Supreme Court: Republic of The Philippines
Supreme Court: Republic of The Philippines
Supreme Court
Manila
EN BANC
-versus-
REPUBLIC OF THE
PHILIPPINES, THE
COMMISSIONER OF INTERNAL
REVENUE, BUREAU OF
On leave.
Decision 2 G.R. No. 198756
INTERNAL REVENUE,
SECRETARY OF FINANCE,
DEPARTMENT OF FINANCE,
THE NATIONAL TREASURER
AND BUREAU OF TREASURY, Promulgated:
Respondents. JANUARY 13, 2015
x-------------------------------------------------------------- -------------x
DECISION
LEONEN,J.:
The case involves the proper tax treatment of the discount or interest
income arising frorri the P35 billion worth of 10-year zero-coupon treasury
bonds issued by the Bureau of Treasury on October 18, 2001 (denominated
·as the Poverty Eradication and Alleviation Certificates or the PEACe Bonds
by the Caucus of Development NGO Networks).
the assailed 2011 BIR Ruling, as well as other related rulings issued by the
BIR of similar tenor and import, pending the resolution by [the court] of
the merits of [the] Petition.3
Factual background
The tax treatment of the proposed PEACe Bonds in BIR Ruling No.
020-2001 was subsequently reiterated in BIR Ruling No. 035-200119 dated
August 16, 2001 and BIR Ruling No. DA-175-0120 dated September 29,
2001 (collectively, the 2001 Rulings). In sum, these rulings pronounced that
to be able 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” for purposes of determining the “20 or more lenders” is to be
determined at the time of the original issuance. Such being the case, the
PEACe Bonds were not to be treated as deposit substitutes.
17
Rollo, pp. 133–137.
18
Id. at 136.
19
Id. at 138–140.
20
Id. at 141–143.
21
Id. at 473–474.
22
Id.
23
Id. at 474. ADAPS is short for Automated Debt Auction Processing System as per DOF Department
Order 141-95.
24
Id.
25
Id. at 130.
Decision 5 G.R. No. 198756
[would] be auctioned on October 16, 2001[.]”26 The notice stated that the
Bonds “shall be issued to not more than 19 buyers/lenders hence, the
necessity of a manual auction for this maiden issue.”27 It also required the
GSEDs to submit their bids not later than 12 noon on auction date and to
disclose in their bid submissions the names of the institutions bidding
through them to ensure strict compliance with the 19 lender limit.28 Lastly,
it stated that “the issue being limited to 19 lenders and while taxable shall
not be subject to the 20% final withholding [tax].”29
A day before the auction date or on October 15, 2001, 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).32
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 Regulation No.
020 2001).”33 The Auction Guidelines, for the first time, also stated that the
26
Id.
27
Id.
28
Id.
29
Id.
30
Id. at 131. The memo states:
Below is the formula in determining the purchase price and settlement amount of the P30B Zero-
Coupon Bond to be auctioned on October 16, 2001. Please be advised that this is only applicable to
the zeroes that are not subject to the 20% final withholding due to the 19 buyer/lender limit.
1. SA = PP * FV
2. PP = 1/[1 + i/m]n
n = (MP * m) – E/x
x = 360/m
E = Settlement Date – Original Issue Date
(Y2 – Y1) 360 + (M2 – M1) 30 + (D2 – D1)
Where:
Y2 M2 D2 = Settlement Date/Value Date
Y1 M1 D1 = Original Issue Date
Note:
a) Based on 30/360 days count, compounded semi-annually
b) If D1 [=]– 31 change it to 30
c) Up to at least 10 decimal places
Where:
SA = Settlement Amount → Cash Out
PP = Purchase Price
FV = Face Value
i = Yield to Maturity
x = days in the present compounding period
m = no. of conversion per year
(1 = annual, 2 = semi-annual, 4 = quarterly)
MP = Maturity Period (or tenor) in years
E = Bond Lapsed Days
31
Id.
32
Id. at 132.
33
Id.
Decision 6 G.R. No. 198756
34
Id.
35
Id. at 292.
36
Id. at 494.
37
Id. at 292.
38
Id.
39
Id. at 496–497. See Milo Tanchuling, No peace in PEACE bonds, INQUIRER, October 22, 2011
<http://opinion.inquirer.net/15839/no-peace-in-peace-bonds#ixzz3O1mBfUD8> (visited January 6,
2015): “Financial analysts said the PEACe bonds hold the record for having the widest differential
between the highest bid and the lowest bid. This is an indication of an information asymmetry in the
market. When the latter exists during an auction, the auction must be declared a failure.”;
See also David Grimes, Revisiting the Peace Bonds, October 7, 2011 <http://systemisbroken.blogspot.
com/2011/10/revisiting-peace-bonds.html> (visited January 6, 2015): “The bid differential of 5.752%
between the top winning bid and the bottom losing bid stands out as one of the highest ever in the
history of 10 year Philippine Treasury Bond auctions (65 auctions since 1998 to 2011). No other
auction prior to the PEACe Bond auction on October 16, 2001 or after the PEACe Bond auction has
ever come close.
