PEACe bond-holders on warpath

when i first heard that the interest earned by Peace bond-holders’ would be taxed 20% by the BIR, contrary to the tax-exempt promise 10 years ago, my reaction was, ha?  why the bondholders?  why not CODE-NGO whose scheme / scam it was and who made Php 1.8 billion in the process for its povertyalleviationefforts kuno?

the latest from the BIR is that CODE-NGO is liable, too, but surely only for 20% also of the 1.8B it raked in as rent, uh, commission, which is about 360M, which is peanuts compared to taxing the almost 25B earned in total by bondholders, 20% of which is a whopping 5B that the aquino administration could use (or hoard for the 2013 elections?).

on this i sympathize with the business community, the bondholders, who must be mad as hell.  as mad as TonGuE-tWisTeD (of the long-dormant blog Tongue In, Anew), whose unexpurgated rants in comments to ellen tordesillas‘s updates re the PEACe bonds i reproduce here:

TonGuE-tWisTeD – October 18, 2011 10:31 am
Sino’ng gago pa ang aasahan nilang mag-iinvest sa financial instruments na ini-isyu ng gobyerno kung bebentahan ka na wala raw tax, tapos kung kelan mo kokolektahin sa maturity date e meron ka nang tax?

TonGuE-tWisTeD – October 18, 2011 10:43 am
Nararamdaman ba nila pulso ng namumuhunan?

Puta, magnenegosyo ka, pag sinuwerte ka, tutubo ka ng 4-7% NIBT para lang wag mawalan ng trabaho yung mga empleyado mo, pagkakataon mo’ng kumita ng konting dagdag sa pondo’ng inilalako ng bangko, tapos ita-tax ka ng 20% na malinaw na sila mismo nagsabing walang tax.

Tangina, ipon ng ipon ng pondo, buwis ng buwis, hindi naman ginagastos. Ayan, walang trabaho, walang negosyo, walang pag-unlad (growth). Tapos parurusahan yung mga nag-iinvest? Pinagtatawanan na lang sila ng mga bangkero.

Handa ba silang makipag-head on collision sa mga bangko?

Bakit di pa pagsisipain yang mga nakaupo diyan sa Finance? Alam ba nilang magpatakbo ng kumpanya? Lalo na ng isang gobyerno?

TonGuE-tWisTeD – October 18, 2011 10:57 am
Pasensya na medyo bastos tubo ng dila ko. Sa kaswapangan nila, ang nagdudusa yung biktima, yung mga salarin nakangiti pa.

Hindi biro ang kinita nila Red Mayo at Bobby Guevarra na P400M yata para sa pagporma at pagluto nitong letseng PEACe Bonds na ito. Isama na sila Yuchengco at Camacho/Songco pati sila Dinky at Deles sa bilyun-bilyong naraket nila.

Tapos ang kakarga ng kagaguhan ng BIR yung mga inosenteng bangko at mga namili ng Bonds?

Ang tingin dito ng mga negosyante, isang malaking con-job perpetrated by government itself against the country’s banking system and the investing public.

Stupid, stupid, stupid.

TonGuE-tWisTeD – October 18, 2011 11:34 am
Ang pinanghahawakan dito ni Kim Henares e yung desisyon ng BIR Commissioner nung 2004 na subject daw ito sa final tax.

Kaya ang kanyang bagong ruling, kung bumili ka matapos ang 2004, sabit ka na sa tax.

Ha? At yung bumili at nagbenta nung 2001 ay libre? Yung original na kriminal libre, yung biktima, may parusa. Nasaan ang katarungan diyan?

TonGuE-tWisTeD – October 18, 2011 11:42 am
Ano’ng ginagawa ni Tetangco para proteksyunan ang mga bangko at mga kliyente nila? BSP Governor na siya panahon pa ni Putot, ngayon ilalaglag pa niya ang mga bangko?

Bakit natulog siya sa pansitan habang ang mga pobreng gustong kumita ng konti diyan, di niya ipinagtanggol noon pa palang 2004 merong desisyon ang BIR?

