BANKS FACE LITTLE REPRIEVE ON OVERDUE TAX ISSUE

C O N F I D E N T I A L SECTION 01 OF 02 MANILA 003778 SIPDIS E.O. 12958: DECL: 08/17/2015 TAGS: EFIN ECON RP SUBJECT: BANKS FACE LITTLE REPRIEVE ON OVERDUE TAX ISSUE REF: MANILA 0311 AND PREVIOUS Classified By: ECONOMIC COUNSELOR ROBERT P. LUDAN. Reasons 1.4 b and d . -------------- SUMMARY -------------- ¶1. (C) The Bankers Association of the Philippines (BAP) cannot fend off the tax assessments on its 1998-2004 foreign currency deposits much longer. Neither the Administration nor Congress will forego revenue earnings stipulated clearly by Philippine law. The new Commissioner of Internal Revenue is giving the banks until November before issuing final assessment notices. Citibank, which alienated BAP members by paying a much-reduced assessment in December, recommends that the banks follow its lead and put this issue behind them. End Summary. ¶2. (C) Citibank Director of Corporate Governance Francis Cuyegkeng told Econoff August 16 that banks hoping to avoid payment of back taxes on their foreign currency deposits units (FCDU) are unlikely to succeed. The Bankers Association of the Philippines (BAP) is still trying to convince the Bureau of Internal Revenue (BIR) to disband its efforts to collect taxes three types of taxes on its foreign and local members with FCDUs that were not exempted by law from 1998 until May 2004. The BAP insists the Congressional Oversight Committee will conclude that the 1998 tax reform act did not intend to eliminate bank exemptions. Cuyegkeng said the Committee is unlikely to take up the issue this year, however, with such front burner issues as constitution change and the budget monopolizing their time. Even if the COC found time to meet and discuss the FCDU tax issue, he said it was unlikely to decide in favor of the BAP with government revenue collection below target for the first half of 2005 and the scandal-plagued President under pressure to amend the expanded VAT act to compensate for higher oil prices and inflation. -------------- New Revenue Commissioner Forcing Payment -------------- ¶3. (C) The new Commissioner of Internal Revenue, Jose Bakus, is unlikely to sympathize with the BAP position, Cuyegkeng said. Bakus is directed to increase revenues and the law clearly states that the banks are subject to tax for the seven years before the restoration of the FCDU tax exemptions in 2004. Cuyegkeng said the BAP consulted three eminent private sector authorities for legal opinions on the issue and all three determined that the banks were subject to the tax assessment. The Court of Tax Appeals heard the BAP's case several years ago and ruled that the banks must pay the back taxes. That decision has not been overturned to date and the Court refuses to hear any further arguments, he said. ¶4. (C) Faced with an urgent task to collect revenues and backed by various legal decisions, Bakus is putting pressure on the banks to pay, Cuyegkeng said. He recently granted the BAP's request to extend the BIR's freeze on issuing final assessment notifications until November. However, he only granted the extension to individual banks making the request and has subsequently issued the FAN to a number of banks, effectively ordering them to pay. Cuyegkeng said he had heard several banks were making plans to discuss the final assessment figures with the BIR with an expectation to pay soon. -------------- Citibank Broke Ranks and Paid -------------- ¶5. (C) Cuyegkeng admitted that Citibank undermined the BAP stance when it paid its assessment. He argued, however, that Citibank was not a "hypocrite" and did not reverse its position. Citibank paid the branch office remittance assessment in 2002 in order to remit profits but waited with the BAP while Congress drafted the 2004 legislation. When the law did not grant the tax exemption retroactively to 1998 because of objections by Senate Ways and Means Chair Ralph Recto and Congressional focus on upcoming elections, Citibank concluded it was necessary to pay. At the time, Citibank owed a large portion of the taxes and was prevented from remitting significant profits to its head office until the matter was concluded. Cuyegkeng reiterated that the bank did not compromise or settle but brought its assessment down to a more accurate figure from the initial highly-inflated estimates set by the former BIR Commissioner as a negotiating tactic. Citibank, and other foreign banks, he said, cannot operate that way but must pay all taxes in full with full transparency and accountability. Citibank Senior Economist Vaughn Montes argued that paying the tax will not harm the banking sector's foreign currency accounts because the exemption is back in place for the future. Clients with FCDUs are willing to pay higher interest rates imposed by banks to recoup tax losses because it is more important for them to maintain hedge account against foreign exchange fluctuations. -------------- COMMENT -------------- ¶6. (C) Citibank was not completely forthright with either the Embassy or the BAP when it unilaterally decided to work with the BIR to pay a reduced assessment. Even so, it made a just and reasonable decision to avoid future recriminations, maintain its reputation, and facilitate remittances by making payment. Although Embassy worked with Philippine Congressional leaders and the GRP to find a fair resolution, it may now be expedient for them and for the country's revenue efforts to work with the BIR to reduce final assessment figures and make restitution. JOHNSON