In fact, the high low differential in auctions of 10 year Philippine Treasury Bonds from 1998 to
2001 (prior to the PEACe Bond auction on October 16, 2001) was a marginal 0.422%. In other words,
the PEACe Bonds differential was over ten times the historical average. . . .
....
The Bureau of Treasury has held no less than 8 auctions of zero-coupon bonds since the PEACe
Bond offering in 2001. . . . The bid differentials for these subsequent zero-coupon bond auctions from
2004 to 2006 averaged 0.601% and ranged from as low as 0.250% to as high as 1.480%.
....
[B]ased on the documents furnished by CODE-NGO, the GSEDs knew:
1. Only one week in advance that the auction of the zero-coupon bond issue was pushing
through; and
2. Only one day before the auction date, the issue's terms, conditions, and eligibilities that
would define its marketability, price, and target market, as well as the bidding procedure to be
used.
In short, the GSEDs had only one day to understand this very new and innovative financial
instrument. They had only one day to test its marketability with potential buyers who have the means
to place a minimum bid of at least PHP 500.0 million face value or PHP 150.0 million cash value.
They had only one day to price it and submit a winning bid.
....
On the other hand, CODE-NGO and RCBC, because they had been working on this flotation since
March 2001, knew all the details surrounding the auction even before it was announced to the other
bidders. They were extremely prepared and fully armed information-wise. No wonder that CODE-
NGO/RCBC won the entire auction.”
See also Freedom from Debt Coalition, Annex 1: Anatomy of the PEACe Bonds controversy, January
30, 2002 <http://www.fil-globalfellows.org/anatomybonds.html> (visited January 6,
2015):“Information Gaps
Treasurer Edeza made sure to brief members of the Investment House Association of the
Philippines about the bond issue, at one of their regular meetings several weeks before the auction.
Nevertheless we observe gaps in the official notices of the government regarding this flotation and the
auction.
For one, even though this was a maiden issue of a zero-coupon bond of the Republic of the
Philippines, neither a prospectus nor a tombstone was prepared and issued. . . .
The first written notice of the Treasury to the GSEDs was dated 09 October 2001, a week before
the auction. This memo made no mention of secondary reserve eligibility. It said only that the bond
Decision 7 G.R. No. 198756
Nonetheless, the Bureau of Treasury accepted the auction results.40 The cut-
off was at 12.75%.41
issue was limited to the 19-lender rule and therefore was exempted from the 20 percent withholding
tax. . . .
The secondary reserve eligibility was finally mentioned in the Treasury Notice that was released
on 15 October 2001, one day before the auction.
On the day of the auction the Treasury gave further clarification on the tax exemption and
secondary reserve eligibility features of the PEACe Bonds.
We do not know what time this memo was released to the dealers, considering that the cutoff time
for submitting bids was 12 noon. But this memo is also an indication that until the day of the auction
itself, RCBC’s rival bidders needed further clarification on crucial aspects of the PEACe Bond float
that should have been factored into their bids.
No mention at all was made of Insurance Commission eligibility, or that winning bidders could
apply to Insurance Commission for eligibility.
Based on this information, we surmise that the GSEDs had far less time than CODE-NGO/RCBC
to look for investors, price the bonds accordingly and submit a winning bid. On the other hand,
because CODE-NGO and RCBC had worked on this flotation since the beginning and knew all the
details surrounding the auction before it was announced to the bidders, they were extremely prepared
to bid appropriately. They also had a seven-month headstart over their rival bidders, to mobilize the
PhP10 billion of resources — whose nature has yet to be determined — needed to snag the entire
auction. Between a bank that had seven months to accumulate several billions of pesos and others that
had only a week’s notice — the cost of capital of the latter would be significantly much higher. This
cost of quickly liquefying assets contributed to the costs of and the consequent weaker ability of the
other banks to bid aggressively even if they intended to.
....
If the auction were a ‘level playing field’ where GSEDs have the same competencies and access to
the same information, the chances of RCBC winning all its four bids is 24 in 3,575,880 (0.0007
percent). Despite such odds RCBC won all its four bids. This means that RCBC operated on either a
tremendous advantage, or on a dire need far greater than its competitors, or both.”
40
Rollo, p. 292.
41
Id.
42
Id. at 27.
43
Id. at 27 and 497.
44
Id. at 1060–1074.
45
Id. at 1060.
46
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[.]”
47
Id. at 1062.
Decision 8 G.R. No. 198756
respectively.”48
BIR rulings
On October 7, 2011, “the BIR issued the assailed 2011 BIR Ruling
imposing a 20% FWT on the Government Bonds and directing the BTr to
withhold said final tax at the maturity thereof, [allegedly without]
consultation with Petitioners as bondholders, and without conducting any
hearing.”50
“It appears that the assailed 2011 BIR Ruling was issued in response
to a query of the Secretary of Finance on the proper tax treatment of the
discount or interest income derived from the Government Bonds.”51 The
Bureau of Internal Revenue, citing three (3) of its rulings rendered in 2004
and 2005, namely: BIR Ruling No. 007-0452 dated July 16, 2004; BIR
Ruling No. DA-491-0453 dated September 13, 2004; and BIR Ruling No.