Dalawang bangko ang nakinabang diyan sa PEACe Bonds, BPI at RCBC. Walo naman ang umaangal ngayon sa Supreme Court na highway robbery ito. Ilan naman kayang mga ginago ang napagbentahan ng mga bangkong ito?

Letseng bansa talaga ito, sino pa kaya gustong magnegosyo dito?

and when the supreme court ordered a TRO on the 20% peace bond tax:

TonGuE-tWisTeD – October 18, 2011 11:45 pm
I knew it would come to this. The complaining banks and their clients would definitely fight this to its bitter end. How long it will take? No one knows, but the 20% tax will still not be paid until this is resolved by (oh, well) THIS Supreme Court! The 20% meanwhile is held in escrow.

The irreparable damage this will cause the country’s image and reputation as a stable and predictable business destination further erodes the much-needed investor confidence, to say the least, and these bunglings will not help alleviate the sad state of the slow trickle of new foreign investments.

We have been overtaken by Vietnam, but hey, Cambodia’s latest numbers suggest they are out to threaten us soon. For all we care, and at the rate we’re going, we’re probably headed towards the tail end of ASEAN in a decade. I won’t be surprised the military junta-led Myanmar/Burma will clobber us, too and we’ll be sending our women as DHs to Rangoon!

Dammit, jail Arroyo, Yuchengco, CODE-NGO we don’t care who else. But puh-leeze, fuckin leave us businessmen alone!

and in response to another commenter saying the BIR should indeed tax everyone who made money out of the peace bonds:

TonGuE-tWisTeD – October 20, 2011 10:45 am
But that is not the case, CODE-NGO/RCBC will go scot-free (refer to the origin of “scot-free” and you find the pun there) because BIR will still honor the tax-free promise it made thru Comm. Bañez in 2001 BUT will not apply to buyers of the Bond after 2004 – when a new BIR directive said the Bonds are NOT tax free. If you bought the “sweetened” Bonds after 2004, sorry na lang daw.

Wow, meron nang fraudulent flavor – tapos sorry lang? The BIR afterwards kept its silence, so did BTr, Bangko Sentral, the traders. All these times, innocent final bondholders were made to believe the bonds were still tax-free up to maturity. Until Henares announced it on Oct. 17.

This is how you run a mafia syndicate. Not a country’s financial institutions.

TonGuE-tWisTeD – October 20, 2011 11:20 am
… Bañez issued 3 BIR directives authorizing the tax-free feature of the PEACe Bonds.

Relaxing taxes as a come-on is practiced in all countries that wish to bring in fresh money from investors, especially when competing for big-ticket projects. That is why we have Export Processing Zones, tax holidays and tax perks are major considerations for new enterprises willing to locate in EPZAs, at least make them survive in the initial stages of production in exchange for future government revenues and much-needed local employment.

TonGuE-tWisTeD – October 20, 2011 12:40 pm
…the 20% that will be held in escrow is just the “witholding tax” portion.

What does that mean? The money will be paid to the banks in full (P35B) by the government. But what is unique in this SC order is that the Bond-trading banks themselves, not a third-party escrow company, will handle the trust accounts amounting to about P4.9B. If the case takes ten years, the banks will have made the same money they were supposed to have “lost”. “Quits” na lang sila. They get the chance to break-even even if the SC decides, after TEN YEARS, that the deal is subject to tax.

The tax is therefore borne fully by the final buyers of the zeroes.

What are the other implications?

It is not only a 20% final tax that will be charged the buyers/holders. 20% is witheld as a PORTION ONLY of the full final tax that will have to be paid. In amounts larger than P1M, the tax due is about one-third or about 33%. Assuming that government collects the full tax, it is therefore not only P4.9B but a whopping P8.1B (one-third of the P24.3B PEACe Bond earnings) that will be a windfall to the BIR coffers.

People will think they do not have anything to lose because the money that was supposed to go to the “greedy” banks and businessmen is back to government. It looks like it but not so.

