BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING reiterated in BIR Ruling no. 035-2001(2001) and BIR Ruling No.

DA-175-01
CORPORATION, METROPOLITAN BANK & TRUST COMPANY, (2001). The determination of the phrase “at any one time” for purposes of
PHILIPPINE BANK OF COMMUNICATIONS, PHILIPPINE NATIONAL determining the “20 or more lenders” is to be determined at the time of the
BANK, PHILIPPINE VETERANS BANK AND PLANTERS DEVELOPMENT original issuance.
BANK, RIZAL COMMERCIAL BANKING CORPORATION (RCBC) AND           Meanwhile, Former Treasurer Eduardo Sergio G. Edeza questioned
RCBC CAPITAL CORPORATION (RCBC CAPITAL), CAUCUS OF the propriety of issuing the bonds directly to a special purpose vehicle
DEVELOPMENT NGO NETWORKS (CODE-NGO) (Petitioner-Intervenor) considering that the latter was not a Government Securities Eligible Dealer
vs REPUBLIC OF THE PHILIPPINES, THE COMMISSIONER OF (GSED). Former Treasurer Edeza recommended that the issuance of the
INTERNAL REVENUE, BUREAU OF INTERNAL REVENUE, SECRETARY Bonds “be done through the Automated Debt Auction Processing System
OF FINANCE, DEPARTMENT OF FINANCE, THE NATIONAL (ADAPS)” and that CODE-NGO “should get a GSED to bid in its behalf.”
TREASURER AND BUREAU OF TREASURY           Subsequently, in the notice to all GSEDs entitled Public Offering of
G.R. No. 198756, January 13, 2015 Treasury Bonds, the Bureau of Treasury announced that “P30.0B worth of
LEONEN, J.: 10-year Zero-Coupon Bonds would be auctioned. The notice stated that the
Bonds “shall be issued to not more than 19 buyers/lenders hence, the
FACTS: necessity of a manual auction for this maiden issue.”
          By letter dated March 23, 2011, the CODE-NGO with the assistance of           On October 16, 2001, the Bureau of Treasury held an auction for the
its financial advisers, RCBC, RCBC Capital, Capex finance investment 10-year zero-coupon bonds. Also on the same date, the Bureau of Treasury
corporation (CAPEX) and Seed Capital Ventures, Inc., (SEED), requested issued another memorandum quoting excerpts of the ruling issued by the
and approval from the Department of Finance (DOF) for the issuance by the Bureau of Internal Revenue concerning the Bonds’ exemption from 20% final
Bureau of Treasury (BTr) of 10- year zero-coupon Treasury Certificates (T- withholding tax and the opinion of the Monetary Board on reserve eligibility.
Notes).           During the auction, there were 45 bids from 15 GSEDs. After the
          The t-notes would initially be purchased by a special purpose vehicle auction, RCBC which participated on behalf of CODE-NGO was declared as
on behalf of CODE-NGO, repackaged and sold at a premium to investors as the winning bidder having tendered the lowest bids.  Accordingly, on October
the PEACe Bonds. 18, 2001, the Bureau of Treasury issued P35 billion worth of Bonds at yield-
          The net proceeds from the sale of the bonds will be used to endow a to-maturity of 12.75% to RCBC for approximately P10.17 billion, resulting in a
permanent fund (Hanapbuhay fund) to finance meritorious activities and discount of approximately P24.83 billion.
projects of accredited non-government organization (NGOs) throughout the Also on October 16, 2001, RCBC Capital entered into an underwriting
country. agreement with CODE-NGO, whereby RCBC Capital was appointed as the
          Prior to and around the time of the proposal of CODE-NGO, other Issue Manager and Lead Underwriter for the offering of the PEACe Bonds. 
proposals for the issuance of zero-coupon bonds were also presented by RCBC Capital agreed to underwrite on a firm basis the offering, distribution
banks and financial institutions. Both the proposal of First Metro Investment and sale of the P35 billion Bonds at the price of P11,995,513,716.51.47  In
Corp. and ATR-Kim Eng Fixed Income indicate that the interest income or Section 7(r) of the underwriting agreement, CODE-NGO represented that “all
discount earned on the proposed zero-coupon bonds would be subject to the income derived from the Bonds, inclusive of premium on redemption and
prevailing withholding tax. gains on the trading of the same, are exempt from all forms of taxation as
          On May 31, 2001, the Bureau of Internal Revenue (BIR), in reply to confirmed by BIR letter rulings.
CODE-NGO’s Letters dated May 10,15 and 25, 2001, issued BIR Ruling no. RCBC Capital sold the Government Bonds in the secondary market for an
020-2001 on the tax treatment of the proposed PEACe bonds. It confirmed issue price of P11,995,513,716.51.  Petitioners purchased the PEACe Bonds
that the PEACe bonds would not be classified as deposit substitutes and on different dates.
would not be subject to the corresponding withholding tax:
To be classified as “Deposit Substitute:, the borrowing of funds must be BIR Ruling:
obtained from twenty (20) or more individuals or corporate lenders at any one           On October 7, 2011, “the BIR issued the assailed 2011 BIR Ruling, in
time. In the light of your representation that the PEACe Bonds will be issued response to a query of the Secretary of Finance on the proper tax treatment
only to one entity, the same shall not be considered as “deposit substitute” of the discount or interest income derived from the Government Bonds,
falling within the purview of the above definition. Hence, the withholding tax imposing a 20% FWT on the Government Bonds and directing the BIR to
on deposit substitute will not apply. withhold said final tax at the maturity thereof, allegedly without consultation
          The tax treatment of the proposed PEACe bonds was subsequently with Petitioners as bondholders, and without conducting any hearing.”
