2016-Banco de Oro v. Republic
2016-Banco de Oro v. Republic
2016-Banco de Oro v. Republic
RESOLUTION
LEONEN J :
LEONEN, p
This resolves separate motions for reconsideration and clari cation led by the
O ce of the Solicitor General 1 and petitioners-intervenors Rizal Commercial Banking
Corporation and RCBC Capital Corporation 2 of our Decision dated January 13, 2015,
which: (1) granted the Petition and Petitions-in-Intervention and nulli ed Bureau of
Internal Revenue (BIR) Ruling Nos. 370-2011 and DA 378-2011; and (2) reprimanded
the Bureau of Treasury for its continued retention of the amount corresponding to the
20% nal withholding tax that it withheld on October 18, 2011, and ordered it to release
the withheld amount to the bondholders.
In the notice to all Government Securities Eligible Dealers (GSEDs) entitled Public
Offering of Treasury Bonds 3 (Public Offering) dated October 9, 2001, the Bureau of
Treasury announced that "P30.0 [billion] worth of 10-year Zero[-]Coupon Bonds [would]
be auctioned on October 16, 2001[.]" 4 It stated that "the issue being limited to 19
lenders and while taxable shall not be subject to the 20% final withholding [tax]." 5
On October 12, 2001, the Bureau of Treasury released a memo on the Formula
for the Zero-Coupon Bond. 6 The memo stated in part that the formula, in determining
the purchase price and settlement amount, "is only applicable to the zeroes that are not
subject to the 20% final withholding due to the 19 buyer/lender limit." 7
ETHIDa
On October 15, 2001, one (1) day before the auction date, the Bureau of Treasury
issued the Auction Guidelines for the 10-year Zero-Coupon Treasury Bond to be Issued
on October 16, 2001 (Auction Guidelines). 8 The Auction Guidelines reiterated that the
Bonds to be auctioned are "[n]ot subject to 20% withholding tax as the issue will be
limited to a maximum of 19 lenders in the primary market (pursuant to BIR Revenue
Regulations No. 020-2001)." 9
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At the auction held on October 16, 2001, Rizal Commercial Banking Corporation
(RCBC) participated on behalf of Caucus of Development NGO Networks (CODE-NGO)
and won the bid. 10 Accordingly, on October 18, 2001, the Bureau of Treasury issued
P35 billion worth of Bonds at yield-to-maturity of 12.75% to RCBC for approximately
P10.17 billion, 11 resulting in a discount of approximately P24.83 billion.
Likewise, on October 16, 2001, RCBC Capital entered into an underwriting
agreement 12 with CODE-NGO, where RCBC Capital was appointed as the Issue
Manager and Lead Underwriter for the offering of the PEACe Bonds. 13 RCBC Capital
agreed to underwrite 14 on a rm basis the offering, distribution, and sale of the P35
billion Bonds at the price of P11,995,513,716.51. 15 In Section 7 (r) of the underwriting
agreement, CODE-NGO represented that "[a]ll income derived from the Bonds, inclusive
of premium on redemption and gains on the trading of the same, are exempt from all
forms of taxation as con rmed by [the] Bureau of Internal Revenue . . . letter rulings
dated 31 May 2001 and 16 August 2001, respectively." 16
RCBC Capital sold and distributed the Government Bonds for an issue price of
P11,995,513,716.51. 17 Banco de Oro, et al. purchased the PEACe Bonds on different
dates. 18
On October 7, 2011, barely 11 days before maturity of the PEACe Bonds, the
Commissioner of Internal Revenue issued BIR Ruling No. 370-2011 19 declaring that
the PEACe Bonds, being deposit substitutes, were subject to 20% nal withholding tax.
20 Under this ruling, the Secretary of Finance directed the Bureau of Treasury to
withhold a 20% nal tax from the face value of the PEACe Bonds upon their payment at
maturity on October 18, 2011. 21
On October 17, 2011, replying to an urgent query from the Bureau of Treasury,
the Bureau of Internal Revenue issued BIR Ruling No. DA 378-2011 22 clarifying that
the nal withholding tax due on the discount or interest earned on the PEACe Bonds
should "be imposed and withheld not only on RCBC/CODE NGO but also [on] 'all
subsequent holders of the Bonds.'" 23
On October 17, 2011, petitioners led before this Court a Petition for Certiorari,
Prohibition, and/or Mandamus (with urgent application for a temporary restraining
order and/or writ of preliminary injunction). 24
On October 18, 2011, this Court issued a temporary restraining order 25
"enjoining the implementation of BIR Ruling No. 370-2011 against the [PEACe Bonds,] . .
. subject to the condition that the 20% nal withholding tax on interest income
therefrom shall be withheld by the petitioner banks and placed in escrow pending
resolution of [the] petition." 26
RCBC and RCBC Capital, as well as CODE-NGO separately moved for leave of
court to intervene and to admit the Petition-in-Intervention. The Motions were granted
by this Court. 27
Meanwhile, on November 9, 2011, petitioners led their Manifestation with
Urgent Ex Parte Motion to Direct Respondents to Comply with the TRO. 28
On November 15, 2011, this Court directed respondents to: "(1) show cause why
they failed to comply with the October 18, 2011 resolution; and (2) comply with the
Court's resolution in order that petitioners may place the corresponding funds in
escrow pending resolution of the petition." 29
On December 6, 2011, this Court noted respondents' compliance. 30
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On November 27, 2012, petitioners led their Manifestation with Urgent
Reiterative Motion [To Direct Respondents to Comply with the Temporary Restraining
Order]. 31
On December 4, 2012, this Court noted petitioners' Manifestation with Urgent
Reiterative Motion and required respondents to comment. 32
Respondents filed their Comment, 33 to which petitioners filed their Reply. 34
On January 13, 2015, this Court promulgated the Decision 35 granting the
Petition and the Petitions-in-Intervention. Applying Section 22 (Y) of the National
Internal Revenue Code, we held that the number of lenders/investors at every
transaction is determinative of whether a debt instrument is a deposit substitute
subject to 20% nal withholding tax. When at any transaction, funds are simultaneously
obtained from 20 or more lenders/investors, there is deemed to be a public borrowing
and the bonds at that point in time are deemed deposit substitutes. Consequently, the
seller is required to withhold the 20% nal withholding tax on the imputed interest
income from the bonds. We further declared void BIR Ruling Nos. 370-2011 and DA
378-2011 for having disregarded the 20-lender rule provided in Section 22 (Y). The
Decision disposed as follows:
WHEREFORE,
WHEREFORE the petition for review and petitions-in-intervention are
GRANTED . BIR Ruling Nos. 370-2011 and DA 378-2011 are NULLIFIED.
Furthermore, respondent Bureau of Treasury is REPRIMANDED for its
continued retention of the amount corresponding to the 20% nal withholding
tax despite this court's directive in the temporary restraining order and in the
resolution dated November 15, 2011 to deliver the amounts to the banks to be
placed in escrow pending resolution of this case.cSEDTC
British American Tobacco involved the validity of: (1) Section 145 of Republic Act
No. 8424; (2) Republic Act No. 9334, which further amended Section 145 of the
National Internal Revenue Code on January 1, 2005; (3) Revenue Regulations Nos. 1-97,
9-2003, and 22-2003; and (4) RMO No. 6-2003. 53
A similar ruling was made in Commissioner of Customs v. Hypermix Feeds
Corporation. 54 Central to the case was Customs Memorandum Order (CMO) No. 27-
2003 issued by the Commissioner of Customs. This issuance provided for the
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classi cation of wheat for tariff purposes. In anticipation of the implementation of the
CMO, Hypermix led a Petition for Declaratory Relief before the Regional Trial Court.
Hypermix claimed that said CMO was issued without observing the provisions of the
Revised Administrative Code; was con scatory; and violated the equal protection
clause of the 1987 Constitution. 55 The Commissioner of Customs moved to dismiss
on the ground of lack of jurisdiction. 56 On the issue regarding declaratory relief, this
Court ruled that the petition led by Hypermix had complied with all the requisites for
an action of declaratory relief to prosper. Moreover:
Indeed, the Constitution vests the power of judicial review or the power to
declare a law, treaty, international or executive agreement, presidential decree,
order, instruction, ordinance, or regulation in the courts, including the regional
trial courts. This is within the scope of judicial power, which includes the
authority of the courts to determine in an appropriate action the validity of the
acts of the political departments. 57 SDHTEC
In other words, within the judicial system, the law intends the Court of Tax
Appeals to have exclusive jurisdiction to resolve all tax problems. Petitions for writs of
certiorari against the acts and omissions of the said quasi-judicial agencies should,
thus, be filed before the Court of Tax Appeals. 67
Republic Act No. 9282, a special and later law than Batas Pambansa Blg. 129 68
provides an exception to the original jurisdiction of the Regional Trial Courts over
actions questioning the constitutionality or validity of tax laws or regulations. Except
for local tax cases, actions directly challenging the constitutionality or validity of a tax
law or regulation or administrative issuance may be led directly before the Court of
Tax Appeals.
