Sep 192014

Reference ID Created Released Classification Origin
05MANILA3778 2005-08-16 09:14 2011-08-30 01:44 CONFIDENTIAL Embassy Manila
This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 02 MANILA 003778


E.O. 12958: DECL: 08/17/2015


Classified By: ECONOMIC COUNSELOR ROBERT P. LUDAN. Reasons 1.4 b and d


¶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

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

¶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.



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