US embassy cable - 05MANILA3778

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 
. 
 
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SUMMARY 
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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. 
 
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New Revenue Commissioner Forcing Payment 
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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. 
 
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Citibank Broke Ranks and Paid 
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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. 
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COMMENT 
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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