Furthermore, with respect to administrative issuances (revenue orders, revenue
memorandum circulars, or rulings), these are issued by the Commissioner under its
power to make rulings or opinions in connection with the implementation of the
provisions of internal revenue laws. Tax rulings, on the other hand, are o cial positions
of the Bureau on inquiries of taxpayers who request clari cation on certain provisions
of the National Internal Revenue Code, other tax laws, or their implementing regulations.
69 Hence, the determination of the validity of these issuances clearly falls within the
exclusive appellate jurisdiction of the Court of Tax Appeals under Section 7 (1) of
Republic Act No. 1125, as amended, subject to prior review by the Secretary of Finance,
as required under Republic Act No. 8424. 70
We now proceed to the substantive aspects.
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II
Respondents contend that the 20-lender rule should not strictly apply to
issuances of government debt instruments, which by nature, are borrowings from the
public. 71 Applying the rule otherwise leads to an absurd result. 72 They point out that in
BIR Ruling No. 007-04 73 dated July 16, 2004 (the precursor of BIR Ruling Nos. 370-
2011 and DA 378-2011), the Bureau of Treasury's admitted intent to make the
government securities freely tradable to an unlimited number of lenders/investors in
the secondary market was considered in place of an actual head count of
lenders/investors due to the limitations brought about by the absolute confidentiality of
investments in government bonds under Section 2 of Republic Act No. 1405, otherwise
known as the Bank Secrecy Law. 74
Considering that the PEACe Bonds were intended to be freely tradable in the
secondary market to 20 or more lenders/investors, respondents contend that they, like
other similarly situated government securities — awarded to 19 or less GSEDs in the
primary market but freely tradable to 20 or more lenders/investors in the secondary
market — should be treated as deposit substitutes subject to the 20% nal withholding
tax. 75
Petitioners and petitioners-intervenors RCBC and RCBC Capital counter that
Section 22 (Y) of the National Internal Revenue Code applies to all types of securities,
including those issued by government. They add that under this provision, it is the
actual number of lenders at any one time that is material in determining whether an
issuance is to be considered a deposit substitute and not the intended distribution plan
of the issuer.
Moreover, petitioners and petitioners-intervenors RCBC and RCBC Capital argue
that the real intent behind the issuance of the PEACe Bonds, as re ected by the
representations and assurances of government in various issuances and rulings, was to
limit the issuance to 19 lenders and below. Hence, they contend that government
cannot now take an inconsistent position.
We nd respondents' proposition to consider the intended public distribution of
government securities — in this case, the PEACe Bonds — in place of an actual head
count to be untenable.
The general rule of requiring adherence to the letter in construing statutes
applies with peculiar strictness to tax laws and the provisions of a taxing act are not to
be extended by implication. 76
The de nition of deposit substitutes in Section 22 (Y) speci cally de ned
"public" to mean "twenty (20) or more individual or corporate lenders at any one time."
77 The qualifying phrase for public introduced 78 by the National Internal Revenue Code
shows that a change in the meaning of the provision was intended, and this Court
should construe the provision as to give effect to the amendment. 79 Hence, in light of
Section 22 (Y), the reckoning of whether there are 20 or more individuals or corporate
lenders is crucial in determining the tax treatment of the yield from the debt instrument.
In other words, if there are 20 or more lenders, the debt instrument is considered a
deposit substitute and subject to 20% final withholding tax.
II.A
The de nition of deposit substitutes under the National Internal Revenue Code
was lifted from Section 95 of Republic Act No. 7653, otherwise known as the New
Central Bank Act:
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SEC. 95. De nition of Deposit Substitutes. — The term "deposit
substitutes" is defined as an alternative form of obtaining funds from the public,
other than deposits, through the issuance, endorsement, or acceptance of debt
instruments for the borrower's own account, for the purpose of relending or
purchasing of receivables and other obligations. These instruments may
include, but need not be limited to, bankers' acceptances, promissory notes,
participations, certi cates of assignment and similar instruments with recourse,
and repurchase agreements. The Monetary Board shall determine what speci c
instruments shall be considered as deposit substitutes for the purposes of
Section 94 of this Act: Provided, however, That deposit substitutes of
commercial, industrial and other non nancial companies issued for the limited
purpose of nancing their own needs or the needs of their agents or dealers
shall not be covered by the provisions of Section 94 of this Act. (Emphasis
supplied) TAIaHE
Banks are entities engaged in the lending of funds obtained from the public in the
form of deposits. 80 Deposits of money in banks and similar institutions are considered
simple loans. 81 Hence, the relationship between a depositor and a bank is that of
creditor and debtor. The ownership of the amount deposited is transmitted to the bank
upon the perfection of the contract and it can make use of the amount deposited for its
own transactions and other banking operations. Although the bank has the obligation
to return the amount deposited, it has no obligation to return or deliver the same money
that was deposited. 82
The de nition of deposit substitutes in the banking laws was brought about by
an observation that banks and non-bank nancial intermediaries have increasingly
resorted to issuing a variety of debt instruments, other than bank deposits, to obtain
funds from the public. The de nition also laid down the groundwork for the supervision
by the Central Bank of quasi-banking functions. 83
As de ned in the banking sector, the term "public" refers to 20 or more lenders.
84 "What controls is the actual number of persons or entities to whom the products or
instruments are issued. If there are at least twenty (20) lenders or creditors, then the
funds are considered obtained from the public." 85
If a bank or non-bank nancial intermediary sells debt instruments to 20 or more
lenders/placers at any one time, irrespective of outstanding amounts, for the purpose
of relending or purchasing of receivables or obligations, it is considered to be
performing a quasi-banking function and consequently subject to the appropriate
regulations of the Bangko Sentral ng Pilipinas (BSP).
II.B
Under the National Internal Revenue Code, however, deposit substitutes include
not only the issuances and sales of banks and quasi-banks for relending or purchasing
receivables and other similar obligations, but also debt instruments issued by
commercial, industrial, and other non- nancial companies to nance their own needs or
the needs of their agents or dealers. This can be deduced from a reading together of
Section 22 (X) and (Y):
Section 22. Definitions. — When used in this Title:
xxx xxx xxx
(X) The term 'quasi-banking activities' means borrowing funds from twenty
(20) or more personal or corporate lenders at any one time, through the
issuance, endorsement, or acceptance of debt instruments of any kind other
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than deposits for the borrower's own account, or through the issuance of
certi cates of assignment or similar instruments, with recourse, or of
repurchase agreements for purposes of re-lending or purchasing receivables
and other similar obligations: Provided, however, That commercial, industrial
and other non- nancial companies, which borrow funds through any of these
means for the limited purpose of nancing their own needs or the needs of their
agents or dealers, shall not be considered as performing quasi-banking
functions.
(Y) The term 'deposit substitutes' shall mean an alternative form of
obtaining funds from the public (the term 'public' means borrowing from
twenty (20) or more individual or corporate lenders at any one time) ,
other than deposits, through the issuance, endorsement, or acceptance of debt
instruments for the borrower's own account, for the purpose of re-lending or
purchasing of receivables and other obligations, or nancing their own
needs or the needs of their agent or dealer. (Emphasis supplied)
For internal revenue tax purposes, therefore, even debt instruments issued and
sold to 20 or more lenders/investors by commercial or industrial companies to nance
their own needs are considered deposit substitutes, taxable as such.
II.C
The interest income on bank deposits was subjected for the rst time to the
withholding tax system under Presidential Decree No. 1156, 86 which was promulgated
in 1977. The whereas clauses spell the reasons for the law:
[I]nterest on bank deposit is one of the items includible in gross income. . . .
[M]any bank depositors fail to declare interest income in their income tax
returns. . . . [I]n order to maximize the collection of the income tax on interest on
bank deposits, it is necessary to apply the withholdings system on this type of
fixed or determinable income.
In the same year, Presidential Decree No. 1154 87 was also promulgated. It
imposed a 35% transaction tax ( nal tax) on interest income from every commercial
paper issued in the primary market, regardless of whether they are issued to the public
or not. 88 Commercial paper was de ned as "an instrument evidencing indebtedness of
any person or entity, including banks and non-banks performing quasi-banking
functions, which is issued, endorsed, sold, transferred or in any manner conveyed to
another person or entity, either with or without recourse and irrespective of maturity."
