LTE: Aquino must do more to make CODE-NGO account for the PEACe bonds

Letter to the Editor
October 27, 2011

It is not enough that the Bureau of Internal Revenue (BIR) upheld the agency’s 2004 decision imposing a 20% final withholding tax on the P24-billion income that investors earned from the Poverty Eradication and Alleviation Certificates or the notorious PEACe bonds. The Caucus of Development NGO Networks (CODE-NGO), despite its key role in the PEACe bonds, has actually gotten scot-free even with the BIR decision as the final bond holders are the ones who will pay the almost P5 billion in income tax.

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According to the Department of Finance (DOF), the tax burden shall be shouldered by the Rizal Commercial Banking Corp. (RCBC) and other banks that bought the PEACe bonds. But what about the liability of CODE-NGO which enticed the said banks to buy the PEACe bonds by dangling its tax-free feature? The BIR says that CODE-NGO will still have to pay the 30% capital gains tax on the P1.8 billion it raked in windfall profit (or about P549 million) from the PEACe bonds. But it still does not resolve the irregularities attending the controversial transaction.

The impact of this irregular transaction is tremendous especially amid the tight fiscal state of the government. Taxpayers have shelled out P35 billion to pay the holders of the PEACe bonds, which were sold for P10.17 billion in October 2001. The more than P24 billion in earnings from the PEACe bonds include the P1.8-billion profit pocketed by CODE-NGO, whose only investment in the entire deal was its connections to the then Arroyo administration.

We are disappointed with how the Aquino administration is handling the issue of the PEACe bonds. We feel that the government is not doing enough to make those behind this anomalous deal to account for their transgression. Is it because the CODE-NGO, a close ally of President Benigno S. Aquino III, is involved? Two of Aquino’s Cabinet secretaries – Dinky Soliman of the Department of Social Welfare and Development (DSWD) and Ging Deles of the Office of the Presidential Adviser on the Peace Process (OPAPP) – were former CODE-NGO officials. Also, Rafael C. Lopa, a cousin of the President, is a member of the National Board of Trustees of CODE-NGO. Are political allies and relatives exempted from the much-hyped anti-corruption campaign of the Aquino administration?

Indeed, the deeper and more fundamental issue is not the payment of proper taxes by CODE-NGO and the bond holders. While the tax exemption anomaly must be addressed to at least minimize the onerous burden caused by the PEACe bonds, real justice can only be achieved if the people and/or groups behind this scam were held liable. The central role of CODE-NGO must not be understated by limiting the issue to tax payments. In the first place, the tax exemption was initially granted by the BIR as a result of intense lobbying by CODE-NGO, which designed and proposed the PEACe bonds. Unfortunately, it appears that Aquino is not interested in determining the accountability of CODE-NGO and its officials. He has dismissed earlier criticisms raised against Soliman’s appointment and said that the Truth Commission should handle complaints relating to the PEACe bonds. The Truth Commission has since been declared unconstitutional by the Supreme Court. Where and how will the people demand accountability from Soliman and her CODE-NGO peers?

It is thus incumbent upon Aquino to take a proactive stance on the issue if only to make the statement that he will fight corruption whoever may be involved. If not, the PEACe bonds – like the other unresolved issues that the President chose to ignore such as the Hacienda Luisita – will repeatedly cast doubt not only on the sincerity but on the very ability of the Aquino administration to pursue genuine reforms.

Prof. Judy Taguiwalo
Pagbabago! People’s Movement for Change

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  1. Under Section 22 (Y) of the 1997 Tax Code, the borrowing of funds can be classified as deposit substitutes “if the funds are obtained from twenty (20) or more individuals or corporate lenders at any one time.” The 2001 Banez Rulings on the PEACe Bonds were erroneous because they very narrowly defined the phrase “at any one time” to mean the point of origination or the point at which the bonds are first issued to the public at a Treasury Bond auction. Ordinarily, common sense would dictate the phrase “at any one time” to mean throughout the life of the bond. In this case, “at any one time” meant only the primary Treasury bond auction and not the secondary market where the bonds are actively traded back and forth among institutional investors. Why is this crucial? Because it expands the size of the potential market for the bonds – enormously. The bonds can now be sold in the secondary market in much much smaller chunks without losing its tax-exempt status. By eliminating the 19-lender constraint, the bonds now had more uses. The bonds could be used for the creation of retail products based on the zero coupon bonds. More importantly, they can be “sold” down to the level of a bank’s delinquent borrowers to wash the NPLs of a bank’s books. Is it any wonder that of the nine banks that are affected by the imposition of the 20% FWT, five of them have very high levels of distressed assets relative to their capital?

    All this and more at: A Tax on the PEACe Bonds – Who is left holding the bag?

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