitutes, like the forthcoming Retail Treasury Bond offering, are subject to the 20 percent final withholding tax,” Purisima explained.

“There was some question as to the proper treatment for the PEACe Bonds since there was a 2001 ruling making it subject to ordinary income tax instead of the 20 percent final withholding tax, which was then superseded by BIR rulings in 2004 and 2005.”

“The recent BIR Ruling makes it clear that the PEACe bonds are treated the same way as all other government securities for tax purposes,” he said.