The Php 24.3 billion discount on the issuance of the PEACe Bonds should be Will it violate Section 245 of the 1997 National Internal Revenue Code on
subject to 20% Final Tax on interest income from deposit substitutes.  It is non-retroactivity of rulings?
now settled that all treasury bonds including PEACe Bonds, regardless of the
number of purchasers/lenders at the time of origination/issuance are ARGUMENTS:
considered deposit substitutes.  In the case of zero-coupon bonds, the
discount (i.e. difference between face value and purchase price/discounted Petitioners; RCBC, RCBC Capital, and CODE-NGO
value of the bond) is treated as interest income of the purchaser/holder. 
Thus, the Php 24.3 interest income should have been properly subject to the [if !supportLists]1.    [endif]The Government cannot impair the efficacy of the
20% Final Tax as provided in Section 27(D)(1) of the Tax Code of 1997. Bonds by arbitrarily, oppressively and unreasonably imposing the withholding
          On October 17, 2011, replying to an urgent query from the BTr, the of 20% FWT upon the Bonds a mere eleven (11) days before maturity and
BIR issued BIR Ruling No. DA 378-201157 clarifying that the final withholding after several, consistent categorical declarations that such bonds are exempt
tax due on the discount or interest earned on the PEACe Bonds should “be from the 20% FWT, without violating due process and the constitutional
imposed and withheld not only on RCBC/CODE NGO but also on ‘all principle on non-impairment of contracts.
subsequent holders of the Bonds.’” [if !supportLists]2.    [endif]Petitioners insist that the PEACe Bonds are not
deposit substitutes as defined under Section 22(Y) of the 1997 National
Petitioners’ Actions Internal Revenue Code because there was only one lender (RCBC) to whom
On October 17, 2011, petitioners filed a petition for certiorari, prohibition, the BTr issued the Bonds. They allege that the 2004, 2005, and 2011 BIR
and/or mandamus with urgent application for a temporary restraining order Rulings “erroneously interpreted that the number of investors that participate
and/or writ of preliminary injunction before this court. in the ‘secondary market’ is the determining factor in reckoning the existence
On October 18, 2011, the Supreme Court issued a temporary restraining or non-existence of twenty (20) or more individual or corporate lenders.”
order (TRO) “enjoining the implementation of BIR Ruling No. 370-2011 [if !supportLists]3.    [endif]They contend that the BIR unduly expanded the
against the PEACe Bonds, subject to the condition that the 20% final definition of deposit substitutes under Section 22 of the 1997 National
withholding tax on interest income therefrom shall be withheld by the Internal Revenue Code in concluding that “the mere issuance of government
petitioner banks and placed in escrow pending resolution of the petition.” debt instruments and securities is deemed as falling within the coverage of
Meanwhile petitioners filed their “Manifestation with Urgent Ex Parte Motion ‘deposit substitutes. Thus, “the 2011 BIR Ruling clearly amounted to an
to Direct Respondents to comply with the TRO.” They alleged that on the unauthorized act of administrative legislation.
same day that the TRO was issued, the BTr paid to petitioners and other [if !supportLists]4.    [endif]Petitioners further argue that their income from the
bondholders the amounts representing the face value of the Bonds, net Bonds is a “trading gain,” which is exempt from income tax. They insist that
however of the amounts corresponding to the 20% final withholding tax on “they are not lenders whose income is considered as ‘interest income or
interest income, and that the Bureau of Treasury refused to release the yield’ subject to the 20% FWT under Section 27 (D)(1) of the 1997 National
amounts corresponding to the 20% final withholding tax. Internal Revenue Code” because they “acquired the Government Bonds in
the secondary or tertiary market.”
ISSUES: [if !supportLists]5.    [endif]Even assuming without admitting that the
Whether the PEACe Bonds are “deposit substitutes” and thus subject to 20% Government Bonds are deposit substitutes, petitioners argue that the
final withholding tax under the 1997 National Internal Revenue Code.  collection of the final tax was barred by prescription. They point out that
Interpretation of the phrase “borrowing from twenty (20) or more individual or under Section 7 of DOF Department Order No. 141-95, the final withholding
corporate lenders at any one time” under Section 22(Y) of the 1997 National tax “should have been withheld at the time of their issuance.” Also, under
Internal Revenue Code Section 203 of the 1997 National Internal Revenue Code, “internal revenue
Whether the reckoning of the 20 lenders includes trading of the bonds in the taxes, such as the final tax, should be assessed within three (3) years after
If the PEACe Bonds are considered “deposit substitutes,” whether the the last day prescribed by law for the filing of the return.
government or the Bureau of Internal Revenue is estopped from imposing [if !supportLists]6.    [endif]Petitioners contend that the retroactive application
and/or collecting the 20% final withholding tax from the face value of these of the 2011 BIR Ruling without prior notice to them was in violation of their
Bonds property rights, their constitutional right to due process as well as Section
Will the imposition of the 20% final withholding tax violate the non-impairment 246 of the 1997 National Internal Revenue Code on non-retroactivity of
clause of the Constitution? rulings.  Allegedly, it would also have “an adverse effect of colossal
Will it constitute a deprivation of property without due process of law? magnitude on the investors, both local and foreign, the Philippine capital
market, and most importantly, the country’s standing in the international interest.  Such interest is clearly an income of the Petitioners considering that
commercial community.” the same is a flow of wealth and not merely a return of capital – the capital
[if !supportLists]7.    [endif]Respondent Commissioner “gravely and seriously initially invested in the Bonds being approximately PhP10.2 Billion.
