Foreign banks threaten to sue BIR on FCDU tax issue

Foreign banks operating in the country are threatening court action against the Bureau of Internal Revenue (BIR) on the issue of imposing taxes on foreign currency deposit unit (FCDU) transactions.

"It is a multi-billion dollar issue which will have severe ramifications for foreign banks if not resolved on a common manner," said Simon Morris, chief executive officer of Standard Chartered Bank of the Philippines (SCBP).

The BIR said it plans to slap gross receipt tax (GRT) and value-added tax (VAT) on FCDU transactions, estimated to amount to over $25 billion.

In the first quarter of the year, FCDU loans reached $4.66 billion while FCDU deposit liabilities stood at $14.33 billion.

FCDU transactions have been exempt from GRT and the VAT for the past 20 years.

The banking community, including local commercial banks and thrift banks, in fact, also objected to the proposal, saying the additional taxes will actually serve as a disincentive to foreign investments and transactions.

The BIR, however, stood firm in its decision, prompting the banks to threaten legal measures.

"There seems to be no basis for amicable solution to the FCDU tax issue, and it is totally unacceptable," bank officials said. "It will be an ugly battle if we will be forced to take legal action."

Instead, they urged the National Government to review its taxation system, adding that there must be absolute clarity in the tax system especially those that affect investments.

While Morris said that SCBP will not pull out of the country solely on the issue of the FCDU tax, he added that foreign banks are very competitive and other Asian countries are pushing each other or making offers for foreign banks to set up shop in their respective countries.

"We are happy and prepared to pay taxes," the SCBP chief executive said. "But when a tax form did not exist but in retrospect, the state decides to impose such a new tax that should not have been there, that is totally unacceptable," Morris said.

When BIR issued Revenue Regulation (RR) 10-76, it did not expressly state that FCDUs were no longer exempt from all taxes.

The FCDU was created under Presidential Decree (PD) 1035 to expand foreign currency lending authority to local commercial banks which then was operating as depository banks under Republic Act (RA) 6426.

The law was seen as beneficial and advantageous to the country by increasing links with foreign lenders, facilitating the flow of desired investments into the country, creating employment opportunities, and expertise in international finance, and contributing to national development as a whole.