MANILA, September 1, 2004 (MALAYA) By AMADO P. MACASAET - Bankers decry move vs FCDUs-  Total foreign currency deposits of close to $20 billion may be transferred elsewhere if the Bureau of Internal Revenue insists on imposing more taxes on money held by "foreign currency deposit units" (FCDUs).

A briefing paper obtained from the banking system said BIR has issued notices to Philippine commercial banks and branches of foreign banks asking them to pay three more taxes: gross receipts tax (GRT), documentary stamp tax (DST) and branch profit remittance tax (BPRT).

The paper emphasized that if the new taxes, considered illegal, are imposed, foreign banks may phase down their FCDU operations.

The banks, speaking through the Bankers Association of the Philippines, also pointed out that "the investment plans of foreign banks in the Philippines may be affected or placed under critical review."

It added that this sentiment may spill over to other major foreign investor groups.

In addition, the banks said, "FCDU borrowers may have to absorb these (new) taxes if their loan agreements contain a tax recovery clause."

The BAP explained that "as FCDU resources shrink, so goes the foreign currency deposits which have served as the important secondary international reserves and as a major prop for the demand for Philippine foreign currency debt papers."

Among the large components of the $19.983 billion FCDU deposits are the $4.763 billion "interbank loan receivables, and $3.255 billion in foreign loan receivables."

Under PD 1035, the FCDU deposits have 100 per cent reserve. Unlike reserves required of commercial banks on deposits, FCDU reserves are allowed to be used to finance export-oriented projects and to purchase government debt instruments such as Treasury Bills and bonds.

A banker told Malaya that the money has been concentrated on government IOUs because "there are very few exports to finance."

The banks believe that the additional burden is illegal because PD 1035 issued by President Ferdinand Marcos in September 1976, which imposes varying rates of income tax, also provides that this tax shall be "in lieu of all taxes."

The various amendments to the National Internal Revenue Code retained the phrase that "(FCDUs) shall be exempt from all taxes."

However, this phrase was omitted in the Comprehensive Tax Reform Program, "creating the erroneous impression that the tax exemption of FCDUs was impliedly removed."

The omission was never subjected to public hearings and discussions in Congress.

This prompted the banking system to seek a clarification from the Department of Finance and tax experts who in turn said that there was a mistake in the omission of the phrase "shall be exempt from all taxes.

The banks were promised that the mistake will be corrected.

To boost the claim that the additional taxes are illegal, the banking system noticed that "no implementing rules and regulations were ever issued by the BIR to govern the collection of GRT, DST and BPRT on the FCDU."

BIR Regulation No. 10-98 explains how the 10 percent FCDU income tax on interest, fees, commissions, foreign exchange gains and trading gains are to be collected.

The phrase "exempt from all taxes" was reinstated in RA 9294, an act "restoring the tax exemption of offshore banking units and foreign currency deposit units."

Reported by: Sol Jose Vanzi

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