008-0554 dated July 28, 2005, declared the following:
The Php 24.3 billion discount on the issuance of the PEACe Bonds
should be subject to 20% Final Tax on interest income from deposit
substitutes. It is now settled that all treasury bonds (including PEACe
Bonds), regardless of the number of purchasers/lenders at the time of
origination/issuance are considered deposit substitutes. In the case of
zero-coupon bonds, the discount (i.e. difference between face value and
purchase price/discounted 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 20% Final Tax as provided in Section
27(D)(1) of the Tax Code of 1997. . . .
....
48
Id. at 1069.
49
Id. at 28.
50
Id.
51
Id.
52
Id. at 577–583.
53
Id. at 611–613.
54
Id. at 614–619.
Decision 9 G.R. No. 198756
plainly indicates that the period contemplated is the entire term of the
bond, and not merely the point of origination or issuance. . . . Thus, by
taking the PEACe bonds out of the ambit of deposits [sic] substitutes and
exempting it from the 20% Final Tax, an exemption in favour of the
PEACe Bonds was created when no such exemption is found in the law.55
On October 28, 2011, RCBC and RCBC Capital filed a motion for
leave of court to intervene and to admit petition-in-intervention62 dated
October 27, 2011, which was granted by this court on November 15, 2011.63
55
Id. at 124–125.
56
Id. at 29–30.
57
Id. at 634–637.
58
Id. at 637.
59
Id. at 13–83.
60
Id. at 235–237.
61
Id. at 236.
62
Id. at 950–1042.
63
Id. at 1164–1166.
Decision 10 G.R. No. 198756
CODE-NGO.
Issues
75
Id. at 1938–1962.
76
Id. at 1965.
77
Id. at 1995–2007.
78
Id. at 2044–2058.
Decision 12 G.R. No. 198756
Petitioners argue that “[a]s the issuer of the Government Bonds acting
through the BTr, the Government is obligated . . . to pay the face value
amount of PhP35 Billion upon maturity without any deduction
whatsoever.”79 They add that “the Government cannot impair the efficacy of
the [Bonds] by arbitrarily, oppressively and unreasonably imposing the
withholding of 20% FWT upon the [Bonds] a mere eleven (11) days before
maturity and after several, consistent categorical declarations that such
bonds are exempt from the 20% FWT, without violating due process”80 and
the constitutional principle on non-impairment of contracts.81 Petitioners
aver that at the time they purchased the Bonds, they had the right to expect
that they would receive the full face value of the Bonds upon maturity, in
view of the 2001 BIR Rulings.82 “[R]egardless of whether or not the 2001
BIR Rulings are correct, the fact remains that [they] relied [on] good faith
thereon.”83
At any rate, petitioners insist that the PEACe Bonds are not deposit
substitutes as defined under Section 22(Y) of the 1997 National Internal
Revenue Code because there was only one lender (RCBC) to whom the
Bureau of Treasury issued the Bonds.84 They allege that the 2004, 2005, and
2011 BIR Rulings “erroneously interpreted that the number of investors that
participate in the ‘secondary market’ is the determining factor in reckoning
the existence or non-existence of twenty (20) or more individual or corporate
lenders.”85 Furthermore, they contend that the Bureau of Internal Revenue
unduly expanded the definition of deposit substitutes under Section 22 of the
1997 National Internal Revenue Code in concluding that “the mere issuance
of government debt instruments and securities is deemed as falling within
the coverage of ‘deposit substitutes[.]’”86 Thus, “[t]he 2011 BIR Ruling
clearly amount[ed] to an unauthorized act of administrative legislation[.]”87
79
Id. at 50.
80
Id.
81
Id.
82
Id. at 45.
83
Id.
84
Id. at 46–47.
85
Id. at 47.
86
Id. at 53.
87
Id. at 54.
88
Id. at 43.
89
Id.
Decision 13 G.R. No. 198756
Assuming the 20% final withholding tax was due on the PEACe
Bonds, petitioners-intervenors RCBC and RCBC Capital claim that
respondents Bureau of Treasury and CODE-NGO should be held liable “as
[these] parties explicitly represented . . . that the said bonds are exempt from
the final withholding tax.”113
For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and
BIR Ruling No. DA 378-2011 are “invalid because they contravene Section
22(Y) of the 1997 [NIRC] when the said rulings disregarded the
applicability of the ‘20 or more lender’ rule to government debt
instruments”[;]115 (b) “when [it] sold the PEACe Bonds in the secondary
market instead of holding them until maturity, [it] derived . . . long-term
trading gain[s], not interest income, which [are] exempt . . . under Section
32(B)(7)(g) of the 1997 NIRC”[;]116 (c) “the tax exemption privilege relating
to the issuance of the PEACe Bonds . . . partakes of a contractual
commitment granted by the Government in exchange for a valid and
material consideration [i.e., the issue price paid and savings in borrowing
cost derived by the Government,] thus protected by the non-impairment
clause of the 1987 Constitution”[;]117 and (d) the 2004, 2005, and 2011 BIR
Rulings “did not validly revoke the 2001 BIR Rulings since no notice of
revocation was issued to [it], RCBC and [RCBC Capital] and petitioners[-
bondholders], nor was there any BIR administrative guidance issued and
published[.]”118 CODE-NGO additionally argues that impleading it in a
Rule 65 petition was improper because: (a) it involves determination of a
factual question;119 and (b) it is premature and states no cause of action as it
amounts to an anticipatory third-party claim.120
Arguments of respondents
114
Id. at 1033.