abused her discretion in the exercise of her rule-making power” when she [if !supportLists]3.    [endif]Maintaining that the imposition of the 20% final
issued the assailed 2011 BIR Ruling which ruled that “all treasury bonds are withholding tax on the PEACe Bonds does not constitute an impairment of
‘deposit substitutes’ regardless of the number of lenders, in clear disregard of the obligations of contract, respondents aver that: “The BTr has no power to
the requirement of twenty (20) or more lenders mandated under the NIRC.” contractually grant a tax exemption in favor of Petitioners thus the 2001 BIR
They argue that “by her blanket and arbitrary classification of treasury bonds Rulings cannot be considered a material term of the Bonds”; “there has been
as deposit substitutes, respondent CIR not only amended and expanded the no change in the laws governing the taxability of interest income from deposit
NIRC, but effectively imposed a new tax on privately-placed treasury bonds.” substitutes and said laws are read into every contract”; “the assailed BIR
[if !supportLists]8.    [endif]Petitioners-intervenors RCBC and RCBC Capital Rulings merely interpret the term “deposit substitute” in accordance with the
further argue that the 2011 BIR Ruling will cause substantial impairment of letter and spirit of the Tax Code”; “the withholding of the 20% FWT does not
their vested rights under the Bonds since the ruling imposes new conditions result in a default by the Government as the latter performed its obligations to
by “subjecting the PEACe Bonds to the twenty percent (20%) final the bondholders in full”; and “if there was a breach of contract or a
withholding tax notwithstanding the fact that the terms and conditions thereof misrepresentation it was between RCBC/CODE-NGO/RCBC Cap and the
as previously represented by the Government, through respondents BTr and succeeding purchasers of the PEACe Bonds.”
BIR, expressly state that it is not subject to final withholding tax upon their [if !supportLists]4.    [endif]Similarly, respondents counter that the withholding
maturity.” They added that “[t]he exemption from the twenty percent (20%) of “the 20% final withholding tax on the PEACe Bonds does not amount to a
final withholding tax [was] the primary inducement and principal deprivation of property without due process of law.” Their imposition of the
consideration for [their] participat[ion] in the auction and underwriting of the 20% final withholding tax is not arbitrary because they were only performing
PEACe Bonds.” a duty imposed by law; “the 2011 BIR Ruling is an interpretative rule which
[if !supportLists]9.    [endif]Petitioners-intervenors RCBC and RCBC Capital merely interprets the meaning of deposit substitutes and upheld the earlier
argue that “the implementation of the 2011 assailed BIR Ruling and BIR construction given to the term by the 2004 and 2005 BIR Rulings.” Hence,
Ruling No. DA 378-2011 will have pernicious effects on the integrity of respondents argue that “there was no need to observe the requirements of
existing securities, which is contrary to the State policies of stabilizing the notice, hearing, and publication.”
financial system and of developing capital markets.” [if !supportLists]5.    [endif]They contend that the assailed 2011 BIR Ruling is
[if !supportLists]10. [endif]“The tax exemption privilege relating to the a valid exercise of the Commissioner of Internal Revenue’s rule-making
issuance of the PEACe Bonds partakes of a contractual commitment granted power; that it and the 2004 and 2005 BIR Rulings did not unduly expand the
by the Government in exchange for a valid and material consideration [i.e., definition of deposit substitutes by creating an unwarranted exception to the
the issue price paid and savings in borrowing cost derived by the requirement of having 20 or more lenders/purchasers; and the word “any” in
Government,] thus protected by the non-impairment clause of the 1987 Section 22(Y) of the National Internal Revenue Code plainly indicates that
Constitution” the period contemplated is the entire term of the bond and not merely the
point of origination or issuance.
Respondents [if !supportLists]6.    [endif]A retroactive application of the 2011 BIR Ruling
will not unjustifiably prejudice petitioners. “With or without the 2011 BIR
Respondents argue that petitioners’ direct resort to this court to challenge the Ruling, Petitioners would be liable to pay a 20% final withholding tax just the
2011 BIR Ruling violates the doctrines of exhaustion of administrative same because the PEACe Bonds in their possession are legally in the nature
remedies and hierarchy of courts, resulting in a lack of cause of action that of deposit substitutes subject to a 20% final withholding tax under the NIRC.” 
justifies the dismissal of the petition. According to them, “the jurisdiction to Section 7 of DOF Department Order No. 141-95 also provides that income
review the rulings of the CIR, after the aggrieved party exhausted the derived from Treasury bonds is subject to the 20% final withholding tax.144 
administrative remedies, pertains to the Court of Tax Appeals.” “While revenue regulations as a general rule have no retroactive effect, if the
[if !supportLists]2.    [endif]Respondents contend that the discount/interest revocation is due to the fact that the regulation is erroneous or contrary to
income derived from the PEACe Bonds is not a trading gain but interest law, such revocation shall have retroactive operation as to affect past
income subject to income tax. They explain that “with the payment of the transactions, because a wrong construction of the law cannot give rise to a
PhP35 Billion proceeds on maturity of the PEACe Bonds, Petitioners receive vested right that can be invoked by a taxpayer.”
an amount of money equivalent to about PhP24.8 Billion as payment for [if !supportLists]7.    [endif]Respondents submit that “there are a number of
variables and factors affecting a capital market.” “Capital market itself is including those between or among banks and quasi-banks shall not be
inherently unstable.” Thus, “petitioners’ argument that the 20% final considered as deposit substitute debt instruments.