The imposition of a nal tax on commercial papers was "aimed primarily to improve the
administrative provisions of the National Internal Revenue Code to ensure the collection
on the tax on interest on commercial papers used as principal instruments issued in the
primary market." 89 It was reported that "the [Bureau of Internal Revenue had] no means
of enforcing strictly the taxation on interest income earned in the money market
transactions." 90 cDHAES
These presidential decrees, as well as other new internal revenue laws and
various laws and decrees that have so far amended the provisions of the 1939 National
Internal Revenue Code were consolidated and codi ed into the 1977 National Internal
Revenue Code. 91
In 1980, Presidential Decree No. 1739 92 was promulgated, which further
amended certain provisions of the 1977 National Internal Revenue Code and repealed
Section 210 (the provision embodying the percentage tax on commercial paper
transactions). The Decree imposed a nal tax of 20% on interests from yields on
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deposit substitutes issued to the public. 93 The tax was required to be withheld by
banks and non-bank nancial intermediaries and paid to the Bureau of Internal Revenue
in accordance with Section 54 of the 1977 National Internal Revenue Code. Presidential
Decree No. 1739, as amended by Presidential Decree No. 1959 in 1984 (which added
the de nition of deposit substitutes) was subsequently incorporated in the National
Internal Revenue Code.
These developments in the National Internal Revenue Code re ect the rationale
for the application of the withholding system to yield from deposit substitutes, which is
essentially to maximize and expedite the collection of income taxes by requiring its
payment at the source, 94 as with the case of the interest on bank deposits. When
banks sell deposit substitutes to the public, the nal withholding tax is imposed on the
interest income because it would be di cult to collect from the public. Thus, the
incipient scheme in the nal withholding tax is to achieve an effective administration in
capturing the interest-income windfall from deposit substitutes as a source of revenue.
It must be emphasized, however, that withholding tax is merely a method of
collecting income tax in advance. The perceived tax is collected at the source of income
payment to ensure collection. Consequently, those subjected to the nal withholding
tax are no longer subject to the regular income tax.
III
Respondents maintain that the phrase "at any one time" must be given its
ordinary meaning, i.e., "at any given time" or "during any particular point or moment in
the day." 95 They submit that the correct interpretation of Section 22 (Y) does not look
at any speci c transaction concerning the security; instead, it considers the existing
number of lenders/investors of such security at any moment in time, whether in the
primary or secondary market. 96 Hence, when during the lifetime of the security, there
was any one instance where twenty or more individual or corporate lenders held the
security, the borrowing becomes "public" in character and is ipso facto subject to 20%
final withholding tax. 97
Respondents further submit that Section 10.1 (k) of the Securities Regulation
Code and its Implementing Rules and Regulations may be applied by analogy, such that
if at any time, (a) the lenders/investors number 20 or more; or (b) should the issuer
merely offer the securities publicly or to 20 or more lenders/investors, these securities
should be deemed deposit substitutes. 98
On the other hand, petitioners-intervenors RCBC and RCBC Capital insist that the
phrase "at any one time" only refers to transactions made in the primary market.
According to them, the PEACe Bonds are not deposit substitutes since CODE-NGO,
through petitioner-intervenor RCBC, is the sole lender in the primary market, and all
subsequent transactions in the secondary market merely pertain to a sale and/or
assignment of credit and not borrowings from the public. 99
Similarly, petitioners contend that for a government security, such as the PEACe
Bonds, to be considered as deposit substitutes, it is an indispensable requirement that
there is "borrowing" between the issuer and the lender/investor in the primary market
and between the transferee and the transferor in the secondary market. Petitioners
submit that in the secondary market, the transferee/buyer must have recourse to the
selling investor as required by Section 22 (Y) of the National Internal Revenue Code so
that a borrowing "for the borrower's (transferor's) own account" is created between the
buyer and the seller. Should the transferees in the secondary market who have recourse
to the transferor reach 20 or more, the transaction will be subjected to a nal
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withholding tax. 100
Petitioners and petitioners-intervenors RCBC and RCBC Capital contend that
respondents' proposed application of Section 10.1 (k) of the Securities Regulation
Code and its Implementing Rules is misplaced because: (1) the National Internal
Revenue Code clearly provides the conditions when a security issuance should qualify
as a deposit substitute subject to the 20% nal withholding tax; and (2) the two laws
govern different matters.
III.A
Generally, a corporation may obtain funds for capital expenditures by oating
either shares of stock (equity) or bonds (debt) in the capital market. Shares of stock or
equity securities represent ownership, interest, or participation in the issuer-
corporation. On the other hand, bonds or debt securities are evidences of indebtedness
of the issuer-corporation.
New securities are issued and sold to the investing public for the rst time in the
primary market. Transactions in the primary market involve an actual transfer of funds
from the investor to the issuer of the new security. The transfer of funds is evidenced
by a security, which becomes a financial asset in the hands of the buyer/investor.
New issues are usually sold through a registered underwriter, which may be an
investment house or a bank registered as an underwriter of securities. 101 An
underwriter helps the issuer nd buyers for its securities. In some cases, the
underwriter buys the whole issue from the issuer and resells this to other security
dealers and the public. 102 When a group of underwriters pool together their resources
to underwrite an issue, they are called the "underwriting syndicate." 103
On the other hand, secondary markets refer to the trading of outstanding or
already-issued securities. In any secondary market trade, the cash proceeds normally
go to the selling investor rather than to the issuer.
To illustrate: A decides to issue bonds to raise capital funds. X buys and is
issued A bonds. The proceeds of the sale go to A, the issuer. The sale between A and X
is a primary market transaction.
Before maturity, X trades its A bonds to Y. The A bonds sold by X are not X's
indebtedness. The cash paid for the bonds no longer go to A, but remains with X, the
selling investor/holder. The transfer of A bonds from X to Y is considered a secondary
market transaction. Any difference between the purchase price of the assets (A bonds)
and the sale price is a trading gain subject to a different tax treatment, as will be
explained later.
When Y trades its A bonds to Z, the sale is still considered a secondary market
transaction. In other words, the trades from X to Y, Y to Z, and Z to subsequent
holders/investors are considered secondary market transactions. If Z holds on to the
bonds and the bonds mature, Z will receive from A the face value of the bonds.
A bond is similar to a bank deposit in the sense that the investor lends money to
the issuer and the issuer pays interest on the invested amount. However, unlike bank
deposits, bonds are marketable securities. The market mechanism provides quick
mobility of money and securities. 104 Thus, bondholders can sell their bonds before
they mature to other investors, in turn converting their nancial assets to cash. In
contrast, deposits, in the form of savings accounts for instance, can only be redeemed
by the issuing bank.
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III.B
An investor in bonds may derive two (2) types of income:
First, the interest or the amount paid by the borrower to the lender/investor for
the use of the lender's money. 105 For interest-bearing bonds, interest is normally
earned at the coupon date. In zero-coupon bonds, the discount is an interest amortized
up to maturity.
Second, the gain, if any, that is earned when the bonds are traded before maturity
date or when redeemed at maturity.
The 20% nal withholding tax imposed on interest income or yield from deposit
substitute does not apply to the gains derived from trading, retirement, or redemption
of the instrument.
It must be stressed that interest income, derived by individuals from long-term
deposits or placements made with banks in the form of deposit substitutes, is exempt
from income tax. Consequently, it is likewise exempt from the nal withholding tax
under Sections 24 (B) (1) and 25 (A) (2) of the National Internal Revenue Code.
However, when it is pre-terminated by the individual investor, graduated rates of 5%,
12%, or 20%, depending on the remaining maturity of the instrument, will apply on the
entire income, to be deducted and withheld by the depository bank. cTDaEH
With respect to gains derived from long-term debt instruments, Section 32 (B)
(7) (g) of the National Internal Revenue Code provides:
Sec. 32. Gross Income. —
xxx xxx xxx
(B) Exclusions from Gross Income. — The following items shall not
be included in gross income and shall be exempt from taxation under this title:
xxx xxx xxx
(7) Miscellaneous Items. —
xxx xxx xxx
(g) Gains from the Sale of Bonds, Debentures or other Certi cate of
Indebtedness. — Gains realized from the sale or exchange or retirement of
bonds, debentures or other certi cate of indebtedness with a maturity of more
than five (5) years.
