XI. BDO vs. Republic

TAX II
XI. BDO vs. Republic

G.R. No. 198756 [745 SCRA 361] 13 January 2015
EN BANC
G.R. No. 198756 January 13, 2015
BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION, METROPOLITAN BANK &
TRUST COMPANY, PHILIPPINE BANK OF COMMUNICATIONS, PHILIPPINE NATIONAL BANK,
PHILIPPINE VETERANS BANK AND PLANTERS DEVELOPMENT BANK, Petitioners, RIZAL
COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL CORPORATION, Petitioners-
Intervenors, CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor, vs. REPUBLIC OF
THE PHILIPPINES, THE COMMISSIONER OF INTERNAL REVENUE, BUREAU OF INTERNAL REVENUE,
SECRETARY OF FINANCE, DEPARTMENT OF FINANCE, THE NATIONAL TREASURER AND BUREAU OF
TREASURY, Respondent.
REMEDIAL LAW; CIVIL PROCEDURE; EXHAUSTION OF ADMINISTRATIVE REMEDIES; 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.—Under Section 4 of the 1997 National
Internal Revenue Code, interpretative rulings are reviewable by the Secretary of Finance. SEC. 4.
Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases.—The power to
interpret the provisions of this Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the Secretary of Finance. (Emphasis
supplied) Thus, it was held that “[i]f superior administrative officers [can] grant the relief prayed
for, [then] special civil actions are generally not entertained.” 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. Nonetheless, jurisprudence allows certain exceptions to the rule on
exhaustion of administrative remedies: [The doctrine of exhaustion of administrative remedies] is a
relative one and its flexibility is called upon by the peculiarity and uniqueness of the factual and
circumstantial settings of a case. Hence, it is disregarded (1) when there is a violation of due
process, (2) when the issue involved is purely a legal question, (3) when the administrative action
is patently illegal amounting to lack or excess of jurisdiction, (4) when there is estoppel on the part
of the administrative agency concerned, (5) when there is irreparable injury, (6) when the
respondent is a department secretary whose acts as an alter ego of the President bears the implied
and assumed approval of the latter, (7) when to require exhaustion of administrative remedies
would be unreasonable, (8) when it would amount to a nullification of a claim, (9) when the subject
matter is a private land in land case proceedings, (10) when the rule does not provide a plain,
speedy and adequate remedy, (11) when there are circumstances indicating the urgency of judicial
intervention.
SAME; SAME; Courts; Court of Tax Appeals; Under Republic Act (RA) No. 1125 (An Act Creating
the Court of Tax Appeals [CTA]), as amended by RA No. 9282, such rulings of the Commissioner of
Internal Revenue (CIR) are appealable to that court.—We agree with respondents that the
jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains to the Court of
Tax Appeals. The questioned BIR Ruling Nos. 370-2011 and DA 378-2011 were issued in
connection with the implementation of the 1997 National Internal Revenue Code on the taxability
of the interest income from zero-coupon bonds issued by the government. Under Republic Act No.
1125 (An Act Creating the Court of Tax Appeals), as amended by Republic Act No. 9282, such
rulings of the Commissioner of Internal Revenue are appealable to that court.
SAME; SAME; In exceptional cases, the Supreme Court (SC) entertained direct recourse to it when
“dictated by public welfare and the advancement of public policy, or demanded by the broader
interest of justice, or the orders complained of were found to be patent nullities, or the appeal was
considered as clearly an inappropriate remedy.”—In exceptional cases, however, this court
entertained direct recourse to it when “dictated by public welfare and the advancement of public
policy, or demanded by the broader interest of justice, or the orders complained of were found to
be patent nullities, or the appeal was considered as clearly an inappropriate remedy.” In Philippine
Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary, Department of Interior
and Local Government, 403 SCRA 558 (2003), this court noted that the petition for prohibition was
filed directly before it “in disregard of the rule on hierarchy of courts. However, [this court] opt[ed]
to take primary jurisdiction over the . . . petition and decide the same on its merits in view of the
significant constitutional issues raised by the parties dealing with the tax treatment of cooperatives
under existing laws and in the interest of speedy justice and prompt disposition of the matter.”
TAXATION; WITHHOLDING TAX; Under Sections 24(B)(1), 27(D)(1), and 28(A)(7) of the 1997
National Internal Revenue Code (NIRC), a final withholding tax at the rate of twenty percent (20%)
is imposed on interest on any currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements.—Under Sections 24(B)(1),
27(D)(1), and 28(A)(7) of the 1997 National Internal Revenue Code, a final withholding tax at the
rate of 20% is imposed on interest on any currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds and similar arrangements.