115
Id. at 1212.
116
Id. at 1215.
117
Id. at 1218.
118
Id. at 1222.
119
Id. at 1235.
120
Id. at 1235–1236.
121
Id. at 315–331.
122
Id. at 328.
123
Id. at 331. The case docketed as CTA Case No. 8351 was deemed withdrawn based on the ruling of the
Court of Tax Appeals in the resolution dated October 28, 2011 and which became final and executory
on December 8, 2011. The RCBC and RCBC Capital filed the notice of withdrawal of the petition.
Decision 16 G.R. No. 198756
124
Id. at 331–333 and 1716.
125
Id. at 332–333.
126
Id. at 333–336.
127
Id. at 339.
128
Id. at 342.
129
Id. at 344.
130
Id. at 346.
131
Id. at 350.
132
Id. at 351.
133
Id. at 354.
134
Id. at 357.
Decision 17 G.R. No. 198756
construction given to the term by the 2004 and 2005 BIR Rulings.”135
Hence, respondents argue that “there was no need to observe the
requirements of notice, hearing, and publication[.]”136
Moreover, they contend that the assailed 2011 BIR Ruling is a valid
exercise of the Commissioner of Internal Revenue’s rule-making power;139
that it and the 2004 and 2005 BIR Rulings did not unduly expand the
definition of deposit substitutes by creating an unwarranted exception to the
requirement of having 20 or more lenders/purchasers;140 and the word “any”
in Section 22(Y) of the National Internal Revenue Code plainly indicates
that the period contemplated is the entire term of the bond and not merely
the point of origination or issuance.141
135
Id. at 362.
136
Id. at 370.
137
Id.
138
Id.
139
Id. at 360.
140
Id. at 362.
141
Id. at 366.
142
Id. at 383.
143
Id. at 384.
144
Id. at 392.
Decision 18 G.R. No. 198756
Summary of arguments
145
Id. at 384–385.
146
Id. at 393.
147
Id.
148
Id. at 392.
149
Id. at 394.
150
Id. at 396.
151
Id. at 396–397.
152
Id. at 397.
Decision 19 G.R. No. 198756
d. The wrong construction of the law that the 2001 BIR Rulings
have perpetrated cannot give rise to a vested right. Therefore,
the 2011 BIR Ruling can be given retroactive effect.
Court’s ruling
Procedural Issues
Non-exhaustion of
administrative remedies proper
Thus, it was held that “[i]f superior administrative officers [can] grant
the relief prayed for, [then] special civil actions are generally not
entertained.”153 The remedy within the administrative machinery must be
resorted to first and pursued to its appropriate conclusion before the court’s
judicial power can be sought.154
153
Militante v. Court of Appeals, 386 Phil. 522, 538 (2000) [Per J. Puno, En Banc], cited in Gorospe v.
Vinzons-Chato, G.R. No. 132228, January 21, 2003 <http://nlpdl.nlp.gov.ph:9000/
rpc/cat/finders/SC02/2003jan/132228.htm> [En Banc].
154
Asia International Auctioneers, Inc. v. Hon. Parayno, Jr., 565 Phil. 255, 270 (2007) [Per C.J. Puno,
First Division]; Laguna CATV Network, Inc. v. Hon. Maraan, 440 Phil. 734, 741 (2002) [Per J.
Sandoval-Gutierrez, Third Division].
155
Dueñas v. Santos Subdivision Homeowners Association, G.R. No. 149417, June 4, 2004, 431 SCRA
76, 84–85 [Per J. Quisumbing,Second Division]; Republic of the Philippines v. Lacap, 546 Phil. 87, 97
Decision 21 G.R. No. 198756
The exceptions under (2) and (11) are present in this case. The
question involved is purely legal, namely: (a) the interpretation of the 20-
lender rule in the definition of the terms public and deposit substitutes under
the 1997 National Internal Revenue Code; and (b) whether the imposition of
the 20% final withholding tax on the PEACe Bonds upon maturity violates
the constitutional provisions on non-impairment of contracts and due
process. Judicial intervention is likewise urgent with the impending
maturity of the PEACe Bonds on October 18, 2011.
(2007) [Per J. Austria-Martinez, Third Division]; Cebu Oxygen and Acetylene Co., Inc. (COACO) v.
Secretary Drilon, 257 Phil. 23, 29 (1989) [Per J. Gancayco, En Banc].
156
Paat v. Court of Appeals, 334 Phil. 146, 153 (1997) [Per J. Torres, Jr., Second Division].
157
Castro v. Sec. Gloria, 415 Phil. 645, 652 (2001) [Per J. Sandoval-Gutierrez, Third Division].