withholding tax. will wreak havoc on the financial stability of the country is a
mere supposition that is not a justiciable issue.” Revenue Regulations No. 17-84, issued to implement Presidential Decree
[if !supportLists]8.    [endif]On the prayer for the temporary restraining order, No. 1959, adopted verbatim the same definition and specifically identified the
respondents argue that this order “could no longer be implemented because following borrowings as “deposit substitutes”;
the acts sought to be enjoined are already fait accompli.” They add that “to [if !supportLists]1.    [endif]All interbank borrowings by or among banks and
disburse the funds withheld to the Petitioners at this time would violate non-bank financial institutions authorized to engage in quasi-banking
Section 29, Article VI of the Constitution prohibiting ‘money being paid out of functions evidenced by deposit substitutes instruments, except interbank call
the Treasury except in pursuance of an appropriation made by law.”  “The loans to cover deficiency in reserves against deposit liabilities as evidenced
remedy of petitioners is to claim a tax refund under Section 204(c) of the Tax by interbank loan advice or repayment transfer tickets.
Code should their position be upheld by the Honorable Court.” [if !supportLists]2.    [endif]All borrowings of the national and local
[if !supportLists]9.    [endif]Respondents also argue that “the implementation government and its instrumentalities including the Central Bank of the
of the TRO would violate Section 218 of the Tax Code in relation to Section Philippines, evidenced by debt instruments denoted as treasury bonds, bills,
11 of Republic Act No. 1125 (as amended by Section 9 of Republic Act No. notes, certificates of indebtedness and similar instruments.
9282) which prohibits courts, except the Court of Tax Appeals, from issuing [if !supportLists]3.    [endif]All borrowings of banks, non-bank financial
injunctions to restrain the collection of any national internal revenue tax intermediaries, finance companies, investment companies, trust companies,
imposed by the Tax Code.” including the trust department of banks and investment houses, evidenced by
deposit substitutes instruments.
SUPREME COURT’s RULING:
The definition of deposit substitutes was amended under the 1997 National
Substantive issues Internal Revenue Code with the addition of the qualifying phrase for public –
borrowing from 20 or more individual or corporate lenders at any one time.
Tax treatment of deposit substitutes Under Section 22(Y), deposit substitute is defined thus:
The term ‘deposit substitutes’ shall mean an alternative form of obtaining
Under Sections 24(B)(1), 27(D)(1), and 28(A)(7) of the 1997 National Internal funds from the public (the term 'public' means borrowing from twenty (20) or
Revenue Code, a final withholding tax at the rate of 20% is imposed on more individual or corporate lenders at any one time) other than deposits,
interest on any currency bank deposit and yield or any other monetary benefit through the issuance, endorsement, or acceptance of debt instruments for
from deposit substitutes and from trust funds and similar arrangements. the borrower’s own account, for the purpose of relending or purchasing of
This tax treatment of interest from bank deposits and yield from deposit receivables and other obligations, or financing their own needs or the needs
substitutes was first introduced in the 1977 National Internal Revenue Code of their agent or dealer. These instruments may include, but need not be
through Presidential Decree No. 1739168 issued in 1980. Later, Presidential limited to, bankers’ acceptances, promissory notes, repurchase agreements,
Decree No. 1959, effective on October 15, 1984, formally added the including reverse repurchase agreements entered into by and between the
definition of deposit substitutes: Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank,
Deposit substitutes’ shall mean an alternative form of obtaining funds from certificates of assignment or participation and similar instruments with
the public, other than deposits, through the issuance, endorsement, or recourse: Provided, however, That debt instruments issued for interbank call
acceptance of debt instruments for the borrower's own account, for the loans with maturity of not more than five (5) days to cover deficiency in
purpose of relending or purchasing of receivables and other obligations, or reserves against deposit liabilities, including those between or among banks
financing their own needs or the needs of their agent or dealer. These and quasi-banks, shall not be considered as deposit substitute debt
promissory notes, repurchase agreements, certificates of assignment or instruments.
participation and similar instrument with recourse as may be authorized by
the Central Bank of the Philippines, for banks and non-bank financial Interpretation of the phrase “borrowing from twenty (20) or more
intermediaries or by the Securities and Exchange Commission of the individual or corporate lenders at any one time” under Section 22(Y) of
Philippines for commercial, industrial, finance companies and either non- the 1997 National Internal Revenue Code
financial companies: Provided, however, that only debt instruments issued for
inter-bank call loans to cover deficiency in reserves against deposit liabilities Under the 1997 National Internal Revenue Code, Congress specifically
defined “public” to mean “twenty (20) or more individual or corporate lenders incomes subject to specific tax rates or final taxes.”197   Hence, interest
at any one time.”  Hence, the number of lenders is determinative of whether a income from deposit substitutes are necessarily part of taxable income.  
debt instrument should be considered a deposit substitute and consequently “However, since these passive incomes are already subject to different rates
subject to the 20% final withholding tax. and taxed finally at source, they are no longer included in the computation of
gross income, which determines taxable income.”198   “Stated otherwise . . .
Meaning of “at any one time” if there were no withholding tax system in place in this country, this 20
percent portion of the ‘passive’ income of [creditors/lenders] would actually
From the point of view of the financial market, the phrase “at any one time”, be paid to the [creditors/lenders] and then remitted by them to the
for purposes of determining the “20 or more lenders”, would mean every government in payment of their income tax.”199chanRoblesvirtualLawlibrary
transaction executed in the primary or secondary market, in connection with
the purchase or sale of securities. This court, in Chamber of Real Estate and Builders’ Associations, Inc. v.