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TAX II
Deposit Substitutes; Words and Phrases; The term ‘deposit substitutes’ shall mean an alternative
form of obtaining funds from the public (the term ‘public’ means borrowing from twenty [20] or
more individual or corporate lenders at any one time) other than deposits, through the issuance,
endorsement, or acceptance of debt instruments for the borrower’s own account, for the purpose of
relending or purchasing of receivables and other obligations, or financing their own needs or the
needs of their agent or dealer.—The definition of deposit substitutes was amended under the 1997
National 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. Under Section 22(Y), deposit
substitute is defined thus: SEC. 22. Definitions.—When used in this Title: . . . . (Y) The term
‘deposit substitutes’ shall mean an alternative form of obtaining funds from the public (the term
‘public’ means borrowing from twenty (20) or more individual or corporate lenders at any one time)
other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the
borrower’s own account, for the purpose of relending or purchasing of receivables and other
obligations, or financing their own needs or the needs of their agent or dealer. These instruments
may include, but need not be limited to, bankers’ acceptances, promissory notes, repurchase
agreements, including reverse repurchase agreements entered into by and between the Bangko
Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or
participation and similar instruments with recourse: Provided, however, That debt instruments
issued for interbank call loans with maturity of not more than five (5) days to cover deficiency in
reserves against deposit liabilities, including those between or among banks and quasi-banks, shall
not be considered as deposit substitute debt instruments. (Emphasis supplied) Under the 1997
National Internal Revenue Code, Congress specifically defined “public” to mean “twenty (20) or
more individual or corporate lenders at any one time.” Hence, the number of lenders is
determinative of whether a debt instrument should be considered a deposit substitute and
consequently subject to the 20% final withholding tax.
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).—
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. “The financial markets that facilitate the transfer of debt securities are commonly
classified by the maturity of the securities[,]” 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 long-term funds (with maturities of more than one year).
SAME; The financial market, therefore, is an agglomeration of financial transactions in securities

performed by market participants that works to transfer the funds from the surplus units (or
investors/lenders) to those who need them (deficit units or borrowers).— The financial market,
therefore, is an agglomeration of financial transactions in securities performed by market
participants that works to transfer the funds from the surplus units (or investors/lenders) to those
who need them (deficit units or borrowers). 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.
TAXATION; DEPOSIT SUBSTITUTES; Interest income from deposit substitutes are necessarily part
of taxable income. —It must be emphasized, however, that debt instruments that do not qualify as
deposit substitutes under the 1997 National Internal Revenue Code are subject to the regular
income tax. 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 definition of gross income is broad enough to include all passive incomes subject to
specific tax rates or final taxes.” Hence, interest income from deposit substitutes are necessarily
part of taxable income. “However, since these passive incomes are already subject to different
rates and taxed finally at source, they are no longer included in the computation of gross income,
which determines taxable income.” “Stated otherwise . . . 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 be paid to the [creditors/lenders] and then remitted by them to the government in
payment of their income tax.”
SAME; WITHHOLDING TAX; When there are twenty (20) or more lenders/investors in a transaction
for a specific bond issue, the seller is required to withhold the twenty percent (20%) final income
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TAX II
tax on the imputed interest income from the bonds.—This court, in Chamber of Real Estate and
Builders’ Associations, Inc. v. Romulo, 614 SCRA 605 (2010), explained the rationale behind the
withholding tax system: 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. (Citations omitted) “The application of the withholdings system to interest on
bank deposits or yield from deposit substitutes is essentially to maximize and expedite the
collection of income taxes by requiring its payment at the source.” Hence, when there are 20 or
more lenders/investors in a transaction for a specific bond issue, the seller is required to withhold
the 20% final income tax on the imputed interest income from the bonds.
SAME; The interest income earned from bonds is not synonymous with the “gains” contemplated
under Section 32(B)(7)(g) of the 1997 National Internal Revenue Code (NIRC), which exempts
gains derived from trading, redemption, or retirement of long-term securities from ordinary income
tax.—The interest income earned from bonds is not synonymous with the “gains” contemplated
under Section 32(B)(7)(g) of the 1997 National Internal Revenue Code, which exempts gains
derived from trading, redemption, or retirement of long-term securities from ordinary income tax.