158
DOF News Correspondent, PEACe Bonds Subject to 20% Final Withholding Tax, October 7, 2011
<http://www.dof.gov.ph/?p=3199> (visited January 27, 2015): “Sought for comment, Finance
Secretary Cesar V. Purisima stated that the recent BIR Ruling merely confirms that existing rulings on
the tax treatment of Treasury Bills and Treasury Bonds apply to the PEACe Bonds and provides
appropriate legal basis for the Treasury to withhold the tax.”
159
Rollo, p. 1114.
Decision 22 G.R. No. 198756
Under Republic Act No. 1125 (An Act Creating the Court of Tax
Appeals), as amended by Republic Act No. 9282,160 such rulings of the
Commissioner of Internal Revenue are appealable to that court, thus:
....
....
160
An Act Expanding the Jurisdiction of the Court of Tax Appeals (CTA), Elevating its Rank to the Level
of a Collegiate Court with Special Jurisdiction and Enlarging its Membership, Amending for the
Purpose Certain Sections of Republic Act No. 1125, As Amended, Otherwise Known as The Law
Creating the Court of Tax Appeals, and for Other Purposes (2004).
161
440 Phil. 477 (2002) [Per Sandoval-Gutierrez, Third Division], cited in Asia International Auctioneers,
Inc. v. Hon. Parayno, Jr., 565 Phil. 255, 268–269 (2007) [Per C.J. Puno, First Division].
162
109 Phil. 598 (1960) [Per J. Concepcion, En Banc].
Decision 23 G.R. No. 198756
The questioned RMO No. 15-91 and RMC No. 43-91 are actually
rulings or opinions of the Commissioner implementing the Tax Code on
the taxability of pawnshops. . . .
....
....
Revenue.’”163
The tax provision on deposit substitutes affects not only the PEACe
Bonds but also any other financial instrument or product that may be issued
and traded in the market. Due to the changing positions of the Bureau of
Internal Revenue on this issue, there is a need for a final ruling from this
court to stabilize the expectations in the financial market.
Substantive issues
163
Commissioner of Internal Revenue v. Leal, 440 Phil. 477, 485–487 (2002) [Per J. Sandoval-Gutierrez,
Third Division].
164
Congressman Chong, et al. v. Hon. Dela Cruz, et al., 610 Phil. 725, 728 (2009) [Per J. Nachura, Third
Division].
165
451 Phil. 683 (2003) [Per J. Puno, En Banc].
166
Id. at 689.
167
See John Hay Peoples Alternative Coalition v. Lim, 460 Phil. 530, 542–543 (2003) [Per J. Carpio
Morales, En Banc].
Decision 25 G.R. No. 198756
....
....
....
This tax treatment of interest from bank deposits and yield from
deposit substitutes was first introduced in the 1977 National Internal
Revenue Code through Presidential Decree No. 1739168 issued in 1980.
Later, Presidential Decree No. 1959, effective on October 15, 1984, formally
added the definition of deposit substitutes, viz:
168
Providing Fiscal Incentives by Amending Certain Provisions of the National Internal Revenue Code,
and for Other Purposes (1980).
Decision 27 G.R. No. 198756
....
....
20-lender rule
Petitioners contend that “there [is] only one (1) lender (i.e. RCBC) to
whom the BTr issued the Government Bonds.”169 On the other hand,
respondents theorize that the word “any” “indicates that the period
contemplated is the entire term of the bond and not merely the point of
origination or issuance[,]”170 such that if the debt instruments “were
subsequently sold in secondary markets and so on, in such a way that twenty
(20) or more buyers eventually own the instruments, then it becomes
indubitable that funds would be obtained from the “public” as defined in
Section 22(Y) of the NIRC.”171 Indeed, in the context of the financial
market, the words “at any one time” create an ambiguity.
Financial markets
Financial markets provide the channel through which funds from the
surplus units (households and business firms that have savings or excess
funds) flow to the deficit units (mainly business firms and government that
need funds to finance their operations or growth). They bring suppliers and
users of funds together and provide the means by which the lenders
transform their funds into financial assets, and the borrowers receive these
funds now considered as their financial liabilities. The transfer of funds is
represented by a security, such as stocks and bonds. Fund suppliers earn a
return on their investment; the return is necessary to ensure that funds are
supplied to the financial markets.172
“The financial markets that facilitate the transfer of debt securities are
commonly classified by the maturity of the securities[,]”173 namely: (1) the
money market, which facilitates the flow of short-term funds (with maturities
of one year or less); and (2) the capital market, which facilitates the flow of
169
Rollo, p. 47.
170
Id. at 346.
171
Id. at 346–347.
172
Jeff Madura, FINANCIAL INSTITUTIONS AND MARKETS 3–4 (9th ed.).
173
Id. at 4.
Decision 29 G.R. No. 198756
“Over time, the system of financial markets has evolved from simple
to more complex ways of carrying out financial transactions.”178 Still, all
systems perform one basic function: the quick mobilization of money from
the lenders/investors to the borrowers.179
Fund transfers are accomplished in three ways: (1) direct finance; (2)
semidirect finance; and (3) indirect finance.180
With direct financing, the “borrower and lender meet each other and
exchange funds in return for financial assets”181 (e.g., purchasing bonds
directly from the company issuing them). This method provides certain
limitations such as: (a) “both borrower and lender must desire to exchange
the same amount of funds at the same time”[;]182 and (b) “both lender and
borrower must frequently incur substantial information costs simply to find
each other.”183
174
Id.