Romulo,200 explained the rationale behind the withholding tax
For example, where the financial assets involved are government securities system:chanroblesvirtuallawlibrary
like bonds, the reckoning of “20 or more lenders/investors” is made at any
transaction in connection with the purchase or sale of the Government The withholding [of tax at source] was devised for three primary reasons:
Bonds, such as: first, to provide the taxpayer a convenient manner to meet his probable
[if !supportLists]·         [endif]Issuance by the Bureau of Treasury of the bonds income tax liability; second, to ensure the collection of income tax which can
to GSEDs in the primary market; otherwise be lost or substantially reduced through failure to file the
[if !supportLists]·         [endif]Sale and distribution by GSEDs to various corresponding returns[;] and third, to improve the government’s cash flow.
lenders/investors in the secondary market; This results in administrative savings, prompt and efficient collection of taxes,
[if !supportLists]·         [endif]Subsequent sale or trading by a bondholder to prevention of delinquencies and reduction of governmental effort to collect
another lender/investor in the secondary market usually through a broker or taxes through more complicated means and remedies.201 (Citations omitted)
dealer; or
[if !supportLists]·         [endif]Sale by a financial intermediary-bondholder of its “The application of the withholdings system to interest on bank deposits or
participation interests in the bonds to individual or corporate lenders in the yield from deposit substitutes is essentially to maximize and expedite the
secondary market. collection of income taxes by requiring its payment at the
source.”202chanRoblesvirtualLawlibrary
When, through any of the foregoing transactions, funds are simultaneously
obtained from 20 or more lenders/investors, there is deemed to be a public Hence, when there are 20 or more lenders/investors in a transaction for a
borrowing and the bonds at that point in time are deemed deposit specific bond issue, the seller is required to withhold the 20% final income tax
substitutes.  Consequently, the seller is required to withhold the 20% final on the imputed interest income from the bonds.
withholding tax on the imputed interest income from the bonds.
Whether the reckoning of the 20 lenders includes trading of the bonds
For debt instruments that are not deposit substitutes, regular income tax in the secondary market
applies  Financial markets
Financial markets provide the channel through which funds from the surplus
It must be emphasized, however, that debt instruments that do not qualify as units (households and business firms that have savings or excess funds) flow
deposit substitutes under the 1997 National Internal Revenue Code are to the deficit units (mainly business firms and government that need funds to
subject to the regular income tax. finance their operations or growth).  They bring suppliers and users of funds
together and provide the means by which the lenders transform their funds
The phrase “all income derived from whatever source” in Chapter VI, into financial assets, and the borrowers receive these funds now considered
Computation of Gross Income, Section 32(A) of the 1997 National Internal as their financial liabilities.  The transfer of funds is represented by a security,
Revenue Code discloses a legislative policy to include all income not such as stocks and bonds.  Fund suppliers earn a return on their investment;
expressly exempted as within the class of taxable income under our laws. the return is necessary to ensure that funds are supplied to the financial
markets.
“The definition of gross income is broad enough to include all passive “The financial markets that facilitate the transfer of debt securities are
commonly classified by the maturity of the securities,” namely:  (1) the money impairment clause of the Constitution?
market, which facilitates the flow of short-term funds (with maturities of one Will it constitute a deprivation of property without due process of law?
year or less); and (2) the capital market, which facilitates the flow of long- Will it violate Section 245 of the 1997 National Internal Revenue Code
term funds (with maturities of more than one year). on non-retroactivity of rulings? (the two rulings were declared void)
Whether referring to money market securities or capital market securities,
transactions occur either in the primary market or in the secondary market. Grave abuse of discretion by CIR
“Primary markets facilitate the issuance of new securities.  Secondary
markets facilitate the trading of existing securities, which allows for a change The Bureau of Internal Revenue rulings
in the ownership of the securities.” The transactions in primary markets exist
between issuers and investors, while secondary market transactions exist The Bureau of Internal Revenue’s interpretation as expressed in the three
among investors. 2001 BIR Rulings is not consistent with law.  Its interpretation of “at any one
Fund transfers are accomplished in three ways: (1) direct finance; (2) time” to mean at the point of origination alone is unduly restrictive.
semidirect finance; and (3) indirect finance.
With direct financing, the “borrower and lender meet each other and BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying on
exchange funds in return for financial assets” (e.g., purchasing bonds directly the 2004 and 2005 BIR Rulings) that “all treasury bonds regardless of the
from the company issuing them).  This method provides certain limitations number of purchasers/lenders at the time of origination/issuance are
such as: (a) “both borrower and lender must desire to exchange the same considered deposit substitutes.” Being the subject of this petition, it is, thus,
amount of funds at the same time”; and (b) “both lender and borrower must declared void because it completely disregarded the 20 or more lender rule
frequently incur substantial information costs simply to find each other.” added by Congress in the 1997 National Internal Revenue Code.  It also
In semidirect financing, a securities broker or dealer brings surplus and deficit created a distinction for government debt instruments as against those
units together, thereby reducing information costs. In semidirect financing, issued by private corporations when there was none in the law.