Thus, trading gains, or gains realized from the sale or transfer of bonds (i.e.,
those with a maturity of more than ve years) in the secondary market, are exempt
from income tax. These "gains" refer to the difference between the selling price of the
bonds in the secondary market and the price at which the bonds were purchased by the
seller. For discounted instruments such as the zero-coupon bonds, the trading gain is
the excess of the selling price over the book value or accreted value (original issue
price plus accumulated discount from the time of purchase up to the time of sale) of
the instruments. 106
Section 32 (B) (7) (g) also includes gains realized by the last holder of the bonds
when the bonds are redeemed at maturity, which is the difference between the
proceeds from the retirement of the bonds and the price at which the last holder
acquired the bonds.
On the other hand, gains realized from the trading of short-term bonds (i.e., those
with a maturity of less than ve years) in the secondary market are subject to regular
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income tax rates (ranging from 5% to 32% for individuals, and 30% for corporations)
under Section 32 107 of the National Internal Revenue Code.
III.C
The Secretary of Finance, through the Bureau of Treasury, 108 is authorized under
Section 1 of Republic Act No. 245, as amended, to issue evidences of indebtedness
such as treasury bills and bonds to meet public expenditures or to provide for the
purchase, redemption, or refunding of any obligations.
These treasury bills and bonds are issued and sold by the Bureau of Treasury to
lenders/investors through a network of licensed dealers (called Government Securities
Eligible Dealers or GSEDs). 109 GSEDs are classi ed into primary and ordinary dealers.
110 A primary dealer enjoys certain privileges such as eligibility to participate in the
competitive bidding of regular issues, eligibility to participate in the issuance of special
issues such as zero-coupon treasury bonds, and access to tap facility window. 111 On
the other hand, ordinary dealers are only allowed to participate in the non-competitive
bidding. 112 Moreover, primary dealers are required to meet the following obligations:
a. Must submit at least one competitive bid in each scheduled auction.
b. Must have total awards of at least 2% of the total amount of bills or bonds
awarded within a particular quarter. This requirement does not cover
special issues.
c. Must be active in the trading of GS [government securities] in the
secondary market. 113
A primary dealer who fails to comply with its obligations will be dropped from
the roster of primary dealers and classified as an ordinary dealer.
The auction method is the main channel used for originating government
securities. 114 Under this method, the Bureau of Treasury issues a public notice offering
treasury bills and bonds for sale and inviting tenders. 115 The GSEDs tender their bids
electronically; 116 after the cut-off time, the Auction Committee deliberates on the bids
and decide on the award. 117
The Auction Committee then downloads the awarded securities to the winning
bidders' Principal Securities Account in the Registry of Scripless Securities (RoSS). The
RoSS, an electronic book-entry system established by the Bureau of Treasury, is the
o cial Registry of ownership of or interest in government securities. 118 All
government securities oated/originated by the National Government under its
scripless policy, as well as subsequent transfers of the same in the secondary market,
are recorded in the RoSS in the Principal Securities Account of the GSED. 119
A GSED is required to open and maintain Client Securities Accounts in the name
of its respective clients for segregating government securities acquired by such clients
from the GSED's own securities holdings. A GSED may also lump all government
securities sold to clients in one account, provided that the GSED maintains complete
records of ownership/other titles of its clients in the GSED's own books. 120
Thus, primary issues of treasury bills and bonds are supposed to be issued only
to GSEDs. By participating in auctions, the GSED acts as a channel between the Bureau
of Treasury and investors in the primary market. The winning GSED bidder acquires the
privilege to on-sell government securities to other nancial institutions or nal
investors who need not be GSEDs. 121 Further, nothing in the law or the rules of the
Bureau of Treasury prevents the GSED from entering into contract with another entity to
further distribute government securities. cSaATC
VI
Petitioners-intervenors RCBC and RCBC Capital contend that they cannot be held
liable for the 20% final withholding tax for two (2) reasons. First, at the time the required
withholding should have been made, their obligation was not clear since BIR Ruling Nos.
370-2011 and DA 378-2011 stated that the 20% nal withholding tax does not apply to
PEACe Bonds. 144 Second, to punish them under the circumstances (i.e., when they
secured the PEACe Bonds from the Bureau of Treasury and sold the Bonds to the
lenders/investors, they had no obligation to remit the 20% nal withholding tax) would
violate due process of law and the constitutional proscription on ex post facto law. 145
Petitioner-intervenor RCBC Capital further posits that it cannot be held liable for
the 20% nal withholding tax even as a taxpayer because it never earned interest
income from the PEACe Bonds, and any income earned is deemed in the nature of an
underwriting fee. 146 Petitioners-intervenors RCBC and RCBC Capital instead argue that
the liability falls on the Bureau of Treasury and CODE-NGO, as withholding agent and
taxpayer, respectively, considering their explicit representation that the PEACe Bonds
are exempt from the final withholding tax. 147
Petitioners-intervenors RCBC and RCBC Capital add that the Bureau of Internal
Revenue is barred from assessing and collecting the 20% nal withholding tax,
assuming it was due, on the ground of prescription. 148 They contend that the three (3)-
year prescriptive period under Section 203, rather than the 10-year assessment period
under Section 222, is applicable because they were compliant with the requirement of
ling monthly returns that re ect the nal withholding taxes due or remitted for the
relevant period. No false or fraudulent return was made because they relied on the
2001 BIR Rulings and on the representations made by the Bureau of Treasury and
CODE-NGO that the PEACe Bonds were not subject to the 20% nal withholding tax. 149
Finally, petitioners-intervenors RCBC and RCBC Capital argue that this Court's
interpretation of the phrase "at any one time" cannot be applied to the PEACe Bonds
and should be given prospective application only because it would cause prejudice to
them, among others. They cite Section 246 of the National Internal Revenue Code on
non-retroactivity of rulings, as well as Commissioner of Internal Revenue v. San Roque
Power Corporation, 150 which held that taxpayers may rely upon a rule or ruling issued
by the Commissioner from the time it was issued up to its reversal by the
Commissioner or the court. According to them, the retroactive application of the
court's decision would impair their vested rights, violate the constitutional prohibition
on non-impairment of contracts, and constitute a substantial breach of obligation on
the part of government. 151 In addition, the imposition of the 20% nal withholding tax
on the PEACe Bonds would allegedly have pernicious effects on the integrity of existing
securities that is contrary to the state policies of stabilizing the nancial system and of
developing the capital markets. 152
CODE-NGO likewise contends that it merely relied in good faith on the 2001 BIR
Rulings con rming that the PEACe Bonds were not subject to the 20% nal withholding
t ax. 153 Therefore, it should not be prejudiced if the BIR Rulings are found to be
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erroneous and reversed by the Commissioner or this court. 154 CODE-NGO argues that
this Court's Decision construing the phrase "at any one time" to determine the phrase
"20 or more lenders" to include both the primary and secondary market should be
applied prospectively. 155
Assuming it is liable for the 20% nal withholding tax, CODE-NGO argues that the
collection of the nal tax was barred by prescription. 156 CODE-NGO points out that
under Section 203 of the National Internal Revenue Code, internal revenue taxes such as
the nal tax, should be assessed within three (3) years after the last day prescribed by
law for the filing of the return. 157 It further argues that Section 222 (a) on exceptions to
the prescribed period for tax assessment and collection does not apply. 158 It claims
that there is no fraud or intent to evade taxes as it relied in good faith on the
assurances of the Bureau of Internal Revenue and Bureau of Treasury the PEACe Bonds
are not subject to the 20% final withholding tax. 159
We nd merit on the claim of petitioners-intervenors RCBC, RCBC Capital, and
CODE-NGO for prospective application of our Decision.
The phrase "at any one time" is ambiguous in the context of the nancial market.
Hence, petitioner-intervenor RCBC and the rest of the investors relied on the opinions of
the Bureau of Internal Revenue in BIR Ruling Nos. 020-2001, 035-2001 160 dated August
16, 2001, and DA-175-01 161 dated September 29, 2001 to vested their rights in the
exemption from the nal withholding tax. In sum, these rulings pronounced that to
determine whether the financial assets, i.e., debt instruments and securities, are deposit
substitutes, the "20 or more individual or corporate lenders" rule must apply. Moreover,
the determination of the phrase "at any one time" to determine the "20 or more lenders"
is to be determined at the time of the original issuance. This being the case, the PEACe
Bonds were not to be treated as deposit substitutes.
