Banco de Oro V. Rrepublic of The Philippines G.R. No. 198756 January 13, 2015

BANCO DE ORO v.
RREPUBLIC OF THE PHILIPPINES

G.R. No. 198756 January 13, 2015
Facts:
By letter dated March 23, 2001, the Caucus of Development NGO Networks (CODE-NGO)
"with the assistance of its financial advisors, Rizal Commercial Banking Corp. ("RCBC"),
RCBC Capital Corp. ("RCBC Capital"), CAPEX Finance and Investment Corp. ("CAPEX") and
SEED Capital Ventures, Inc. (SEED)," requested an approval from the Department of Finance
for the issuance by the Bureau of Treasury of 10-year zerocoupon Treasury Certificates (T-
notes). The T-notes would initially be purchased by a special purpose vehicle on behalf of
CODE-NGO, repackaged and sold at a premium to investors as the PEACe Bonds. The net
proceeds from the sale of the Bonds"will be used to endow a permanent fund (Hanapbuhay
Fund) to finance meritorious activities and projects of accredited non-government organizations
(NGOs) throughout the country.
PEACe Bonds are 10-year zerocoupon treasury bonds issued by the Bureau of Treasury (BTr),
designed to endow a permanent fund to finance meritorious activities and projects of accredited
non-government organizations (NGOs) throughout the country. Zero-coupon bonds are bonds
issued at a deep discount or at a price substantially lower than its face value. It does not make
periodic interest payments and the face value is repaid at the time of maturity.
On October 16, 2001, the Bureau of Treasury held an auction for the 10-year zero-coupon bonds.
Also on the same date, the Bureau of Treasury issued another memorandum quoting excerpts of
the ruling issued by the Bureau of Internal Revenue concerning the Bonds’ exemption from 20%
final withholding tax and the opinion of the Monetary Board on reserve eligibility.
During the auction, there were 45 bids from 15 GSEDs. The bidding range was very wide, from
as low as 12.248% to as high as 18.000%. Nonetheless, the Bureau of Treasury accepted the
auction results. The cut-off was at 12.75%.
After the auction, RCBC which participated on behalf of CODE-NGO was declared as the
winning bidder having tendered the lowest bids. Accordingly, on October 18, 2001, the Bureau
of Treasury issued ₱35 billion worth of Bonds at yield-to-maturity of 12.75% to RCBC for
approximately ₱10.17 billion, resulting in a discount of approximately ₱24.83 billion.
The Bureau of Internal Revenue (BIR), in reply to a letter of the Secretary of Finance regarding
the tax treatment of the PEACe Bonds, issued BIR Ruling No. 370-11 dated Oct. 7, 2011. In BIR
Ruling No. 370-11, the Commissioner of Internal Revenue (CIR) opined that the PEACe Bonds
are deposit substitutes and should be subject to 20 percent final tax on interest income from
deposit substitutes. The CIR further stated that it is a settled rule that all treasury bonds
(including PEACe Bonds), regardless of the number of purchasers/lender at the time of
origination/issuance are considered deposit substitutes.
The BIR likewise issued BIR Ruling No. DA 378-2011 dated Oct. 17, 2011 clarifying that the
final withholding tax due on the discount or interest earned on the PEACe Bonds should be
imposed and withheld not only on Rizal Commercial Banking Corporation (RCBC) or Caucus of
Development NGO Networks (CODE-NGO), as the winning bidder of the PEACe Bonds issued
by the BTr, but also on all subsequent holders of the bonds. On the basis of the foregoing
issuances, the BTr paid the face value of the PEACe Bonds, at their maturity, net of the amounts
corresponding to the 20 percent final withholding tax. These issuances were assailed by
bondholders and ultimately resulted in a case being filed before the Supreme Court.
Issue:
Whether or not PEACe Bonds are deposit substitutes and therefore subject to the 20 percent
final withholding tax.
Held:
The Supreme Court did not consider the PEACe Bonds as deposit substitutes and therefore not
subject to the 20 percent final withholding tax on the interest on deposit substitutes, due to the
failure to adequately show that there was borrowing from the public. There was, however, a
qualification that should there have been a simultaneous sale of the bonds from BTr and
RCBC/CODE-NGO and from RCBC/CODE-NGO to the undisclosed investors, and the total
number of the investor/lender exceeded twenty (20), the PEACe Bonds would have been
considered as deposit substitutes.
It is likewise worthy to note that this decision of the Supreme Court enlarged the meaning of the
phrase “at any one time” to include not only the original issuance of the bonds, as previously
interpreted by the earlier BIR issuances, but also transactions within the secondary market. In
effect, where a simultaneous sale referred above occurred, the bondholder who sells or trades his
bonds to another lender/investor is now constituted as a withholding agent of the 20 percent final
withholding tax.

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Banco de Oro V. Rrepublic of The Philippines G.R. No. 198756 January 13, 2015

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BANCO DE ORO v.

RREPUBLIC OF THE PHILIPPINES

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