I agree with the analysts that this deal weighed down on the macro-economic scale as it affects revenues, debts, and investor confidence. Anything that impacts these would eventually be felt down the economic food chain in terms of social services, jobs, prices, among others.

Still fresh from losing billions in the educational plans that insurers blame on Cory’s changing the rules on tuition control, the pre-need industry now faces a similar situation under Cory’s son, those who invested on the zeroes to recoup some of the loses in the 80s are up for more surprises.

Those still hoping to send their children through college via educational plans are praying their fund managers be one of those who avoided buying the zeroes.

To shake off any perceived bias, I will not repeat here how it will impact on the predictability and stability of government rules as it affects foreign investments which small businessmen like me have been trumpeting since time immemorial. Ramos was the only president who heeded that call and unless future leaders are willing to make the same paradigm shift in exchange for a few billions today, forget long-lasting prosperity for the country. I am sad that I may not see that in my lifetime.

We will always be exporters of warm bodies to countries where business rules are stable, where government stimulates job generation, where laws are investment-friendly, and financial markets are more predictable and less prone to manipulations of the powerful few.

Forget the smallness of stability defined only by minimum wage; thinking beyond the next payroll and focusing on what’s in for the long haul is what will save this country that flaunts its college-educated English-speaking nannies, its gene pool of creative artisans and pound-for-pound champs, its savvy techies, accountants and engineers who are nothing but.

and here’s another question from an anonymous fb friend of ellen:

October 10, 2011 5:11 pm
One way of looking at the matter is to ask whether the 12.75% interest rate that government paid to CODE-NGO was “fair”? CODE-NGO claims the 10-yr (usual) Treasury note at the time was yielding 13.64%, so it seems that the government didn’t pay too high an interest rate. But if RCBC or some other entity was willing to buy the zero-coupon PEACe bonds for P1.448B more than CODE-NGO paid, then that lender was willing to lend to government at an interest rate BELOW 12.75%. Why was the government not able to borrow at that lower interest rate?

not surprisingly, the latest retail treasury bond offering of the aquino admin that had hoped to raise at least Php 250B raised only 110B “amid the confusion sowed by the government’s turnabout on the tax treatment of the controversial PEACe bonds.” maybe also because the interest rates are only half that of the peace bonds?

today the prez is reported to have met with finance sec cesar purisima and bir commissioner kim henares, as well as representatives of ngos that benefitted from the sale of the peace bonds.

“Yung P5-billion na tax na dapat makuha ng gobyerno, wala akong karapatan para i-waive. ‘Yung taxes imposed by Congress, ‘pag magbibigay ka ng exemptions o ia-amend, babawasan, dadagdagan – puro Kongreso po ‘yan. Kami taga-implement ng batas,” Aquino told reporters during the celebration of the 67th anniversary of the Leyte Gulf landing.

…“I think it is safer for us to implement the law the way we understand it rather than to ignore implementing the law and be guilty of not fulfilling our obligations and duties,” Aquino added.

safer daw, hello.  it may be safer, but is it right?  and safer for whom?  read the Freedom from Debt Coalition‘s paper PEACe Bonds: Unresolved, Ten Years On.

Truth is, there are more questions that need to be asked such as whether CODE-NGO paid taxes for its PhP1.8B earnings, or, at least, for the PhP140M it retained. However, this will require CODE-NGO to open all its financial statements, which we believe would be better answered by CODE-NGO on its own accord.

To give CODE-NGO its due, it did try to present its side about the transaction. It argued that the deal was “legal,” “transparent” and “pro-poor.” However, based on the facts mentioned, one cannot help but conclude that the transaction carries features of cronyism and influence-peddling in the name of the poor. Not even the argument of good intention is enough to wipe away the stain that was left by this transaction or recover the diminished public’s trust in civil society organizations.

Worse, the deal contributed to the indebtedness of the Filipino people. This 16th of October, the government is scheduled to pay PhP35 billion in interests for the matured PhP10 billion bonds. This will impact greatly on the country’s coffers especially as the government tries to fund important social services even as it is criticized for not spending enough.