“the ultimate lender still winds up holding the borrower’s securities, and
therefore the lender must be willing to accept the risk, liquidity, and maturity It may be granted that the interpretation of the Commissioner of Internal
characteristics of the borrower’s debt security.  There still must be a Revenue in charge of executing the 1997 National Internal Revenue Code is
fundamental coincidence of wants and needs between lenders and an authoritative construction of great weight, but the principle is not absolute
borrowers for semidirect financial transactions to take place.” and may be overcome by strong reasons to the contrary.  If through a
misapprehension of law an officer has issued an erroneous interpretation, the
“The limitations of both direct and semidirect finance stimulated the error must be corrected when the true construction is ascertained.
development of indirect financial transactions, carried out with the help of It bears repeating that Revenue memorandum-circulars are considered
financial intermediaries” or financial institutions, like banks, investment administrative rulings (in the sense of more specific and less general
banks, finance companies, insurance companies, and mutual funds. interpretations of tax laws) which are issued from time to time by the
Financial intermediaries accept funds from surplus units and channel the Commissioner of Internal Revenue.  It is widely accepted that the
funds to deficit units. “Depository institutions such as banks accept deposits interpretation placed upon a statute by the executive officers, whose duty is
from surplus units and provide credit to deficit units through loans and to enforce it, is entitled to great respect by the courts.  Nevertheless, such
purchase of debt securities.”  Nondepository institutions, like mutual funds, interpretation is not conclusive and will be ignored if judicially found to be
issue securities of their own (usually in smaller and affordable erroneous.  Thus, courts will not countenance administrative issuances that
denominations) to surplus units and at the same time purchase debt override, instead of remaining consistent and in harmony with, the law they
securities of deficit units. “By pooling the resources of small savers, a seek to apply and implement.
financial intermediary can service the credit needs of large firms This court further held that “[a] memorandum-circular of a bureau head could
simultaneously.” not operate to vest a taxpayer with a shield against judicial action because
there are no vested rights to speak of respecting a wrong construction of the
If the PEACe Bonds are considered “deposit substitutes,” whether the law by the administrative officials and such wrong interpretation could not
government or the Bureau of Internal Revenue is estopped from place the Government in estoppel to correct or overrule the same.”
imposing and/or collecting the 20% final withholding tax from the face In Misamis Oriental Association of Coco Traders, Inc. v. Department of
value of these Bonds Finance Secretary, this court stated that the Commissioner of Internal
Will the imposition of the 20% final withholding tax violate the non- Revenue is not bound by the ruling of his predecessors, but, to the contrary,
the overruling of decisions is inherent in the interpretation of laws: discounted instruments, like the zero-coupon bonds, the trading gain shall be
In considering a legislative rule a court is free to make three inquiries: the excess of the selling price over the book value or accreted value (original
[if !supportLists](i)       [endif]Whether the rule is within the delegated issue price plus accumulated discount from the time of purchase up to the
authority of the administrative agency; time of sale) of the instruments.
[if !supportLists](ii)      [endif]Whether it is reasonable; and          
[if !supportLists](iii)    [endif]Whether it was issued pursuant to proper          
procedure. But the court is not free to substitute its judgment as to the Tax treatment of income derived from the PEACe Bonds
desirability or wisdom of the rule for the legislative body, by its delegation of
administrative judgment, has committed those questions to administrative The transactions executed for the sale of the PEACe Bonds are:
judgments and not to judicial judgments.
In the case of an interpretative rule, the inquiry is not into the validity but into The issuance of the P35 billion Bonds by the Bureau of Treasury to
the correctness or propriety of the rule. As a matter of power a court, when RCBC/CODE-NGO at P10.2 billion; and
confronted with an interpretative rule, is free to
[if !supportLists](i)           [endif]Give the force of law to the rule; The sale and distribution by RCBC Capital (underwriter) on behalf of CODE-
[if !supportLists](ii)          [endif]Go to the opposite extreme and substitute its NGO of the PEACe Bonds to undisclosed investors at P11.996 billion.
judgment; or
[if !supportLists](iii)        [endif]Give some intermediate degree of authoritative It may seem that there was only one lender — RCBC on behalf of CODE-
weight to the interpretative rule. NGO — to whom the PEACe Bonds were issued at the time of origination. 
However, a reading of the underwriting agreement221 and RCBC term
sheet222 reveals that the settlement dates for the sale and distribution by
Tax Refund RCBC Capital (as underwriter for CODE-NGO) of the PEACe Bonds to
various undisclosed investors at a purchase price of approximately P11.996
Interest income v. gains from sale or redemption would fall on the same day, October 18, 2001, when the PEACe Bonds were
supposedly issued to CODE-NGO/RCBC.  In reality, therefore, the entire
The interest income earned from bonds is not synonymous with the “gains” P10.2 billion borrowing received by the Bureau of Treasury in exchange for
contemplated under Section 32(B)(7)(g)203 of the 1997 National Internal the P35 billion worth of PEACe Bonds was sourced directly from the
Revenue Code, which exempts gains derived from trading, redemption, or undisclosed number of investors to whom RCBC Capital/CODE-NGO
retirement of long-term securities from ordinary income tax. distributed the PEACe Bonds — all at the time of origination or issuance.  At
this point, however, we do not know as to how many investors the PEACe
The term “gain” as used in Section 32(B)(7)(g) does not include interest, Bonds were sold to by RCBC Capital.