In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals , 162 the Commissioner
demanded from petitioner deficiency withholding income tax on film rentals remitted to
foreign corporations for the years 1965 to 1968. The assessment was made under
Revised Memo Circular No. 4-71 issued in 1971, which used gross income as tax basis
for the required withholding tax, instead of one-half of the lm rentals as provided
under General Circular No. V-334. In setting aside the assessment, this Court ruled that
in the interest of justice and fair play, rulings or circulars promulgated by the
Commissioner of Internal Revenue have no retroactive application where applying them
would prove prejudicial to taxpayers who relied in good faith on previous issuances of
the Commissioner. This Court further held that Section 24 (b) of then National Internal
Revenue Code sought to be implemented by General Circular No. V-334 was neither too
plain nor simple to understand and was capable of different interpretations. Thus: CAacTH
The rationale behind General Circular No. V-334 was clearly stated
therein, however: "It ha[d] been determined that the tax is still imposed on
income derived from capital, or labor, or both combined, in accordance with the
basic principle of income taxation . . . and that a mere return of capital or
investment is not income. . . ." "A part of the receipts of a non-resident foreign
lm distributor derived from said lm represents, therefore, a return of
investment." The circular thus xed the return of capital at 50% to simplify the
administrative chore of determining the portion of the rentals covering the return
of capital.
Were the "gross income" base clear from Sec. 24(b), perhaps,
the ratiocination of the Tax Court could be upheld. It should be noted,
however, that said Section was not too plain and simple to
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understand. The fact that the issuance of the General Circular in
question was rendered necessary leads to no other conclusion than
that it was not easy of comprehension and could be subjected to
different interpretations.
In fact, Republic Act No. 2343, dated June 20, 1959, supra, which was the
basis of General Circular No. V-334, was just one in a series of enactments
regarding Sec. 24(b) of the Tax Code. Republic Act No. 3825 came next on June
22, 1963 without changing the basis but merely adding a proviso (in bold
letters).
(b) Tax on foreign corporation. — (1) Non-resident
corporations. — There shall be levied, collected, and paid for each
taxable year, in lieu of the tax imposed by the preceding
paragraph, upon the amount received by every foreign corporation
not engaged in trade or business within the Philippines, from all
sources within the Philippines, as interest, dividends, rents,
salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other xed or determinable annual
or periodical gains, pro ts and income, a tax equal to thirty per
centum of such amount: PROVIDED, HOWEVER, THAT PREMIUMS
SHALL NOT INCLUDE REINSURANCE PREMIUMS." (double
emphasis ours)
Republic Act No. 3841, dated likewise on June 22, 1963, followed after,
omitting the proviso and inserting some words (also in bold letters).
"(b) Tax on foreign corporations. — (1) Non-resident
corporations. — There shall be levied, collected and paid for each
taxable year, in lieu of the tax imposed by the preceding
paragraph, upon the amount received by every foreign corporation
not engaged in trade or business within the Philippines, from all
sources within the Philippines, as interest, dividends, rents,
salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other xed or determinable annual
or periodical OR CASUAL gains, pro ts and income, AND CAPITAL
GAINS, a tax equal to thirty per centum of such amount."
The principle of legislative approval of administrative interpretation by re-
enactment clearly obtains in this case. It provides that "the re-enactment of a
statute substantially unchanged is persuasive indication of the adoption by
Congress of a prior executive construction." Note should be taken of the fact
that this case involves not a mere opinion of the Commissioner or ruling
rendered on a mere query, but a Circular formally issued to "all internal revenue
officials" by the then Commissioner of Internal Revenue.
It was only on June 27, 1968 under Republic Act No. 5431, supra, which
became the basis of Revenue Memorandum Circular No. 4-71, that Sec. 24(b)
was amended to refer speci cally to 35% of the "gross income." 163 (Emphasis
supplied)
San Roque has held that the 120-day and the 30-day periods under Section 112
of the National Internal Revenue Code are mandatory and jurisdictional. Nevertheless,
San Roque provided an exception to the rule, such that judicial claims led by taxpayers
who relied on BIR Ruling No. DA-489-03 — from its issuance on December 10, 2003
until its reversal by this Court in Commissioner of Internal Revenue v. Aichi Forging
Company of Asia, Inc. 164 on October 6, 2010 — are shielded from the vice of
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prematurity. The BIR Ruling declared that the "taxpayer-claimant need not wait for the
lapse of the 120-day period before it could seek judicial relief with the C[ourt] [of] T[ax]
A[ppeals] by way of Petition for Review." The Court reasoned that:
Taxpayers should not be prejudiced by an erroneous interpretation by the
Commissioner, particularly on a di cult question of law. The abandonment of
the Atlas doctrine by Mirant and Aichi is proof that the reckoning of the
prescriptive periods for input VAT tax refund or credit is a di cult question of
law. The abandonment of the Atlas doctrine did not result in Atlas, or other
taxpayers similarly situated, being made to return the tax refund or credit they
received or could have received under Atlas prior to its abandonment. This Court
is applying Mirant and Aichi prospectively. Absent fraud, bad faith or
misrepresentation, the reversal by this Court of a general interpretative rule
issued by the Commissioner, like the reversal of a speci c BIR ruling under
Section 246, should also apply prospectively. . . .
xxx xxx xxx
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general
interpretative rule applicable to all taxpayers or a speci c ruling applicable only
to a particular taxpayer.
BIR Ruling No. DA-489-03 is a general interpretative rule because it was a
response to a query made, not by a particular taxpayer, but by a government
agency tasked with processing tax refunds and credits, that is, the One Stop
Shop Inter-Agency Tax Credit and Drawback Center of the Department of
Finance. This government agency is also the addressee, or the entity responded
to, in BIR Ruling No. DA-489-03. Thus, while this government agency mentions
in its query to the Commissioner the administrative claim of Lazi Bay Resources
Development, Inc., the agency was in fact asking the Commissioner what to do
in cases like the tax claim of Lazi Bay Resources Development, Inc., where the
taxpayer did not wait for the lapse of the 120-day period. IAETDc
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all
taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its issuance on
10 December 2003 up to its reversal by this Court in Aichi on 6 October 2010,
where this Court held that the 120+30-day periods are mandatory and
jurisdictional. 165 (Emphasis supplied)
The previous interpretations given to an ambiguous law by the Commissioner of
Internal Revenue, who is charged to carry out its provisions, are entitled to great weight,
and taxpayers who relied on the same should not be prejudiced in their rights. 166
Hence, this Court's construction should be prospective; otherwise, there will be a
violation of due process for failure to accord persons, especially the parties affected by
it, fair notice of the special burdens imposed on them.
VII
Urgent Reiterative Motion [to Direct Respondents to Comply with the
Temporary Restraining Order]
Petitioners Banco de Oro, et al. allege that the temporary restraining order issued
by this Court on October 18, 2011 continues to be effective under Rule 58, Section 5 of
the Rules of Court and the Decision dated January 13, 2015. Thus, considering
respondents' refusal to comply with their obligation under the temporary restraining
order, petitioners ask this Court to issue a resolution directing respondents, particularly
the Bureau of Treasury, "to comply with its order by immediately releasing to the
petitioners during the pendency of the case the 20% nal withholding tax" so that the
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monies may be placed in escrow pending resolution of the case. 167
We recall that in its previous pleadings, respondents remain rm in its stance
that the October 18, 2011 temporary restraining order could no longer be implemented
because the acts sought to be enjoined were already fait accompli. 168 They allege that
the amount withheld was already remitted by the Bureau of Treasury to the Bureau of
Internal Revenue. Hence, it became part of the General Fund, which required legislative
appropriation before it could validly be disbursed. 169 Moreover, they argue that since
the amount in question pertains to taxes alleged to be erroneously withheld and
collected by government, the proper recourse was for the taxpayers to le an
application for tax refund before the Commissioner of Internal Revenue under Section
204 of the National Internal Revenue Code. 170
In our January 13, 2015 Decision, we rejected respondents' defense of fait
accompli. We held that the amount withheld were yet to be remitted to the Bureau of
Internal Revenue, and the evidence (journal entry voucher) submitted by respondents
was insufficient to prove the fact of remittance. Thus:
The temporary restraining order enjoins the entire implementation of the
2011 BIR Ruling that constitutes both the withholding and remittance of the
20% nal withholding tax to the Bureau of Internal Revenue. Even though the
Bureau of Treasury had already withheld the 20% nal withholding tax when
they received the temporary restraining order, it had yet to remit the monies it
withheld to the Bureau of Internal Revenue, a remittance which was due only on
November 10, 2011. The act enjoined by the temporary restraining order had not
yet been fully satisfied and was still continuing.