This issue presents a setback in both the state’s and civil society’s efforts to establish transparency, accountability and honesty in our political culture and structures. Hence, in its campaign to make the previous administration accountable for its colossal crimes, the Aquino government must put just closure to this issue by seeking the truth and making accountable those who may have erred. This is especially important, as some of the personalities implicated in this transaction are now part of the Aquino government. If the broad civil society community is willing to open a sad chapter of its history and re-open old wounds to rectify wrongdoings, then all the more that the Aquino government should do its part to facilitate this process.

the prez should stop salivating over the Php 5B and settle for taxing only CODE-NGO and whoever else were complicit in that devious pro-poor kuno scheme.  and really, someone should be brought to court for violating laws against rigged biddings and influence peddling.



  1. With the Occupy Wall Street movement ongoing, it may well be out of fashion to sympathize with the big banks.

    This is a three-cornered legal dispute. If it can be proved that there was “rigged bidding,” “influence peddling,” or “misrepresentation” in 2001, the current bond holders have basis to sue CODE-NGO and RCBC for injury because now they have to pay income tax. I believe however that the bond holders have a weak reed on which to lean in demanding non-taxability if the correct interpretation of law is that the bonds’ interest income is taxable. Two cases (Corominas v Balmaceda, 1975; Sevilla v BIR Commissioner, 2004), among others, restate that estoppel does not apply to tax cases. In effect, the government is not estopped or bound by errors of its agents, because “the King can do no wrong.”

    The blog commentary on how investors will adversely perceive future ROP bond issuance is perhaps exaggerated. This is not a case of the government changing the rules. It appears more of a case of agents of government initially committing error, and later, in the interest of applying the law properly, rectifying the original mistake. Moreover, the banks were not exactly born yesterday. They may well have understood that the BIR in 2001 was on shaky ground, in which case, they would, as Shakespeare might say, protest too much.

    What this means is that if you deal with an entity with little or no financial credibility, you assume the risk that in an untoward subsequent event, you might not be able to collect from that entity in case you have to sue – and win! But this “truth” is consistent with the primary prudential rule followed by banks: “Know thy customer.” It seems that in this case, the banks did not do their due diligence on the tax aspects of the bonds. If an ordinary depositor or credit card holder fails to read the fine print, the banks are quick to impose penalty fees, etc. If the banks now failed to appreciate the tax law fine print, it may well end up an instance of karmic justice. If the banks prevail against the BIR, then we the ordinary people (read taxpayers) are up the proverbial creek.

    Still, I do agree with you Angela that if there was wrongdoing by CODE-NGO and RCBC in 2001, the proper remedies against them should be pursued. I believe the best remedy is not legal, but a highly symbolic act on the part of the Aquino administration to sever ties with the NGOs and officials involved on the proper ground that, even if the wrongdoing is hard to prove, Caesar’s wife should be beyond suspicion. Another good remedy is for BSP, as guardian of the debt-contracting practices of government, to properly investigate the auctions in 2001, and to sanction RCBC if so warranted.

  2. do you know what the problem is with the peacebonds? i clicked on the link and it was confusing. is it because:

    a) it was a negotiated, uncompetitive bid?
    b) that the private sector implements the poverty alleviation program?

  3. Here’s another interesting twist because of the tax rules. It appears that the general rule of the tax code is to exempt from taxation interest income on bonds held for five years or more. But there is a specific provision – Sec. 27 – that says that there will be a final withholding tax of 20% if the entity receiving interest income is a domestic corporation. Well, banks are domestic corporations. And the usual principle of statutory interpretation is that a special provision prevails over the general one. The general rule of tax exemption will of course apply to individuals.

    • Angela, I keep thinking of the basics of the transaction. With a competitive bond market, it should be hard to earn much of a “spread” between underwriting (the take-up of a bond issue by a bank) and distribution (the re-sale of the bond by the bank to ultimate investors). In this case, the spread was big enough for RCBC to give some of the gains from underwriting to CODE-NGO. This probably means some sort of market failure that allowed the spread to be abnormal.