The term “gain” as used in Section 32(B)(7)(g) does not include interest, which represents
forbearance for the use of money. Gains from sale or exchange or retirement of bonds or other
certificate of indebtedness fall within the general category of “gains derived from dealings in
property” under Section 32(A)(3), while interest from bonds or other certificate of indebtedness
falls within the category of “interests” under Section 32(A)(4). The use of the term “gains from
sale” in Section 32(B)(7)(g) shows the intent of Congress not to include interest as referred under
Sections 24, 25, 27, and 28 in the exemption. Hence, the “gains” contemplated in Section 32(B)(7)
(g) refers to: (1) gain 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 and the price at
which the bonds were purchased by the seller; and (2) gain realized by the last holder of the bonds
when the bonds are redeemed at maturity, which is the difference between the proceeds from the
retirement of the bonds and the price at which such last holder acquired the bonds. For discounted
instruments, like the zero-coupon bonds, the trading gain shall be the excess of the selling price
over the book value or accreted value (original issue price plus accumulated discount from the time
of purchase up to the time of sale) of the instruments.
STATUTORY CONSTRUCTION; That construction which will leave every word operative will be
favored over one that leaves some word, clause, or sentence meaningless and insignificant.—Tax
statutes must be reasonably construed as to give effect to the whole act. Their constituent
provisions must be read together, endeavoring to make every part effective, harmonious, and
sensible. That construction which will leave every word operative will be favored over one that
leaves some word, clause, or sentence meaningless and insignificant.
SAME; A memorandum-circular of a bureau head could 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 law by the administrative officials and such wrong interpretation could not place
the Government in estoppel to correct or overrule the same.—This court further held that “[a]
memorandum-circular of a bureau head could 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 law by the administrative officials and such wrong interpretation could not place the
Government in estoppel to correct or overrule the same.”
TAXATION; TAX EXEMPTIONS; Under Section 24 of the 1997 National Internal Revenue Code
(NIRC), interest income received by individuals from long-term deposits or investments with a
holding period of not less than five (5) years is exempt from the final tax.—Should there have been
a simultaneous sale to 20 or more lenders/investors, the PEACe Bonds are deemed deposit
substitutes within the meaning of Section 22(Y) of the 1997 National Internal Revenue Code and
RCBC Capital/CODE-NGO would have been obliged to pay the 20% final withholding tax on the
interest or discount from the PEACe Bonds. Further, the obligation to withhold the 20% final tax on
the corresponding interest from 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, simultaneously
to 20 or more lenders or investors. We note, however, that under Section 24 of the 1997 National
Internal Revenue Code, interest income received by individuals from long-term deposits or
investments with a holding period of not less than five (5) years is exempt from the final tax.
SAME; PRESCRIPTION; The three (3)-year prescriptive period under Section 203 of the 1997
National Internal Revenue Code (NIRC) to assess and collect internal revenue taxes is extended to
ten (10) years in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3)
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TAX II
failure to file a return, to be computed from the time of discovery of the falsity, fraud, or omission.
—The three (3)-year prescriptive period under Section 203 of the 1997 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: SEC. 203. Period
of Limitation Upon Assessment and Collection.—Except as provided in Section 222, internal
revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the
filing of the return, and no proceeding in court without assessment for the collection of such taxes
shall be begun after the expiration of such period: Provided, That in a case where a return is filed
beyond the period prescribed by law, the three (3)-year period shall be counted from the day the
return was filed. For purposes of this Section, a return filed before the last day prescribed by law
for the filing thereof shall be considered as filed on such last day. (Emphasis supplied) . . . . SEC.
222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.—(a) In the case
of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be
assessed, or a proceeding in court for the collection of such tax may be filed without assessment,
at any time within ten (10) years after the discovery of the falsity, fraud or omission: Provided,
That in a fraud assessment which has become final and executory, the fact of fraud shall be
judicially taken cognizance of in the civil or criminal action for the collection thereof.
REMEDIAL LAW; PROVISIONAL REMEDIES; INJUNCTION; One cannot be punished for violating an
injunction or an order for an injunction unless it is shown that such injunction or order was served
on him personally or that he had notice of the issuance or making of such injunction or order.
—“[O]ne cannot be punished for violating an injunction or an order for an injunction unless it is
shown that such injunction or order was served on him personally or that he had notice of the
issuance or making of such injunction or order.”
TAXATION; WITHHOLDING TAX; In case of doubt, a withholding agent may always protect himself
or herself by withholding the tax due and return the amount of the tax withheld should it be finally
determined that the income paid is not subject to withholding.—At any rate, “[i]n case of doubt, a
withholding agent may always protect himself or herself by withholding the tax due” and return the
amount of the tax withheld should it be finally determined that the income paid is not subject to
withholding. Hence, respondent Bureau of Treasury was justified in withholding the amount
corresponding to the 20% final withholding tax from the proceeds of the PEACe Bonds, as it
received this court’s temporary restraining order only on October 19, 2011, or the day after this
tax had been withheld.