Under DOF-DBM Joint Circular No. 1-2000A dated July 31, 2001 which
prescribes to national government agencies such as the Bureau of Treasury the
procedure for the remittance of all taxes they withheld to the Bureau of Internal
Revenue, a national agency shall le before the Bureau of Internal Revenue a
Tax Remittance Advice (TRA) supported by withholding tax returns on or before
the 10th day of the following month after the said taxes had been withheld. The
Bureau of Internal Revenue shall transmit an original copy of the TRA to the
Bureau of Treasury, which shall be the basis in recording the remittance of the
tax collection. The Bureau of Internal Revenue will then record the amount of
taxes re ected in the TRA as tax collection in the Journal of Tax Remittance by
government agencies based on its copies of the TRA. Respondents did not
submit any withholding tax return or TRA to prove that the 20% nal
withholding tax was indeed remitted by the Bureau of Treasury to the Bureau of
Internal Revenue on October 18, 2011.
Respondent Bureau of Treasury's Journal Entry Voucher No. 11-10-10395
dated October 18, 2011 submitted to this court shows:
Account Code Debit Amount Credit Amount
Respondents did not submit any withholding tax return or tax remittance advice
to prove that the 20% nal withholding tax was, indeed, remitted by the Bureau of
Treasury to the Bureau of Internal Revenue on October 18, 2011, and consequently
became part of the general fund of the government. The corresponding journal entry in
the books of both the Bureau of Treasury and Bureau of Internal Revenue showing the
transfer of the withheld funds to the Bureau of Internal Revenue was likewise not
submitted to this Court. The burden of proof lies on them to show their claim of
remittance. Until now, respondents have failed to submit su cient supporting evidence
to prove their claim.
I n Commissioner of Internal Revenue v. Procter & Gamble Philippine
Manufacturing Corporation, 172 this Court upheld the right of a withholding agent to le
a claim for refund of the withheld taxes of its foreign parent company. This Court, citing
Philippine Guaranty Company, Inc. v Commissioner of Internal Revenue , 173 ruled that
inasmuch as it is an agent of government for the withholding of the proper amount of
tax, it is also an agent of its foreign parent company with respect to the ling of the
necessary income tax return and with respect to actual payment of the tax to the
government. Thus:
The term "taxpayer" is de ned in our NIRC as referring to "any person subject to
tax imposed by the Title [on Tax on Income]." It thus becomes important to note
that under Section 53(c) of the NIRC, the withholding agent who is "required to
deduct and withhold any tax" is made "personally liable for such tax" and indeed
is indemni ed against any claims and demands which the stockholder might
wish to make in questioning the amount of payments effected by the
withholding agent in accordance with the provisions of the NIRC. The
withholding agent, P&G-Phil., is directly and independently liable for the correct
amount of the tax that should be withheld from the dividend remittances. The
withholding agent is, moreover, subject to and liable for de ciency
assessments, surcharges and penalties should the amount of the tax withheld
be nally found to be less than the amount that should have been withheld
under law.
A "person liable for tax" has been held to be a "person subject to tax" and
properly considered a "taxpayer." The terms "liable for tax" and "subject to tax"
both connote legal obligation or duty to pay a tax. It is very di cult, indeed
conceptually impossible, to consider a person who is statutorily made "liable for
tax" as not "subject to tax." By any reasonable standard, such a person should
be regarded as a party in interest, or as a person having su cient legal interest,
to bring a suit for refund of taxes he believes were illegally collected from him.
I n Philippine Guaranty Company, Inc. v. Commissioner of Internal
Revenue, this Court pointed out that a withholding agent is in fact the agent
both of the government and of the taxpayer, and that the withholding agent is
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not an ordinary government agent:
The law sets no condition for the personal liability of the
withholding agent to attach. The reason is to compel the
withholding agent to withhold the tax under all circumstances. In
effect, the responsibility for the collection of the tax as well as the
payment thereof is concentrated upon the person over whom the
Government has jurisdiction. Thus, the withholding agent is
constituted the agent of both the Government and the taxpayer.
With respect to the collection and/or withholding of the tax, he is
the Government's agent. In regard to the ling of the necessary
income tax return and the payment of the tax to the Government,
he is the agent of the taxpayer. The withholding agent, therefore, is
no ordinary government agent especially because under Section
53 (c) he is held personally liable for the tax he is duty bound to
withhold; whereas the Commissioner and his deputies are not
made liable by law.
If, as pointed out in Philippine Guaranty, the withholding agent is also an
agent of the bene cial owner of the dividends with respect to the ling of the
necessary income tax return and with respect to actual payment of the tax to
the government, such authority may reasonably be held to include the authority
to le a claim for refund and to bring an action for recovery of such claim. This
implied authority is especially warranted where, as in the instant case, the
withholding agent is the wholly owned subsidiary of the parent-stockholder and
therefore, at all times, under the effective control of such parent-stockholder. In
the circumstances of this case, it seems particularly unreal to deny the implied
authority of P&G-Phil. to claim a refund and to commence an action for such
refund.
xxx xxx xxx
We believe and so hold that, under the circumstances of this case, P&G-
Phil. is properly regarded as a "taxpayer" within the meaning of Section 309,
NIRC, and as impliedly authorized to le the claim for refund and the suit to
recover such claim. 174 (Emphasis supplied, citations omitted)
In Commissioner of Internal Revenue v. Smart Communication, Inc.: 175
[W]hile the withholding agent has the right to recover the taxes erroneously or
illegally collected, he nevertheless has the obligation to remit the same to the
principal taxpayer. As an agent of the taxpayer, it is his duty to return what he
has recovered; otherwise, he would be unjustly enriching himself at the expense
of the principal taxpayer from whom the taxes were withheld, and from whom
he derives his legal right to file a claim for refund. 176 SCaITA
Since respondents have not su ciently shown the actual remittance of the 20%
nal withholding taxes withheld from the proceeds of the PEACe bonds to the Bureau
of Internal Revenue, there was no legal impediment for the Bureau of Treasury (as agent
of petitioners) to release the monies to petitioners to be placed in escrow, pending
resolution of the motions for reconsideration led in this case by respondents and
petitioners-intervenors RCBC and RCBC Capital.
Moreover, Sections 204 and 229 of the National Internal Revenue Code are not
applicable since the Bureau of Treasury's act of withholding the 20% nal withholding
tax was done after the Petition was filed.
Petitioners also urge 177 us to hold respondents liable for 6% legal interest
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reckoned from October 19, 2011 until they fully pay the amount corresponding to the
20% final withholding tax.
This Court has previously granted interest in cases where patent arbitrariness on
the part of the revenue authorities has been shown, or where the collection of tax was
illegal. 178
In Philex Mining Corp. v. Commissioner of Internal Revenue: 179
[T]he rule is that no interest on refund of tax can be awarded unless authorized
by law or the collection of the tax was attended by arbitrariness. An action is not
arbitrary when exercised honestly and upon due consideration where there is
room for two opinions, however much it may be believed that an erroneous
conclusion was reached. Arbitrariness presupposes inexcusable or obstinate
disregard of legal provisions. 180 (Emphasis supplied, citations omitted)
Here, the Bureau of Treasury made no effort to release the amount of
P4,966,207,796.41, corresponding to the 20% nal withholding tax, when it could have
done so.
In the Court's temporary restraining order dated October 18, 2011, 181 which
respondent received on October 19, 2011, we "enjoin[ed] the implementation of BIR
Ruling No. 370-2011 against the [PEACe Bonds,] . . . subject to the condition that the
20% nal withholding tax on interest income therefrom shall be withheld by the
petitioner banks and placed in escrow pending resolution of [the] petition." 182
Subsequently, in our November 15, 2011 Resolution, we directed respondents to
"show cause why they failed to comply with the [temporary restraining order]; and [to]
comply with the [temporary restraining order] in order that petitioners may place the
corresponding funds in escrow pending resolution of the petition." 183
Respondent did not heed our orders.
In our Decision dated January 13, 2015, we reprimanded the Bureau of Treasury
for its continued retention of the amount corresponding to the 20% nal withholding
tax, in wanton disregard of the orders of this Court.
We further ordered the Bureau of Treasury to immediately release and pay the
bondholders the amount corresponding to the 20% nal withholding tax that it withheld
on October 18, 2011.
However, respondent remained obstinate in its refusal to release the monies and
exhibited utter disregard and defiance of this Court.
As early as October 19, 2011, petitioners could have deposited the amount of
P4,966,207,796.41 in escrow and earned interest, had respondent Bureau of Treasury
complied with the temporary restraining order and released the funds. It was
inequitable for the Bureau of Treasury to have withheld the potential earnings of the
funds in escrow from petitioners.
Due to the Bureau of Treasury's unjusti ed refusal to release the funds to be
deposited in escrow, in utter disregard of the orders of the Court, it is held liable to pay
legal interest of 6% per annum 184 on the amount of P4,966,207,796.41 representing
the 20% final withholding tax on the PEACe Bonds.