      The comments by others suggest an informational advantage to RCBC because it helped design the zero-coupon, supposedly tax exempt, bond. My guess is that the other bond dealers did not fully understand the transaction at the time.

  4. ok, from your blog, you mean u dont like:

    1) raising funds via debt
    2) what they want to do with the money? (its not clear to me what exactly they did w the money, but whatever it is, environmental protection or what, you dont like it because it conflates up the image of the NGO with that of the GO.


  5. @ Gabby: a problem with “charities” — whether private or public, religious or secular — is something called the “principal-agent” problem. The principal is the donor, and the agent is the one obliged to aid the beneficiary, a third party – in this case, “the poor.” The principal usually cannot fully monitor the acts of the agent. If the agent “helps himself” to the money, and the principal can’t prove it, the outcome is “leakage,” as in Okun’s Leaky Bucket. I believe that in general a part of the funds raised by charities goes to agent “perks” — honoraria, seminars, travel, salaries, or equipment (e.g. laptops, cell phones, cars) that can also be used for personal use, etc. But it seems that we don’t have a good mechanism, other than self-regulation and voluntary transparency, to monitor the use of funds by charities. Of course, once the principal suspects shenanigans, he simply stops donating funds. A rough test of a charity’s performance is: Does it over time continue to inspire a reasonably stable or growing flow of donations? Perhaps we should ask whether hard-nosed donors are continuing to fund CODE-NGO. If so, then they deserve much more respect than many observers give them.

    • i cant find it, but i read that code ngo has regular reports on what happens to the money, their projects. i only found a quote saying they are using the money as it was intended.

      i want to see the reports/notices. havent found them.

      • to their credit, financial reporting is reasonably transparent. financials are in their website:

        best i can figure out is that they operate on something like P8M per year of earnings on a core investment holding of about P150M, and they get about the same amount in the form of grants from other charities or institutions based on “projects” (the big donors are the World Bank, German and Japanese aid agencies, Asia Foundation, Ateneo, Commission on Human Rights, and PEF). PEF was the original beneficiary of the Peace Bonds, so PEF is not a hard-nosed donor.

        they spend about P2M on annual salaries, which seems to be about 15% of their “current” expenses.

        two interesting advocacies: charter change should be political not economic; and they started a “pork barrel” watch operation.

  6. Orly, there were 45 bids submitted by GSEDs. Even if this was the maiden zero offering of BTr, bidding participants are not noobs in these transactions as you would believe them to be especially the international bidders who are used to trading zeroes.

    The four lowest winning bids – the 9th, 10th, 11th, & 12th (in the order of actual bid submission) were all by RCBC @12.75%.

    Let’s pretend we are one of the GSEDs accredited to bid.

    On Oct. 9, 2001, a letter from the Bureau of Treasury to all GSEDs, announcing a public auction of PHP 30.0 billion worth of 10-year Zero-Coupon Bonds to be held one week later, October 16, 2001. The letter did not describe any other feature of the bond other than the fact that the issue was limited to the 19-lender rule and was therefore not subject to the 20% final withholding tax. This is not just BIR, this is National Treasurer Edeza’s memo.

    We check with Bloomberg, Reuters, and Bridge online and find the notice there.

    We also know BIR Commisioner Bañez already confirmed in THREE SEPARATE LETTERS the tax-free feature of the bond offering prior to bidding.

    You are right when you say securities maturing beyond 5 Years were not covered by capital gains tax. So no Capital gains Tax, and no Final Tax either according to both BIR and BTr.

    What we don’t know at that exact time was if the bonds will be accepted by the Insurance Commission as capital and investment reserve by Insurance Companies who may want to participate in the bid. (This was also approved later on, sweetening the pot post- bidding. Making it more attractive to the secondary market)

    Further, local banks get favored more because of the 4% spread in BSP’s reserve requirement (11% after RCBC pays CODE-NGO minus existing liquidity reserve yields of 7% at the time = 4%) They still make 4% p.a. just by holding on to the bonds.

