Vindication

Finally, a resolution to the tax issue that hounded the controversial issuance in 2001 of the so-called “Peace bonds” (Poverty Eradication and Alleviation Certificates). The Supreme Court has ruled that the Bureau of Internal Revenue erred in taxing the income from the sale of the debt instruments. But there is more to this victory than just the tax aspect. The Aquino administration had tried to pin down the players in the Peace bonds issuance—many of them linked to the Arroyo regime—using this tax case to prove that the whole exercise was disadvantageous to the government.

Both the Senate and the House of Representatives have investigated the Peace bonds, and found no irregularity. When President Aquino took office in 2010, the issues against the Peace bonds were resurrected. The government, through the BIR, changed the rules on Oct. 7, 2011 (or 11 days before the 10-year bonds matured), by reversing three of its rulings in 2001 that exempted the Peace bonds from the 20-percent final withholding tax. This prompted the filing of a case at the Supreme Court to question the BIR action.

In a 45-page en banc decision dated last Jan. 13, the Court voided the contested BIR Rulings Nos. 370-2011 and 378-2011 for disregarding a National Internal Revenue Code definition of “deposit substitutes”—which are subject to the 20-percent tax—that required at least 20 lenders. The Court also cited a Treasury memorandum and BIR guidelines a few days before the October 2001 bond issuance saying the bonds were “not subject to 20-percent withholding tax.” The Court explained that the BIR had erroneously ruled that “all treasury bonds (including the Peace bonds), regardless of the number of purchasers/lenders at the time of origination/issuance, are considered deposit substitutes.” It noted that “at the time of original issuance, the Peace bonds were not deemed deposit substitutes since there is only one lender—RCBC (Rizal Commercial Banking Corp.) on behalf of Code-NGO (Caucus of Development NGO Networks) to whom the bonds were issued.”

The criticisms raised against the Peace bonds exercise arose mainly from the fact that the government paid P35 billion in 2011 for the P10.17 billion it borrowed in 2001, which at the outset seemed outrageous and disadvantageous to the government. However, this had been explained clearly. Had the government made semiannual compounded interest payments over a 10-year period at 12.75 percent a year, the total (principal plus interest payments) after 10 years would be P35 billion. It seemed so big because the government made only a one-time payment after 10 years.

On the political front, the Peace bonds advocates were accused of using their ties to then President Gloria Arroyo to obtain tax concessions. At the center of the criticisms was Social Welfare Secretary Dinky Soliman, but Code-NGO repeatedly explained that she was no longer connected to it when the process for the bond issue began in March 2001 as she resigned as its chair in January 2001 when she accepted the social welfare portfolio. It was under the leadership of Marissa Camacho-Reyes that the Peace bonds were conceptualized and designed—another issue raised as she is the sibling of Joselito Camacho, who was Arroyo’s finance secretary. But according to records, Camacho formally inhibited himself in writing and assigned Finance Undersecretary Cornelio Gison to handle all matters pertaining to the Peace bonds.

It is also worth noting that the Peace bonds have since been lauded internationally as an innovative means of raising resources for poverty-reduction programs of NGOs. Ninety percent or P1.3 billion of Code-NGO’s proceeds from the Peace bonds was donated to the Peace and Equity Foundation (PEF). In reports submitted to the congressional inquiries, PEF said that as of 2010, it had provided P1.06 billion to support 1,215 antipoverty projects (involving potable water systems, livelihood programs, social enterprises and renewable energy) run by NGOs, people’s organizations and communities. These projects benefited 320,000 households in the poorest communities, or more than 1.5 million Filipinos.

Vindication took a long time for the players in the Peace bonds issuance. With the questions answered, the government should now view the exercise as a novel way of tapping private funding for poverty-alleviation projects that it is finding too difficult to finance. The Peace bonds created a fund that has benefited poor Filipinos for more than a decade now. It deserves to be replicated.