175
Id.
176
Id.
177
Id.
178
Peter S. Rose, MONEY AND CAPITAL MARKETS 33 (1983).
179
Id.
180
Id.
181
Id. at 34.
182
Id.
183
Id.
184
Id. at 35.
185
SECURITIES CODE, sec. 3.3 defines a “Broker” as “a person engaged in the business of buying and
selling securities for the account of others.”
186
Peter S. Rose, MONEY AND CAPITAL MARKETS 35 (1983).
187
SECURITIES CODE, sec. 3.4 defines a “Dealer” as “any person who buys and sells securities for his or
her own account in the ordinary course of business.”
Decision 30 G.R. No. 198756
Thus, from the point of view of the financial market, the phrase “at
any one time” for purposes of determining the “20 or more lenders” would
mean every transaction executed in the primary or secondary market in
connection with the purchase or sale of securities.
188
Peter S. Rose, MONEY AND CAPITAL MARKETS 35 (1983).
189
Id.
190
Id.
191
Id. at 36.
192
Id.
193
Id.
194
Jeff Madura, FINANCIAL INSTITUTIONS AND MARKETS 14 (9th ed.).
195
Id. at 15.
196
Peter S. Rose, MONEY AND CAPITAL MARKETS 36–37 (1983).
Decision 31 G.R. No. 198756
The phrase “all income derived from whatever source” in Chapter VI,
Computation of Gross Income, Section 32(A) of the 1997 National Internal
Revenue Code discloses a legislative policy to include all income not
expressly exempted as within the class of taxable income under our laws.
The withholding [of tax at source] was devised for three primary
reasons: first, to provide the taxpayer a convenient manner to meet his
probable income tax liability; second, to ensure the collection of income
tax which can otherwise be lost or substantially reduced through failure to
file the corresponding returns[;] and third, to improve the government’s
cash flow. This results in administrative savings, prompt and efficient
collection of taxes, prevention of delinquencies and reduction of
governmental effort to collect taxes through more complicated means and
remedies.201 (Citations omitted)
The interest income earned from bonds is not synonymous with the
“gains” contemplated under Section 32(B)(7)(g)203 of the 1997 National
Internal Revenue Code, which exempts gains derived from trading,
redemption, or retirement of long-term securities from ordinary income tax.
199
Commissioner of Internal Revenue v. Solidbank Corp., 462 Phil. 96, 107 (2003) [Per J. Panganiban,
First Division].
200
Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo, G.R. No. 160756, March 9, 2010,
614 SCRA 605 [Per J. Corona, En Banc].
201
Id. at 632–633.
202
Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 95022, March 23, 1992, 207 SCRA
487, 496 [Per J. Melencio-Herrera, En Banc].
203
Sec. 32. Gross Income. -
....
(B) Exclusions from Gross Income. - The following items shall not be included in gross income and
shall be exempt from taxation under this title:
....
(7) Miscellaneous Items. -
....
(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains realized
from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a
maturity of more than five (5) years.
Decision 33 G.R. No. 198756
204
The Court of Tax Appeals, beginning in the case of Nippon Life Insurance Company Philippines, Inc.
v. Commissioner of Internal Revenue, C.T.A. Case No. 6142, February 4, 2002 (which was affirmed
by the Court of Appeals in CA-G.R. SP No. 69224, November 15, 2002), has consistently ruled that
only the gain from sale (as distinguished from interest) of bonds, debentures, or other certificates of
indebtedness with maturity of more than five (5) years is exempt from income tax. This ruling was
reiterated in Malayan Reinsurance Corp. (formerly Eastern General Reinsurance Corp.) v.
Commissioner of Internal Revenue, C.T.A. Case No. 6252, July 24, 2002; Malayan Zurich Insurance
Co., Inc. v. Commissioner of Internal Revenue, C.T.A. Case No. 6251, September 30, 2002; First
Nationwide Assurance Corp. v. Commissioner of Internal Revenue, C.T.A. Case No. 6253, October 3,
2002; Rizal Commercial Banking Corp. v. Commissioner of Internal Revenue, C.T.A. Case No. 6228,
December 4, 2002; Malayan Insurance Co., Inc. v. Commissioner of Internal Revenue, C.T.A. Case
No. 6243, December 16, 2002; Tokio Marine Malayan Insurance Company, Inc. (formerly Pan
Malayan Insurance Corp.) v. Commissioner of Internal Revenue, C.T.A. Case No. 6254, January 13,
2003; RCBC Savings Bank, Inc. v. Commissioner of Internal Revenue, C.T.A. Case No. 6341, May 5,
2003; Nippon Life Insurance Company of the Philippines, Inc. v. Commissioner of Internal Revenue,
C.T.A. No. 6323, July 24, 2003; Nippon Life Insurance Company of the Philippines, Inc. v.
