MANILA, Philippines — The Department of Finance (DoF) said it did not defy the Supreme Court’s temporary restraining order over the controversial rules regulating the so-called PEACe bonds.

In a statement, the finance department explained that the TRO was received only on October 19, 2011, or a day after the PEACe Bonds had matured and the 20 percent final tax on the interest income from the same was withheld. The SC granted the petition for TRO by a consortium of banks seeking the high court to stop the imposition of a 20-percent final withholding tax on the PEACe bonds issued by the previous government in October 2001.

“The agencies concerned did not ‘defy’ the Order of the Court. The agencies simply did not receive the TRO before they were required by law to withhold the tax. It must be stressed that the DoF, Bureau of Internal Revenue and the Bureau of Treasury had absolutely no discretion to defer the withholding of the tax,” the finance department said.

The DoF said that if they did not withhold the taxes, they will be penalized by Sections 251 and 255 of the Tax Code, which may result to an imprisonment of between one year to 10 years, a fine of not less than P10 thousand and a penalty equal to the amount of tax not withheld.

“Considering the criminal and civil penalties for failure to withhold a tax, government officials waited until the very last minute for the reported TRO. Unfortunately, no TRO arrived in time,” the DoF pointed.

Earlier, the DoF and BIR called on certain banking and investment groups to let the courts determine the tax treatment of the PEACe Bonds thus they were surprised and disappointed with the continued press statements and paid advertisements by certain banking and investment groups.

They cited that at the meeting held last October 24, at the request of the banks and investor groups, both sides had agreed to leave to the Courts the proper determination of the question of the taxability of the PEACe Bonds.

“Let us set the record straight. This is a problem that the current administration only inherited. No rules are being changed by the current administration. It is only incumbent upon the current administration to clarify the various issuances released during the previous administration,” the statement read.

“This is not an issue of the government against the banks and the investing public. This is about straightening out the various pronouncements of the previous administration to further strengthen the consistency and predictability of our rules,” it added.

The DoF and BIR stressed that the final tax on the interest earned on the PEACe Bonds merely adheres to the clear rule under the Tax Code that interest income from deposits and deposit substitutes are subject to a final withholding tax.

The statement also said that banks had admitted in their meeting with BIR Commissioner Kim S. Jacinto-Henares last October 17 that they were aware that the PEACe bonds were subject to income tax when said bonds were issued in 2001.

A consortium of banks earlier filed a petition to the Supreme Court that aimed at stopping the imposition of a 20-percent final withholding tax on the PEACe bonds issued by the government in October 2001.

The consortium also warned that the sudden change in the PEACe bond rules may have implications on the capital market as investors may view this as another form of regulatory risk.

The consortium, which is composed of Banco De Oro, Bank of Commerce, China Bank, Metrobank, PBCom, Philippine National Bank, Philippine Veterans and Planters Bank insisted that the BIR cannot withhold the 20-percent final withholding tax from the payment.