which represents forbearance for the use of money.  Gains from sale or
exchange or retirement of bonds or other certificate of indebtedness fall Should there have been a simultaneous sale to 20 or more lenders/investors,
within the general category of “gains derived from dealings in property” under the PEACe Bonds are deemed deposit substitutes within the meaning of
Section 32(A)(3), while interest from bonds or other certificate of Section 22(Y) of the 1997 National Internal Revenue Code and RCBC
indebtedness falls within the category of “interests” under Section 32(A) Capital/CODE-NGO would have been obliged to pay the 20% final
(4).204  The use of the term “gains from sale” in Section 32(B)(7)(g) shows withholding tax on the interest or discount from the PEACe Bonds.  Further,
the intent of Congress not to include interest as referred under Sections 24, the obligation to withhold the 20% final tax on the corresponding interest from
25, 27, and 28 in the exemption.205chanRoblesvirtualLawlibrary the PEACe Bonds would likewise be required of any lender/investor had the
latter turned around and sold said PEACe Bonds, whether in whole or part,
Hence, the “gains” contemplated in Section 32(B)(7)(g) refers to: (1) gain simultaneously to 20 or more lenders or investors.
realized from the trading of the bonds before their maturity date, which is the
difference between the selling price of the bonds in the secondary market We note, however, that under Section 24223 of the 1997 National Internal
and the price at which the bonds were purchased by the seller; and (2) gain Revenue Code, interest income received by individuals from long-term
realized by the last holder of the bonds when the bonds are redeemed at deposits or investments with a holding period of not less than five (5) years is
maturity, which is the difference between the proceeds from the retirement of exempt from the final tax.
the bonds and the price at which such last holder acquired the bonds.  For
Thus, should the PEACe Bonds be found to be within the coverage of deposit amount corresponding to the 20% final withholding tax in order that it may be
substitutes, the proper procedure was for the Bureau of Treasury to pay the placed in escrow as directed by this court constitutes a defiance of this
face value of the PEACe Bonds to the bondholders and for the Bureau of court’s temporary restraining order.231chanRoblesvirtualLawlibrary
Internal Revenue to collect the unpaid final withholding tax directly from
RCBC Capital/CODE-NGO, or any lender or investor if such be the case, as The temporary restraining order is not moot.  The acts sought to be enjoined
the withholding agents. are not fait accompli.  For an act to be considered fait accompli, the act must
have already been fully accomplished and consummated.232  It must be
irreversible, e.g., demolition of properties,233 service of the penalty of
Reiterative motion on the temporary restraining order imprisonment,234 and hearings on cases.235  When the act sought to be
enjoined has not yet been fully satisfied, and/or is still continuing in
nature,236 the defense of fait accompli cannot prosper.
Respondents’ withholding of the 20% final withholding tax on October
18, 2011 was justified  The temporary restraining order enjoins the entire implementation of the
2011 BIR Ruling that constitutes both the withholding and remittance of the
Under the Rules of Court, court orders are required to be “served upon the 20% final withholding tax to the Bureau of Internal Revenue.  Even though
parties affected.”224  Moreover, service may be made personally or by the Bureau of Treasury had already withheld the 20% final withholding
mail.225  And, “[p]ersonal service is complete upon actual delivery [of the tax237 when it received the temporary restraining order, it had yet to remit
order.]”226  This court’s temporary restraining order was received only on the monies it withheld to the Bureau of Internal Revenue, a remittance which
October 19, 2011, or a day after the PEACe Bonds had matured and the was due only on November 10, 2011.238  The act enjoined by the temporary
20% final withholding tax on the interest income from the same was withheld. restraining order had not yet been fully satisfied and was still continuing.

Publication of news reports in the print and broadcast media, as well as on Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001 which
the internet, is not a recognized mode of service of pleadings, court orders, prescribes to national government agencies such as the Bureau of Treasury
or processes.  Moreover, the news reports227 cited by petitioners were the procedure for the remittance of all taxes it withheld to the Bureau of
posted minutes before the close of office hours or late in the evening of Internal Revenue, a national agency shall file before the Bureau of Internal
October 18, 2011, and they did not give the exact contents of the temporary Revenue a Tax Remittance Advice (TRA) supported by withholding tax
restraining order. returns on or before the 10th day of the following month after the said taxes
had been withheld.240  The Bureau of Internal Revenue shall transmit an
“[O]ne cannot be punished for violating an injunction or an order for an original copy of the TRA to the Bureau of Treasury,241 which shall be the
injunction unless it is shown that such injunction or order was served on him basis for recording the remittance of the tax collection.242  The Bureau of
personally or that he had notice of the issuance or making of such injunction Internal Revenue will then record the amount of taxes reflected in the TRA as
or order.”228chanRoblesvirtualLawlibrary tax collection in the Journal of Tax Remittance by government agencies
based on its copies of the TRA.243  Respondents did not submit any
At any rate, “[i]n case of doubt, a withholding agent may always protect withholding tax return or TRA to prove that the 20% final withholding tax was
himself or herself by withholding the tax due”229 and return the amount of indeed remitted by the Bureau of Treasury to the Bureau of Internal Revenue
the tax withheld should it be finally determined that the income paid is not on October 18, 2011.
subject to withholding.230  Hence, respondent Bureau of Treasury was
justified in withholding the amount corresponding to the 20% final withholding To record redemption of 10yr Zero  coupon (Peace Bond) net of the 20%
tax from the proceeds of the PEACe Bonds, as it received this court’s final  withholding tax pursuant to BIR Ruling No. 378-2011, value date,
temporary restraining order only on October 19, 2011, or the day after this October 18, 2011 per BTr letter authority and BSP Bank Statements.
tax had been withheld.