    The chance to win a bid at the same value and terms may not present itself again in the future.

    So we now price our bids. Will you compute your bid to include the 20% Final Witholding Tax?

    That is the only question that needs to be answered. Never mind all the other sweeteners.

    • I kept going over the tax code, and still I think the correct way to read it is that the interest is taxable as passive income if received by a corporation, foreign or domestic. That’s the express rule in Sec. 27(d), and also 28(a)(7).

      It’s dangerous to read people’s minds, but if I were a corporation, I would have to think it’s taxable even if the BIR then says it’s not, and hedge my bid accordingly. RCBC took the risk, and so did the subsequent buyers. When one assumes a risk, he can’t turn around and demand the rest of the world (the taxpayers) to save his backside.

      But it is hard to prove mental acts, so the ones “stuck” today may not prevail against RCBC or CODE-NGO if the issue is kept narrowly as between them and the 8 banks that are now suing for non-taxability.

      There may yet be a better way to look at the P1.8B “earned” by RCBC and CODE-NGO. Think of it as “found money on the sidewalk.” Keeping and not returning it to the rightful owner (here it is either the taxpayers or the subsequent bondholders) is either theft or unjust enrichment. The money cannot belong to RCBC/CODE-NGO/PEF because the public officials committed an error that somehow allowed RCBC to win the auction. When the mistake is later corrected, RCBC and CODE-NGO should forthrightly accept that they benefitted unjustly from the mistake.

      Under this legal theory, the SC can order CODE-NGO, RCBC, and their assigns (PEF) to return the money. But that’s only P1.8B, and the proper tax is today P5B. On a pro hac vice decision, the SC can do a King Solomon and order a “cutting the baby” approach: P1.8B would be disgorged to the 8 banks, and the balance could be “compromised” – say in half to P1.6B – as no longer taxable (even if the tax code says it is). But perhaps this is thinking of the matter in an ideal world of everyone willing to act in good faith.

  7. This is not a case of the government changing the rules. It appears more of a case of agents of government initially committing error, and later, in the interest of applying the law properly, rectifying the original mistake. – Orly

    Nyaaah. Are you kidding? We’d rather admit we are incompetents and that we punish investors for our incompetence? That mere Commissioners can misinterpret and re-interpret our tax laws thus bypassing legislation?

  8. The blog commentary on how investors will adversely perceive future ROP bond issuance is perhaps exaggerated. – Orly

    On the blockquote date Oct. 18 attributed to me, I got that from 2010 data showing RP slipping two notches from #132 to #134 and Cambodia rising up by 8.

    Now, this just in: The latest IFC/WB 2012 Doing Business data survey of 183 countries showed that the Philippines was only able to eclipse Cambodia in the ranking but not by much since the latter ranked 138th overall. We are 136th. Other ASEAN countries include Singapore which topped the Doing Business survey followed by Thailand at 17th; Malaysia at 18th; Brunei at 83rd; Vietnam which graduated from the 100’s to 98th rank overall; and Indonesia at 129th.

    The facts are staring us in the face, it’s not just bond issuance, but gov’t implemented business rules in general that take us out of the investors’ radar screens. We are notoriously popular for not honoring our contractual obligations local and international – the IPPs in 1992-98, BNPP, Subic Freeport, NBN-ZTE, NorthRail, SouthRail, PIATCO, GSIS computerization, Stradcom, Laguna dredging, now this PEACe Bonds and many more.

    So no new economic activities, no jobs, more babies, more squatters, more doleouts, because money that are taken out of the troubled West and brought to the Far East emerging dragons all skip the Philippines for obvious reasons.

    In a nutshell, we, the Pinoy businessmen will remain STANDARD and POOR.