Commissioner of Internal Revenue, C.T.A. Case No. 6289, September 22, 2003; Nippon Life Insurance
Company of the Philippines, Inc. v. Commissioner of Internal Revenue, C.T.A. Case No. 6348,
September 12, 2003; Tokio Marine Malayan Insurance Company, Inc. (formerly Pan Malayan
Insurance Corp.) v. Commissioner of Internal Revenue, C.T.A. Case No. 6472, December 1, 2003;
First Nationwide Assurance Corp. v. Commissioner of Internal Revenue, C.T.A. Case No. 6473,
December 22, 2003.
205
See Malayan Zurich Insurance Co., Inc. v. Comm.,CA-G.R. SP No. 77070, March 28, 2005.
206
See BIR Ruling No. 026-02 (2002).
207
See Fort Bonifacio Dev’t Corp. v. Commissioner of Internal Revenue, 617 Phil. 358, 369 (2009) [Per J.
Leonardo-De Castro, En Banc]; Executive Secretary v. Southwing Heavy Industries, Inc., 518 Phil.
Decision 34 G.R. No. 198756
any one time” to mean at the point of origination alone is unduly restrictive.
213
Id. at 928–929.
214
Id. at 931.
215
453 Phil. 1043 (2003) [Per C.J. Davide, Jr., First Division].
216
Id. at 1059.
217
Id. at 1052.
218
G.R. No. 108524, November 10, 1994, 238 SCRA 63 [Per J. Mendoza, Second Division].
219
BPI Family Bank v. Court of Appeals, G.R. No. 117319, July 19, 2006, resolution.
Decision 36 G.R. No. 198756
give the force of law to the rule; (ii) go to the opposite extreme and
substitute its judgment; or (iii) give some intermediate degree of
authoritative weight to the interpretative rule.
The transactions executed for the sale of the PEACe Bonds are:
It may seem that there was only one lender — RCBC on behalf of
CODE-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 RCBC Capital (as underwriter for CODE-NGO) of the
PEACe Bonds to various undisclosed investors at a purchase price of
approximately 11.996 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 10.2 billion borrowing received by the Bureau
of Treasury in exchange for the 35 billion worth of PEACe Bonds was
sourced directly from the undisclosed number of investors to whom RCBC
Capital/CODE-NGO 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 Bonds were sold to by RCBC Capital.
220
Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary, G.R. No.
108524, November 10, 1994, 238 SCRA 63, 69–70 [Per J. Mendoza, Second Division].
221
Rollo, pp. 560–574. Under the Definitions and Interpretation, issue date shall be on October 18, 2001;
offering period shall mean the period commencing at 9:00 a.m. of October 17, 2001 and ending at 12
noon of October 17, 2001 (Rollo, p. 561). Under Terms and Conditions of Application and Payment for
the Bonds, RCBC Capital shall 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 (Rollo, pp. 563–564).
222
Rollo, p. 576.
Decision 37 G.R. No. 198756
The three (3)-year prescriptive period under Section 203 of the 1997
223
Sec. 24. Income Tax Rates.
....
(B) Rate of Tax on Certain Passive Income.
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is
hereby imposed upon the amount of interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties,
except on books, as well as other literary works and musical compositions, which shall be imposed a
final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less
which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except
Philippine Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines:
Provided, however, That interest income received by an individual taxpayer (except a nonresident
individual) from a depository bank under the expanded foreign currency deposit system shall be
subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income:
Provided, further, That interest income from long-term deposit or investment in the form of savings,
common or individual trust funds, deposit substitutes, investment management accounts and other
investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas
(BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the
holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax
shall be imposed on the entire income and shall be deducted and withheld by the depository bank from
the proceeds of the long-term deposit or investment certificate based on the remaining maturity
thereof:
Four (4) years to less than five (5) years – 5%;
Three (3) years to less than four (4) years – 12%; and
Less than three (3) years – 20% (Emphasis supplied)
Decision 38 G.R. No. 198756
National Internal Revenue Code to assess and collect internal revenue taxes
is extended to 10 years in cases of (1) fraudulent returns; (2) false returns
with intent to evade tax; and (3) failure to file a return, to be computed from
the time of discovery of the falsity, fraud, or omission. Section 203 states:
....
In view of the foregoing, there is no need to pass upon the other issues
raised by petitioners and petitioners-intervenors.
Under the Rules of Court, court orders are required to be “served upon
the parties affected.”224 Moreover, service may be made personally or by
224
RULES OF COURT, Rule 13, sec. 4.
Decision 39 G.R. No. 198756
mail.225 And, “[p]ersonal service is complete upon actual delivery [of the
order.]”226 This court’s temporary restraining order was received only on
October 19, 2011, or a day after the PEACe Bonds had matured and the 20%
final withholding tax on the interest income from the same was withheld.
225
RULES OF COURT, Rule 13, sec. 5.
226
RULES OF COURT, Rule 13, sec. 10.
227
Rollo, pp. 1119–1121 and 1126–1132.
228
Spouses Lee v. Court of Appeals, 528 Phil. 1050, 1065 (2006) [Per J. Chico-Nazario, First Division].
229
Philippine Guaranty Co., Inc. v. Commissioner of Internal Revenue, 121 Phil. 755, 766 (1965) [Per J.