The foregoing journal entry, however, does not prove that the amount of
Respondents’ retention of the amounts withheld is a defiance of the P4,966,207,796.41, representing the 20% final withholding tax on the PEACe
temporary restraining order Bonds, was disbursed by it and remitted to the Bureau of Internal Revenue
on October 18, 2011.  The entries merely show that the monies
Nonetheless, respondents’ continued failure to release to petitioners the corresponding to 20% final withholding tax was set aside for remittance to the
Bureau of Internal Revenue. The amount of P35 billion that includes the monies corresponding to 20%
final withholding tax is a lawful and valid obligation of the Republic under the
We recall the November 15, 2011 resolution issued by this court directing Government Bonds.  Since said obligation represents a public debt, the
respondents to “show cause why they failed to comply with the [TRO]; and release of the monies requires no legislative appropriation.
[to] comply with the [TRO] in order that petitioners may place the
corresponding funds in escrow pending resolution of the petition.”245  The Section 2 of Republic Act No. 245 likewise provides that the money to be
20% final withholding tax was effectively placed in custodia legis when this used for the payment of Government Bonds may be lawfully taken from the
court ordered the deposit of the amount in escrow.  The Bureau of Treasury continuing appropriation out of any monies in the National Treasury and is
could still release the money withheld to petitioners for the latter to place in not required to be the subject of another appropriation legislation
escrow pursuant to this court’s directive.  There was no legal obstacle to the
release of the 20% final withholding tax to petitioners. SEC. 2. The Secretary of Finance shall cause to be paid out of any moneys
in the National Treasury not otherwise appropriated, or from any sinking
Congressional appropriation is not required for the servicing of public debts funds provided for the purpose by law, any interest falling due, or accruing,
in view of the automatic appropriations clause embodied in Presidential on any portion of the public debt authorized by law. He shall also cause to be
Decree Nos. 1177 and 1967. paid out of any such money, or from any such sinking funds the principal
amount of any obligations which have matured, or which have been called for
Section 31 of Presidential Decree No. 1177 provides: redemption or for which redemption has been demanded in accordance with
Section 31. Automatic Appropriations.  All expenditures for (a) personnel terms prescribed by him prior to date of issue . . . In the case of interest-
retirement premiums, government service insurance, and other similar fixed bearing obligations, he shall pay not less than their face value; in the case of
expenditures, (b) principal and interest on public debt, (c) national obligations issued at a discount he shall pay the face value at maturity; or if
government guarantees of obligations which are drawn upon, are redeemed prior to maturity, such portion of the face value as is prescribed by
automatically appropriated: provided, that no obligations shall be incurred or the terms and conditions under which such obligations were originally issued.
payments made from funds thus automatically appropriated except as issued There are hereby appropriated as a continuing appropriation out of any
in the form of regular budgetary allotments. moneys in the National Treasury not otherwise appropriated, such sums as
may be necessary from time to time to carry out the provisions of this section.
Section 1 of Presidential Decree No. 1967 states: The Secretary of Finance shall transmit to Congress during the first month of
each regular session a detailed statement of all expenditures made under
Section 1. There is hereby appropriated, out of any funds in the National this section during the calendar year immediately preceding.
Treasury not otherwise appropriated, such amounts as may be necessary to
effect payments on foreign or domestic loans, or foreign or domestic loans Thus, DOF Department Order No. 141-95, as amended, states that payment
whereon creditors make a call on the direct and indirect guarantee of the for Treasury bills and bonds shall be made through the National Treasury’s
Republic of the Philippines, obtained by: account with the Bangko Sentral ng Pilipinas, to
wit:chanroblesvirtuallawlibrary
a. the Republic of the Philippines the proceeds of which were relent to
government-owned or controlled corporations and/or government financial Section 38. Demand Deposit Account. – The Treasurer of the Philippines
institutions; maintains a Demand Deposit Account with the Bangko Sentral ng Pilipinas to
which all proceeds from the sale of Treasury Bills and Bonds under R.A. No.
b. government-owned or controlled corporations and/or government financial 245, as amended, shall be credited and all payments for redemption of
institutions the proceeds of which were relent to public or private institutions; Treasury Bills and Bonds shall be charged.

c. government-owned or controlled corporations and/or financial institutions Regarding these legislative enactments ordaining an automatic
and guaranteed by the Republic of the Philippines; appropriations provision for debt servicing, this court has held:

d. other public or private institutions and guaranteed by government-owned Congress . . . deliberates or acts on the budget proposals of the President,
or controlled corporations and/or government financial institutions. and Congress in the exercise of its own judgment and wisdom formulates an
appropriation act precisely following the process established by the
Constitution, which specifies that no money may be paid from the Treasury
except in accordance with an appropriation made by law.

Debt service is not included in the General Appropriation Act, since

authorization therefor already exists under RA Nos. 4860 and 245, as
amended, and PD 1967. Precisely in the light of this subsisting authorization
as embodied in said Republic Acts and PD for debt service, Congress does
not concern itself with details for implementation by the Executive, but largely
with annual levels and approval thereof upon due deliberations as part of the
whole obligation program for the year. Upon such approval, Congress has
spoken and cannot be said to have delegated its wisdom to the Executive, on
whose part lies the implementation or execution of the legislative wisdom.246
(Citation omitted)

Respondent Bureau of Treasury had the duty to obey the temporary

restraining order issued by this court, which remained in full force and effect,
until set aside, vacated, or modified.  Its conduct finds no justification and is
reprehensible.247chanRoblesvirtualLawlibrarychanrobleslaw

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% final 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.

Respondent Bureau of Treasury is hereby ORDERED to immediately release

and pay to the bondholders the amount corresponding to the 20% final
withholding tax that it withheld on October 18, 2011.