    • Agree with you on the much more important problem of how foreign investors see the country. But the Peace bonds can also be seen as a transaction that (I believe) did not do damage to foreign investors. Maybe the whole story makes us look really bad, somewhere between Charlie Chaplin and W. C. Fields, but that’s not an entirely new thing.

      The estoppel argument — used by the so-called financial gurus — seems a bit self-serving.

  9. Erroneous or Anomalous?

    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?

    • Mr. Grimes,
      I tried to understand the “wash” transaction on the non-performing loans (NPL) of a bank that was also holding Peace bonds. Could the wash transaction be done using any other bond already in the portfolio of the bank? If so, then the presence of Peace bonds in the balance sheet of the bank is not necessarily indicative of any accounting “trick” that had converted an old NPL into a supposedly new performing “payable” of the delinquent borrower. Wouldn’t the examiners at the BSP uncover the ruse? Or am I missing something in the story?

      • Any bond can be used. But the PEACe Bonds have the added advantage of being heavily discounted from the face amount or par value. So a PEACe Bond with a PHP 1M Face Amount due at maturity only has a value of PHP 290K at the time of issuance. This can be used to disguise losses on the NPL because what is recorded is the Face Amount of PHP 1M.

        The BSP is very complicit in this ruse. If the BSP is willing to provide “regulatory relief” by allowing banks to book losses realized on the sale of these NPLs to SPVs as “deferred charges” (See BSP’s Ampaw Accounting:, I think they will be perfectly willing to allow this NPL washing to take place.

        • Mr. Grimes:
          Thanks for the reply. What this seems to boil down to is that certain “oversight” parties — BSP, Treasury — were likely “in the know” as to what was happening. Either they knew but kept silent, or possibly didn’t know because of negligence. So, would getting testimony from these parties help resolve this controversy?

          I also looked at your latest “explanation.” What it also means is that there was then, and perhaps it remains so till today, a nice margin for GSEDs between their cost of acquiring ROPs and the price at which they can sell them retail. Can one reasonably conclude that there isn’t enough competition in this part of the financial markets? If so, why? And shouldn’t the government focus its fund-raising into RTBs so as to cut out the middleman profits?

  10. David Carl Grimes series is a must-read. Especially this last blog post. The simpletons in BIR obviously aren’t prepared of the humongous legal headache this would create.

    “…the final bondholders would have to create a chain of litigation that would recreate this process, meaning the final bondholder would have to sue the previous bondholder to collect the 20% FWT that the final bondholders are not liable for, and that previous bondholder would have to collect from the previous bondholder, and so on and so forth, until the chain of sale is retraced back to CODE-NGO/RCBC, the original bondholders, creating a gigantic legal mess.” – David Carl Grimes

    Unless the final bondholders themselves present the bonds to BIR, Henares would have no idea who’s paying how much because of the Bank secrecy law.

    Assuming this route is the only available legal remedy, they face a dead-end when it comes to CODE-NGO since it does not make money, and are not taxable. Even if they make money.

    • Hi TonGuE:
      I may be wrong but I think the “scripless” system for the Peace bonds is a computerized register of who at any point in time is the registered owner of a Peace bond. If so, the chain of ownership and accrual of interest income can be determined with little or no hassle. If RCBC Capital failed to register its subsequent sales of bonds, it could be liable for the taxability of interest income up to the point that a “final” holder would claim it “bought” the bond. (It seems non-taxability can be had only if the SC upholds as correct the original 2001 BIR ruling that the bonds are NOT deposit substitutes; and also only if the holder had held the bonds for five years or more. Nonetheless, I believe the 2004 BIR ruling that the bonds are deposit substitutes is correct, in which case a corporate holder is taxable on interest accrued for the length of time it held the zero-coupon bond.)

      As to CODE-NGO and PEF, the original corpus “earned” by or donated to these entities is apparently intact, according to their audited accounts. So the P1.8B could be recovered. The same can be said for whatever liability can be determined on the part of RCBC since RCBC has to maintain sufficient capital under the banking laws.

  11. Orly, But Henares already admits they cannot pinpoint who holds how much. That’s the reason they had to pay the bank the full P35B with orders to hold 20% in escrow. She does not know whom she will tax.

