The earlier investigation was undertaken in the previous Congress by the Senate Committee on Banks and Financial Institution, of which he is now chairman.

But Osmeña suggested that a reopened PEACe bonds inquiry be undertaken by the Ways and Means Committee, chaired by Sen. Ralph Recto, given the tax issue raised by several banks before the Supreme Court questioning Finance Secretary Cesar Purisima’s decision to impose the 20-percent withholding tax—or almost P5 billion—on the bondholders when the government pays them as the bonds matured.

“[I would] rather that the Committee on Ways and Means tackle it as I am swamped with work. It has a tax issue that is new,” Osmeña said.

Responding to a query from the Department of Finance, the Bureau of Internal Revenue (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 reversed an earlier 2001 ruling of the BIR, which found that the PEACe bonds were exempt from the final withholding tax.

Purisima has said the BIR ruling merely confirmed that existing rulings on the tax treatment of Treasury bills and Treasury bonds apply to the PEACe bonds and provide appropriate legal basis for the Treasury to withhold the tax.

“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,” Purisima said. “Normally, deposit substitutes, like the forthcoming retail Treasury bond offering, are subject to the 20-percent final withholding tax.”

“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a 2001 ruling making it subject to ordinary income tax instead of the 20-percent final withholding tax, which was then superseded by BIR rulings in 2004 and 2005,” he said.

“The recent BIR ruling makes it clear that the PEACe bonds are treated the same way as all other government securities for tax purposes,” Purisima asserted. “No other government borrowing would be affected by the BIR ruling.”

Civil-society groups earlier called on the government to suspend the P35-billion payment of the Arroyo-era PEACe bonds scheme even as the BIR moved to impose the 20-percent tax.

The Department of Finance also announced that Purisima, Internal Revenue Commissioner Kim Jacinto-Henares and National Treasurer Roberto Tan met last week with eligible dealers of government securities to “discuss this development and have agreed to coordinate on its implementation.”

In a statement, the Freedom from Debt Coalition noted that the BIR, in its ruling, said the Bureau of the Treasury should withhold the applicable tax from the P35-billion face value of the bonds, which was to be paid out on October 18, with tax dues amounting to close to P5 billion.

The FDC recalled that when the PEACe bonds were first issued in 2001, the BIR had said the bonds were to be slapped with just the ordinary income tax, but this was reversed in 2005, raising questions in the market about the final shape of the payments. Hence, the BIR made a final ruling to impose the 20-percent final withholding tax, it added.

The PEACe bonds were issued by the Treasury in 2001 and, being zero-coupon bonds, were supposed to be paid in one tranche on maturity date.

The FDC cited economists as saying that the matter of what kind of tax to impose on the bonds—whether just the ordinary income tax, as stated by the office of then-Finance Secretary Jose Isidro Camacho, or the heavier, 20-percent final withholding tax—had been a key sweetener for the bonds, which “caused a stir for alleged irregularities.”

The FDC asserted that paying the bonds would inflict “an unjust burden on taxpayers, considering the controversy surrounding” the role of the Caucus of NGO Networks (Code-NGO), the NGO consortium where Social Welfare Secretary Corazon Soliman was once active.

It recalled that the P10-billion, 10-year treasury zero-coupon notes were awarded by the Arroyo administration in October 2001 to the Rizal Commercial Banking Corp. (RCBC) in behalf of Code-NGO, which resold this to RCBC Capital.

According to the FDC, the Code-NGO joined the auction—which was held manually despite the fact that Treasury auctions had already been automated by the previous national treasurer, Leonor Briones—and Code-NGO was supposed to partake of some P1.8 billion in profits, from which it plowed funds to anti-poverty campaigns.

In exchange for the P10-billion IOU, it added, Filipino taxpayers were to pay P35 billion after 10 years—which fell due on October 18, and at that time, “many questioned the wisdom of incurring a P35-billion liability for a P10-billion IOU that would mainly benefit a private bank, just to raise a few hundreds of millions for fighting poverty,” the FDC said.

It also noted that Code-NGO was then seen as quite influential because it was among the civil-society groups that backed the rise to power of Gloria Arroyo at Edsa 2.

Soliman later joined the Arroyo Cabinet but resigned in 2005 amid the “Hello, Garci” scandal that embroiled Mrs. Arroyo.

“At a time when the public is reeling from the negative impact of the unmitigated increase in the prices of goods and services, and the government’s unwarranted under-spending combined with the
 catastrophes brought about by the recent supertyphoons, to carve out P35 billion from the people’s coffers—which is bigger than the 2012 budget for the government’s conditional cash- transfer—is improper, especially if the public will be paying for something that many viewed as irregular,” the FDC said in a statement.