WHEREFORE , respondents' Motion for Reconsideration and Clari cation is
DENIED,
DENIED and petitioners-intervenors RCBC and RCBC Capital Corporation's Motion for
Clarification and/or Partial Reconsideration is PARTLY GRANTED.
* No part.
** On leave.
*** No part.
2. Id. at 2253-2309.
3. Id. at 130.
4. Id.
5. Id.
1. SA = PP * FV
2. PP = 1/[1 + i/m]n
n = (MP * m) - E/x
x = 360/m
Where:
b) If D1 - 31 change it to 30
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c) Up to at least 10 decimal places
Where:
PP = Purchase Price
FV = Face Value
i = Yield to Maturity
7. Id.
8. Id. at 132.
9. Id.
14. Id. at 1066. Section 5 of the underwriting agreement provides that the "underwriting fee
and selling commission [shall be] in such amount as may be agreed upon between
CODE NGO and [RCBC Capital] but not to exceed two percent (2%) of the total issue
price of the total Bonds sold[.]"
15. Id. at 1062.
18. Id.
19. Id. at 217-230.
21. Id. at n
42. Banco de Oro v. Republic, G.R. No. 198756, January 13, 2015, 745 SCRA 361, 400-403 [Per
J. Leonen, En Banc], citing Commissioner of Internal Revenue v. Leal, 440 Phil. 477,
485-487 (2002) [Per Sandoval-Gutierrez, Third Division], as, in turn, cited in Asia
International Auctioneers, Inc. v. Hon. Parayno, Jr. , 565 Phil. 255, 268-269 (2007) [Per
C.J. Puno, First Division]; Rodriguez v. Blaquera, 109 Phil. 598 (1960) [Per J.
Concepcion, En Banc].
46. Id.
49. 565 Phil. 255 (2007) [Per C.J. Puno, First Division].
61. Ynot v. IAC, 232 Phil. 615, 621 (1987) [Per J. Cruz, En Banc]. See also Garcia v. Drilon, 712
Phil. 44, 78-80 (2013) [Per J. Perlas-Bernabe, En Banc].
64. See Republic v. Abella, 190 Phil. 630 (1981) [Per C.J. Fernando, Second Division], citing
Good Day Trading v. Board of Tax Appeals , 95 Phil. 569, 575 (1954) [Per J.
Montemayor, En Banc]; Millarez v. Amparo , 97 Phil. 282, 284 (1955) [J. Bengzon, En
Banc]; Ollada v. Court of Tax Appeals , 99 Phil. 604, 608-609 (1956) [Per J. Bautista
Angelo, En Banc]; Castro v. David, 100 Phil. 454, 457 (1956) [Per J. Padilla, En Banc];
and Ledesma v. Court of Tax Appeals , 102 Phil. 931, 934 (1955) [Per J. Montemayor,
En Banc].
65. Rep. Act No. 1125 (1954), sec. 1, as amended by Rep. Act No. 9282 (2004).
66. Metro Construction, Inc. v. Chatham Properties, Inc. , 418 Phil. 176, 202-203 (2001) [Per
C.J. Davide, Jr., First Division]: "A quasi-judicial agency or body has been de ned as
an organ of government other than a court and other than a legislature, which affects
the rights of private parties through either adjudication or rule-making. The very
de nition of an administrative agency includes its being vested with quasi-judicial
powers. The ever increasing variety of powers and functions given to administrative
agencies recognizes the need for the active intervention of administrative agencies in
matters calling for technical knowledge and speed in countless controversies which
cannot possibly be handled by regular courts."
67. We apply by analogy the ruling In National Water Resources Board v. A. L. Ang Network,
Inc., 632 Phil. 22, 28-29 (2010) [Per J. Carpio-Morales, First Division], which states
that "[s]ince the appellate court has exclusive appellate jurisdiction over quasi-judicial
agencies under Rule 43 of the Rules of Court, petitions for writs of certiorari,
prohibition or mandamus against the acts and omissions of quasi-judicial agencies,
like petitioner, should be filed with it."
68. An Act Reorganizing the Judiciary, Appropriating Funds Therefor and for Other Purposes
(1981).
73. BIR Ruling No. 007-04 (2004), signed by Commissioner Guillermo L. Parayno, Jr.
essentially held that government debt instruments are deposit substitutes irrespective
of the number of lenders at the time of origination.
74. Rollo, p. 2209.
76. Commissioner of Internal Revenue v. Philippine American Accident Insurance Co., Inc., 493
Phil. 785, 793-794 (2005) [Per J. Carpio, First Division]: "Unless a statute imposes a
tax clearly, expressly and unambiguously, what applies is the equally well-settled rule
that the imposition of a tax cannot be presumed. Where there is doubt, tax laws must
be construed strictly against the government and in favor of the taxpayer. This is
because taxes are burdens on the taxpayer, and should not be unduly imposed or
presumed beyond what the statutes expressly and clearly import."
Commissioner of Internal Revenue v. Court of Appeals , 338 Phil. 322 (1997) [Per J.
Panganiban, Third Division]; Marinduque Lion Mines Agents, Inc. vs. Hinabangan
Samar, 120 Phil. 413, 418 (1964) [Per J. Reyes, J.B.L., En Banc].
77. TAX CODE, sec. 22 (Y).
78. The 20% nal tax treatment of interest from bank deposits and yield from deposit
substitutes was rst introduced in the 1977 Tax Code through Presidential Decree
No. 1739 issued in 1980. Later, Presidential Decree No. 1959, effective on October 15,
1984, formally added the definition of deposit substitutes, viz.:
(y) 'Deposit substitutes' shall mean an alternative form of obtaining funds from the
public, other than deposits, through the issuance, endorsement, or
acceptance of debt instruments for the borrower's own account, for the
purpose of relending or purchasing of receivables and other obligations, or
nancing their own needs or the needs of their agent or dealer. These
promissory notes, repurchase agreements, certi cates of assignment or participation
and similar instrument with recourse as may be authorized by the Central Bank of the
Philippines, for banks and non-bank nancial intermediaries or by the Securities and
Exchange Commission of the Philippines for commercial, industrial, nance
companies and either non- nancial companies: Provided, however, that only debt
instruments issued for inter-bank call loans to cover de ciency in reserves against
deposit liabilities including those between or among banks and quasi-banks shall not
be considered as deposit substitute debt instruments.
79. Commissioner of Customs v. Court of Tax Appeals , G.R. Nos. 48886-88, July 21, 1993,
224 SCRA 665 [Per J. Melo, Third Division].
81. CIVIL CODE, art. 1980; Guingona, Jr. v. City Fiscal of Manila, 213 Phil. 516, 523 (1984) [Per
J. Makasiar, Second Division].
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82. Guingona, Jr. v. City Fiscal of Manila , 213 Phil. 516, 523 (1984) [Per J. Makasiar, Second
Division].
Sec. 2-D. For purposes of Sections Two, Two-A, Two-B, and Two-C the following de nition or
terms shall apply:
(b) 'Quasi-Banking Functions' shall mean borrowing funds, for the borrower's own
account, through the issuance, endorsement or acceptance of debt instruments of
any kind other than deposits, or through the issuance of participations, certi cates of
assignment, or similar instruments with recourse, trust certi cates, or of repurchase
agreements, from twenty or more lenders at any one time, for purposes of relending
or purchasing of receivables and other obligations: Provided, however, That
commercial, industrial, and other non- nancial companies, which borrow funds
through any of these means for the limited purpose of nancing their own needs or
the needs of their agents or dealers, shall not be considered as performing quasi-
banking functions.
The tax herein imposed shall be remitted by the borrower to the Commissioner of
Internal Revenue or his Collection Agent in the municipality where such borrower has
its principal place of business within ve (5) working days from the issuance of the
commercial paper. In the case of long term commercial paper, the tax upon the
untaxed portion of the interest which corresponds to a period not exceeding one year
shall be paid upon accrual payment, whichever is earlier.
91. Pres. Decree No. 1158 (1977), A Decree to Consolidate and Codify all the Internal Revenue
Laws of the Philippines.
92. Providing Fiscal Incentives by Amending Certain Provisions of the National Internal
Revenue Code, and for Other Purposes.
93. Western Minolco Corporation v. Commissioner of Internal Revenue , 209 Phil. 90, 101
(1983) [Per J. Gutierrez, Jr., En Banc].
94. Commissioner v. Court of Appeals , G.R. No. 95022, March 23, 1992, 207 SCRA 487 [Per J.
Melencio-Herrera, En Banc].
