THE Supreme Court has temporarily stopped the Bureau of Internal Revenue (BIR) from implementing its ruling that imposes a 20-percent final withholding tax on the P35-billion government bonds that are supposed to mature on Tuesday.

But SC Administrator and Spokesman Jose Midas Marquez said the issuance of the temporary restraining order (TRO) was on condition that the withholding tax be withheld by the banks and placed in escrow pending the resolution of the petition.

President Aquino said he was set to meet with those concerned with the issue this week.

“I’ll be meeting both the secretary of finance and the commissioner of the BIR to discuss this particular issue, then we will review this specifically to address the complaints of those who undertook the PEACe bonds,” he said.

Presidential Spokesman Edwin Lacierda, in an interview with reporters, would not say whether the Executive, through a review of the issue, could rescind the BIR ruling to collect the 20-percent final withholding tax on the bonds.

He said the issue will be “studied further” and that “we would have to defer to the legal and also to the finance department on that point.”

The petition for a TRO was filed by Banco de Oro Unibank Inc., Bank of Commerce, China Banking Corp., Metropolitan Bank and Trust Co., Philippine Bank of Communications, Philippine National Bank, Philippine Veterans Bank, and Planters Development Bank. They questioned the legality of the BIR ruling in their capacity as holders of the Poverty Eradication and Alleviation Certificate—or PEACe —bonds issued by the government in 2001.

“The banks are being required to hold in escrow the 20 percent and release 80 percent of the bonds to protect the government in case the court will rule that these bonds are taxable,” the High Court said.

The TRO was unanimously granted by the 15-member tribunal, Marquez said.  He said the 20-percent withholding tax was being asked to be placed in the petitioners’ respective escrow accounts so the government would difficulty recovering it in case the SC decides that the bonds are taxable.

The court also directed the respondents—the BIR, the Bureau of Treasury and the Department of Finance—to submit their comments on the petition within 10 days.

In a text message to the BusinessMirror on Tuesday, Internal Revenue Commissioner Kim Henares said, “We will comply with the SC decision.”

Meanwhile, the Bankers Association of the Philippines (BAP), stood behind their colleagues on the tax-exempt nature of a the PEACe bonds. The BAP said the government’s move to tax the bonds would be like changing horses in midstream and this would bad business sense on the whole.

In a statement, the BAP said the government plan would substantially impair the contract entered into by the banks and the government.

“Investors who bought the bonds relied on the representation of the government that it was not subject to a 20-percent final withholding tax based on three BIR rulings issued in 2001,” the group said. “It should be noted that the pricing of the bonds, which was lower than comparable issues that were subject to tax at the time of issue, reflected the status of the bonds as not subject to the 20-percent final withholding tax.” 

According to the BAP, the BIR ruling issued on October 7, 2011, subjecting the bonds to a withholding tax “changes the rules of the game not only midway but on the eve of the maturity of the bonds.”

Belatedly applying the 2011 ruling to investors who bought the bonds prior to the ruling is prohibited by the Tax Code, the BAP said.

The BAP said changing the rules could backfire on the country’s continuing effort to develop a deeper and wider domestic capital market as prospective investors could view the change in rules as another form of regulatory risk.

“The intention of the issue was not to subject it to the 20-percent final withholding tax consistent with the rules for issues covering 19 lenders. We made sure we complied with those rules,” Sergio Edeza, the country’s treasurer during the time of the PEACe bonds sale, also said in a statement. Edeza now serves as president and chief executive at the Bank of Commerce.

Francis Lim, former president at the Philippine Stock Exchange and legal counsel of the consortium of banks, said the tax issue “has devastating implications on the credibility of our country and will definitely be viewed as exemplifying lack of credibility, predictability and stability in our markets.”

Lim represents the eight PEACe bondholders, which sought the TRO.

But the banks are not getting the sympathy of everyone.

The Freedom from Debt Coalition (FDC) is supporting the government’s imposition of taxes on the bonds. The debt watchdog likened the PEACe bonds to the financial scams by huge Wall Street banks, which triggered the 2008 financial crisis.

“These banks want super profit and risk-free and no-tax investments, and expect government to bail them out in case of default, using public money,” FDC Secretary-General Milo Tanchuling said in a statement on Tuesday. “This is the same with the PEACe bonds case. The banks that bought the bonds know of the taxes, but because of greed they still bought the controversy-ridden bonds. These banks are as greedy as the major banks in Wall Street.”

(With Jun Vallecera, VG Cabuag and Mia Gonzalez)