    But that’s beside the point. I’m more concerned with Mr. Grimes’ presentation of the reality that the latter buyers who will shoulder all the tax would have not just lost ALL interest earnings they have projected but it will even include principal! Grimes estimates this to start eating up the fund at around minus 4 years though I compute this a little later – around minus 2 years. This, considering that interest rates had steep slippages in recent years. You are no longer buying at 12.75% but much cheaper and yet, you will be paying the same 20% that BIR failed to collect from CODE-NGO and RCBC. Think of all the relevant products these banks have issued in the last 10 years with the full P35B in sight. Now they have to shoulder P5B in unforeseen expense.

    If this were Wall Street, we’d have seen people jumping off the buildings already.

    Again, Bonds, especially government-issued zeroes, are supposed to be risk-free.

  12. You are right about the scripless securities registry. Unlike before, the issuer no longer distributes certificates but are registered in BTr’s RoSS.

    I am assuming here that since the investor banks had to maintain the 19-lender count, the RoSS only has 19 registered buyers AT ANY ONE TIME (Sec. 27) from RCBC Capital. One buyer beyond twenty and we will not be discussing this anymore since it will surely be subject to 20% tax.

    Regardless of how the bonds were actually registered, the buyer banks will not just sit on P10B and wait for it to become P35B in ten years. They will sell other products based on the P25B profit they will realize later. Insurers will however, probably just wait for maturity.

    • I thought the “deposit substitute” controversy was a red herring. The definition comes from the rule that you become a bank if you accept deposits from 20 people. It can boil down to a matter of statutory interpretation because the Peace bonds can also quality as “similar arrangements” (similar to deposit substitutes) that represent any act of financial investment. (The wording is copied into sec. 27 from sec. 24 of the tax code.) In short, the idea is that any debt instrument is covered by the phrase “deposit substitute, trust funds, or similar arrangements” if it can be re-offered in secondary trading to the public. The 2001 Banez ruling is therefore faulty for holding that a 19-lender pool at issuance would allow the bonds to escape FWT. It was in effect too cute to be true.

      Of course the matter generates a calculation problem because an individual holding the bond escapes tax on interest if he holds for 5 years or more; but that should be easy enough with the computerized scripless system that identifies holders according to their tax status (individual or corporate, resident or not, etc.).

  13. Grabe talaga. Imagine how the sophisticated investing community, especially those already actively looking for prospects in SE Asia, will be impressed with our amateurish “jologness” in high finance. Yung pera sa Europe at New York naka-park lang muna ngayon dahil tagilid doon. Nandito sa Asia ang aksyon. Saka sa Africa.

    Kahit ano’ng ratings upgrade ang ibigay ngayon ng Moody’s o Fitch o S&P sa Pinas, kahit investment grade pa, matatalino na lending banks ngayon owing to the US ratings experience. Balik-conservative sila. Sabayan mo pa naman ng ganitong mga balita. Juicekopo. Kaya pati Stock Exchange sa Ayala at Ortigas suporta na sa mga bangko in this issue.

    Sino ba ang magdudusa kung tataas na naman ang interest rate ng foreign borrowings natin?

    Wala ka na ngang investor, lalong ibabaon mo pa sarili mo sa utang.

  14. Orly, it is still technically possible that a secondary trade can be contracted without violating the 19-lender rule. There are not so many traders who can by its lonesome, purchase a whole 1/19 block of bonds (assuming the bonds were equally distributed) it is possible only by pooling of buyers by a single fund manager who registers the buy as one, preserving the headcount. The seller/buyer may not even register the trade and just cover it with some other form of IOU.

  15. Let us not forget that it was not just BIR Comm. Bañez, but BTr’s National Treasurer Edeza, too, who in his bidding invitation to GSEDs, confirmed the tax-free feature of the zeroes.

    It appears that Bañez is solely getting all the flak for a supposed “mistake” that Edeza is equally liable for.