J. P. Bengzon, En Banc].
230
Id.
231
Kibad v. Commission on Elections, 134 Phil. 846, 850 (1968) [Per J. Fernando, En Banc].
Decision 40 G.R. No. 198756
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
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.
Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001
which prescribes to national government agencies such as the Bureau of
Treasury the procedure for the remittance of all taxes it withheld to the
Bureau of Internal Revenue, a national agency shall file 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.240 The Bureau of Internal Revenue shall transmit
an original copy of the TRA to the Bureau of Treasury,241 which shall be the
basis for recording the remittance of the tax collection.242 The Bureau of
Internal Revenue will then record the amount of taxes reflected in the TRA
as tax collection in the Journal of Tax Remittance by government agencies
based on its copies of the TRA.243 Respondents did not submit any
232
See Benedicto v. Court of Appeals, 510 Phil. 150, 156 (2005) [Per J. Quisumbing, First Division].
233
Aznar Brothers Realty Company v. Court of Appeals, 384 Phil. 95, 109–110 (2000) [Per C.J. Davide,
Jr., First Division]; Tamin v. Court of Appeals, G.R. No. 97477, May 8, 1992, 208 SCRA 863, 875
[Per J. Gutierrez, Jr., En Banc].
234
Quizon v. Court of Appeals, 471 Phil. 888, 892 (2004) [Per J. Tinga, Second Division].
235
Spouses Guerrero v. Domingo, G.R. No. 156142, March 23, 2011, 646 SCRA 175, 179 [Per J.
Leonardo-De Castro, First Division].
236
Strategic Alliance Development Corporation v. Star Infrastructure Development Corporation, G.R.
No. 187872, April 11, 2011, 647 SCRA 545, 556 [Per J. Perez, First Division]; Reyes-Tabujara v.
Court of Appeals, 528 Phil. 445, 458 (2006) [Per J. Chico-Nazario, First Division].
237
Rollo, p. 1329.
238
TAX CODE, secs. 57 and 58, as implemented by sec. 2.58(A)(2)(a) of Revenue Regulations 2-98 (as
amended by Revenue Regulations 6-2001):
(2) WHEN TO FILE –
(a) For both large and non-large taxpayers, the withholding tax return, whether creditable or final
(including final withholding taxes on interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar arrangements) shall be filed
and payments should be made, within ten (10) days after the end of each month, except for taxes
withheld for the month of December of each year, which shall be filed on or before January 15 of the
following year. (Emphasis and underscoring supplied)
239
Amendments to Joint Circular No. 1-2000 dated January 3, 2000 Re: Guidelines in the Remittance of
All Taxes Withheld by National Government Agencies (NGAs) to the Bureau of Internal Revenue
(BIR).
240
DOF-DBM Joint Circular 1-2000A, sec. 3.5.3.
241
DOF-DBM Joint Circular 1-2000A, sec. 3.3.3.
242
DOF-DBM Joint Circular 1-2000A, sec. 3.4.2.
243
DOF-DBM Joint Circular 1-2000A, sec. 3.3.4.
Decision 41 G.R. No. 198756
withholding tax return or TRA to prove that the 20% final withholding tax
was indeed remitted by the Bureau of Treasury to the Bureau of Internal
Revenue on October 18, 2011.
The foregoing journal entry, however, does not prove that the amount
of 4,966,207,796.41, representing the 20% final withholding tax on the
PEACe Bonds, was disbursed by it and remitted to the Bureau of Internal
Revenue on October 18, 2011. The entries merely show that the monies
corresponding to 20% final withholding tax was set aside for remittance to
the Bureau of Internal Revenue.
244
Rollo, p. 2008.
245
Id. at 1164.
Decision 42 G.R. No. 198756
Section 2 of Republic Act No. 245 likewise provides that the money to
be used for the payment of Government Bonds may be lawfully taken from
the continuing appropriation out of any monies in the National Treasury and
is not required to be the subject of another appropriation legislation:
246
Spouses Constantino, Jr. v. Cuisia, 509 Phil. 486, 513–514 [Per J. Tinga, En Banc].
Decision 44 G.R. No. 198756
. repre.hens1'bl e. 247
and 1s
"
WE CONCUR:
VELASCO, JR.
Associate Justice Ass0'Ciate Justice
JAJUAA
TERESITAJ. LEONARDO-DE CASTRO
(On leave)
ARTURO D. BRION
Associate Justice Associate Justice
247
Kibad v. Commission on Elections, 134 Phil. 846, 849-850 (1968) [Per J. Fernando, En Banc];
Commissioner of Immigration v. Cloribel, 127 Phil. 716 (1967) [Per Curiam, En Banc].
Decision 45 G.R. No. 198756
OM.PERALTA
C. DEL CASTILLO
Associate Justice Associate J]
JOSEC
.
ESTELA M.'fERLAS-BERNABE
Associate Justice Associate Justice
Associate Justice
fnt). PJ,.;.. s
A
CERTIFICATION
I certify that the conclusions in the above Decision had been reached
in consultation before the case was assigned to the writer of the opinion of
the court.