New BIR chief to nullify order of predecessor

The Bureau of Internal Revenue under new BIR Commissioner Dakila Fonacier will declare as null and void a Jan. 7, 2000 ruling issued by former BIR Commissioner Beethoven Rualo exempting from taxation all investments in government securities of more than five years.

Finance Secretary Jose T. Pardo, upon learning of the possible loss of anywhere from P2.2 billion to P5.5 billion annually in taxes from such bonds, has ordered Fonacier to nullify the ruling made by Rualo and issue a new ruling to clarify that the exemption will only be extended to capital gains and not to interest income.

According to Pardo, Rualo made the ruling based on a "misrepresentation of facts." Pardo said he will direct Fonacier to issue a ruling that the tax exemption should be based on the capital gains and not interest income which has always been taxable.

Pardo said "the facts given were wrong. The net effect of (Rualo's) ruling was to exempt interest income on instruments held beyond five years. The number one fact is that Section 32 of the National Revenue Code talks only about exempting the sale of bonds from income tax. But the exemption was meant for capital gains."

Bangko Sentral ng Pilipinas (BSP) Gov. Rafael B. Buenaventura had pointed out that if the ruling is not invalidated, it would result in higher interest rates as the bids submitted by investors recently on the government's five- year bonds had factored in the fact that their investment would be tax-free.

If there is a 20-percent withholding tax on interest income, the rates would have to be higher.

Based on a simulation of revenues from government securities, the government earns a total of about P9 billion annually from withholding tax on interest income on such instruments.

Rualo's ruling was apparently not immediately brought to the attention of Fonacier and Pardo, leaving some investors with a temporary windfall.