Gov't may lose up to P5.5 B on tax-exempt, long-term bonds

The National Government stands to lose between P2.2 and P5.5 billion annually from a ruling issued by former Internal Revenue (BIR) Commissioner Beethoven Rualo that would exempt from taxes all government-issued bonds with maturity of more than five years.

The BIR ruling was issued by Rualo on Jan. 7, 2000 following a query from National Treasurer Leonor Briones regarding the tax exemption of bonds issued by the Bureau of Treasury (BTr).

The BIR ruled that based on Sec. 32 (B) (7) (g) of the Tax Code of 1997, "gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five years are excluded from gross income, hence exempt from income tax, effective Jan. 1, 1998."

The BIR ruling further stated that if the maturity period of the bonds issued through the BTr will be more than five years, the gains that may be derived by the bondholders will be exempt from income tax.

Consequently, the BIR added, such gains are also exempt from the 20 percent final withholding tax.

Based on a simulation of the government's bond offerings worth P342.5 billion with a maturity period ranging from five years to 40 years and a weighted average rate of 13.15 percent, the government stands to lose between P2.2 billion and P5.561 billion from the tax exemption.

The computation takes into consideration that some institutions such as the Social Security System (SSS) and the Government Service Insurance System (GSIS) are already tax exempt.

The government expects to collect about P9 billion in taxes from its outstanding bonds worth P342 billion.

Government is desperately trying to raise additional revenues this year but now has to contend with a possible tax leakage.

Newly appointed BIR Commissioner Dakila Fonacier was reportedly unaware of Rualo's ruling.

Sources, however, said if Fonacier reverses or invalidates the ruling, government securities dealers who are already benefiting from the ruling may question the move.