101. Pres. Decree No. 129 (1973), The Investment Houses Law, secs. 2 and 7 provide:
SECTION 2. Scope. — Any enterprise which engages in the underwriting of securities of other
corporations shall be considered an "Investment House" and shall be subject to the
provisions of this Decree and of other pertinent laws.
(4) Participate as soliciting dealer or selling group member in tender offers, block sales, or
exchange offering or securities; deal in options, rights or warrants relating to
securities and such other powers which a dealer may exercise under the Securities
Act (Act No. 83), as amended;
(5) Promote, sponsor, or otherwise assist and implement ventures, projects and
programs that contribute to the economy's development;
(9) Undertake or contract for researches, studies and surveys on such matters as
business and economic conditions of various countries, the structure of nancial
markets, the institutional arrangements for mobilizing investments;
(10) Acquire, own, hold, lease or obtain an interest in real and/or personal property
as may be necessary or appropriate to carry on its objectives and purposes;
(11) Design pension, profit-sharing and other employee benefits plans; and
(12) Such other activities or business ventures as are directly or indirectly related to
the dealing in securities and other commercial papers, unless otherwise governed or
prohibited by special laws, in which case the special law shall apply.
102. Pres. Decree No. 129, sec. 3 (a) provides:
(a) "Underwriting" is de ned as the act or process of guaranteeing the distribution and
sale of securities of any kind issued by another corporation.
The Omnibus Rules and Regulations for Investment Houses and Universal Banks
Registered as Underwriters of Securities (July 23, 2002) de nes underwriting as
follows:
( A ) General De nition. — Except when otherwise provided in this Title, gross income
means all income derived from whatever source, including (but not limited to) the
following items:
(1) Compensation for services in whatever form paid, including, but not limited to
fees, salaries, wages, commissions, and similar items;
(2) Gross income derived from the conduct of trade or business or the exercise of a
profession;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(11) Partner's distributive share from the net income of the general professional
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partnership.
108. Exec. Order No. 449 (1997), sec. 1.
The List of GSEDs are mostly banks with a few non-banks with quasi-banking license.
114. Other selling arrangements provided in DOF Department Order No. 141-95 are over the
counter (Section 15) and tap method (Section 26).
119. Handbill on Eligibility to Bid for Government Securities in the Primary Market: Oath of
Undertaking for Registry of Scripless Securities <http://www.treasury.gov.ph/wp-
content/uploads/2014/04/handbill.pdf> (visited August 1, 2016).
120. Handbill on Eligibility to Bid for Government Securities in the Primary Market: Oath of
Undertaking for Registry of Scripless Securities <http://www.treasury.gov.ph/wp-
content/uploads/2014/04/oathrossgsed.pdf> (visited August 1, 2016).
121. See Bank of Commerce v. Nite , G.R. No. 211535, July 22, 2015
<http://sc.judiciary.gov.ph/pdf/web/viewer.html?
le=/jurisprudence/2015/july2015/211535.pdf> [Per Acting C.J. Carpio, Second
Division].
122. 525 Phil. 673 (2006) [Per J. Austria-Martinez, First Division].
The case was cited in Bank of the Philippine Islands v. Laingo , G.R. No. 205206, March
16, 2016 <http://sc.judiciary.gov.ph/pdf/web/viewer.html?
le=/jurisprudence/2016/march2016/205206.pdf> [Per J. Carpio, Second Division],
where this Court held that BPI acted as agent of FGU Insurance with respect to the
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insurance feature of its own marketed product, and consequently obligated to give
proper notice of the existence of the insurance coverage and the stipulation in the
insurance contract for filing a claim to the beneficiary, upon the insured's death.
124. Id.
125. Id.
126. Id.
127. Id.
128. Id.
129. Constantino, Jr. v. Cuisia , 509 Phil. 486, 509-510 (2005) [Per J. Tinga, En Banc] holds
that "[b]onds are interest-bearing or discounted government or corporate securities
that obligate the issuer to pay the bondholder a speci ed sum of money, usually at
speci c intervals, and to repay the principal amount of the loan at maturity. An
investor who purchases a bond is lending money to the issuer, and the bond
represents the issuer's contractual promise to pay interest and repay principal
according to specific terms."
130. Rollo, pp. 2213-2214. Respondents contend that the application of the 20-lender rule as
per the court's decision creates an uncertainty due to the possibility that regular
government securities may be held by less than 20 investors at any one time as
re ected in the Registry of Scripless Securities (ROSS). Respondents provide two
illustrations:
[a] . . . In the case of T-Bills, there have been instances before that only one (1) GSED was
awarded the full volume issued. Given that transactions in T-bills attract non-resident
investors, there could be an instance where there would apparently only be a few
transfers in ownership from a ROSS records standpoint despite an actual transfer of
bene cial ownership to 20 or more (foreign or combination of foreign and local
investors). This is because these non-resident lenders/investors together with
resident lenders/investors may be lumped together in a common custodian account
in the ROSS.
[b] . . . In the case of T-Bonds, during auctions, most of the time, if not all the time, the
Auction Committee awards to less than 20 GSEDs. While technically these GSEDs
redistribute these bonds in the secondary market to a wider pool of investors, the
settlement convention in the market (T+1 or T+2) may create a lag or delay in the
actual transfers of the bonds from one registered holder to another. Hence, the ROSS
records may technically re ect 19 or less lenders/investors at a given time, when the
bene cial owners of the government securities may in fact be 20 or more depending
on the number of "lagging" or not-yet-settled transactions.
131. Id. at 2215. Respondents argue that the requirement that "funds are simultaneously
obtained from 20 or more lenders/investors" provides a loophole in that a bondholder
may conveniently turn around and sell his holdings in several tranches to 19 or less
investors for each tranche. Thus, even if he eventually sold his entire stock to 1000
investors, as long as there is no element of simultaneous sale to 20 people, there is
no deposit substitute.
132. See Commissioner of Internal Revenue v. American Express International, Inc. (Philippine
Branch), 500 Phil. 586, 608 (2005) [Per J. Panganiban, Third Division].
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133. Abakada Guro Party List v. Ermita , 506 Phil. 1, 120 (2005) [Per J. Austria-Martinez, En
Banc].
141. Rollo, pp. 560-575. Under the De nitions and Interpretation , Issue Date shall be on
October 18, 2001; Offering Period shall mean the period commencing on 9:00 a.m. of
October 17, 2001 and ending on 12:00 noon of October 17, 2001. (p. 561); Under
Terms and Conditions of Application and Payment for the Bonds , RCBC Capital will
submit to CODE NGO a consolidated report on sales made not later than 4:00 p.m. of
the last day of the Offering Period; and remittance of the purchase price for the
bonds should be made not later than 10:00 a.m. of the Issue Date.
156. Id.
164. 646 Phil. 710 (2010) [Per J. Del Castillo, First Division].
165. Commissioner of Internal Revenue v. San Roque Power Corporation , 703 Phil. 310, 375-
376 (2013) [Per J. Carpio, En Banc].
166. See Everett v. Bautista, 69 Phil. 137, 140-141 (1939) [Per J. Diaz, En Banc].
171. Banco de Oro v. Republic , G.R. No. 198756, January 13, 2015, 745 SCRA 361, 428-430
[Per J. Leonen, En Banc].
174. Commissioner of Internal Revenue v. Procter & Gamble Phil. Mfg. Corp. , 281 Phil. 425,
441-444 (1991) [Per J. Feliciano, En Banc].
175. 643 Phil. 550 (2010) [Per J. Del Castillo, First Division].
176. Id. at 563-564.
178. Blue Bar Coconut Co. v. City of Zamboanga , 122 Phil. 929, 930 (1965) [Per J. J.B.L.
Reyes, En Banc]; Carcar Electric & Ice Plant Co., Inc. v. Collector of Internal Revenue ,
100 Phil. 50, 56 and 59 (1956) [Per J. J.B.L. Reyes, En Banc].
179. 365 Phil. 572 (1999) [Per J. Quisumbing, Second Division].
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the
following revisions governing the rate of interest in the absence of stipulation in loan
contracts, thereby amending Section 2 of Circular No. 905, Series of 1982:
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Section 1. The rate of interest for the loan or forbearance of any money, goods or credits
and the rate allowed in judgments, in the absence of an express contract as to such
rate of interest, shall be six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations for Banks
and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-
Bank Financial Institutions are hereby amended accordingly.
See Nacar v. Gallery Frames, 716 Phil. 267 (2013) [Per J. Peralta, En Banc].
n Note from the Publisher: Copied verbatim from the official copy.