REMEDIAL LAW; PROVISIONAL REMEDIES; INJUNCTION; When the act sought to be enjoined has
not yet been fully satisfied, and/or is still continuing in nature, the defense of fait accompli cannot
prosper.—The temporary restraining order is not moot. The acts sought to be enjoined are not fait
accompli. For an act to be considered fait accompli, the act must have already been fully
accomplished and consummated. It must be irreversible, e.g., demolition of properties, service of
the penalty of imprisonment, and hearings on cases. When the act sought to be enjoined has not
yet been fully satisfied, and/or is still continuing in nature, the defense of fait accompli cannot
prosper. The temporary restraining order enjoins the entire implementation of the 2011 BIR Ruling
that constitutes both the withholding and remittance of the 20% final withholding tax to the Bureau
of Internal Revenue. Even though the Bureau of Treasury had already withheld the 20% final
withholding tax when it received the temporary restraining order, it had yet to remit the monies it
withheld to the Bureau of Internal Revenue, a remittance which was due only on November 10,
2011. The act enjoined by the temporary restraining order had not yet been fully satisfied and was
still continuing.
SPECIAL CIVIL ACTION in the Supreme Court. Certiorari, Prohibition and/or Mandamus. The facts
are stated in the opinion of the Court.
Angara, Abello, Concepcion, Regala & Cruz for petitioners Banco de Oro, Bank of Commerce, China
Banking Corporation, Metropolitan Bank & Trust Company, Philippine Bank of Communications,
Philippine National Bank and Philippine Veterans Bank.
Odel Sarmiento Janda for petitioner Planters Development Bank.
Law Firm of Diaz, Del Rosario and Associates for petitioners-intervenors Rizal Commercial Banking
Corporation (RCBC) and RCBC Capital Corporation (RCAP).
Baniqued & Baniqued for petitioner-intervenor Caucus of Development NGO Networks. Banco de
Oro vs. Republic, 745 SCRA 361, G.R. No. 198756 January 13, 2015
DECISION
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TAX II
LEONEN, J.:
The case involves the proper tax treatment of the discount or interest income arising from the ₱35
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 PEA Ce Bonds
by the Caucus of Development NGO Networks).
On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling No. 370-2011 1 (2011
BIR Ruling), declaring that the PEACe Bonds being deposit substitutes are subject to the 20% final
withholding tax. Pursuant to this ruling, the Secretary of Finance directed the Bureau of Treasury to
withhold a 20% final tax from the face value of the PEACe Bonds upon their payment at maturity
on October 18, 2011.
This is a petition for certiorari, prohibition and/or mandamus 2 filed by petitioners under Rule 65 of
the Rules of Court seeking to:
a. ANNUL Respondent BIR's Ruling No. 370-2011 dated 7 October 2011 [and] other related
rulings issued by BIR of similar tenor and import, for being unconstitutional and for having
been issued without jurisdiction or with grave abuse of discretion amounting to lack or·
excess of jurisdiction ... ;
b. PROHIBIT Respondents, particularly the BTr; from withholding or collecting the 20% FWT
from the payment of the face value of the Government Bonds upon their maturity;
c. COMMAND Respondents, particularly the BTr, to pay the full amount of the face value of
the Government Bonds upon maturity ... ; and
d. SECURE a temporary restraining order (TRO), and subsequently a writ of preliminary

injunction, enjoining Respondents, particularly the BIR and the BTr, from withholding or
collecting 20% FWT on the Government Bonds and the respondent BIR from enforcing the
assailed 2011 BIR Ruling, as well asother 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
By letter4 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),"5 requested an approval from the Department of Finance for the issuance by the Bureau of
Treasury of 10-year zerocoupon Treasury Certificates (T-notes). 6 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.7 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." 8
Prior to and around the time of the proposal of CODE-NGO, other proposals for the issuance of
zero-coupon bonds were also presented by banks and financial institutions, such as First Metro
Investment Corporation (proposal dated March 1, 2001), 9 International Exchange Bank (proposal
dated July 27, 2000),10 Security Bank Corporation and SB Capital Investment Corporation (proposal
dated July 25, 2001),11 and ATR-Kim Eng Fixed Income, Inc. (proposal dated August 25,
1999).12 "[B]oth the proposals of First Metro Investment Corp. and ATR-Kim Eng Fixed Income
indicate that the interest income or discount earned on the proposed zerocoupon bonds would be
subject to the prevailing withholding tax."13
A zero-coupon bondis a bond bought at a price substantially lower than its face value (or at a deep
discount), with the face value repaid at the time of maturity. 14 It does not make periodic interest
payments, or have socalled "coupons," hence the term zero-coupon bond. 15 However, the discount
to face value constitutes the return to the bondholder.16
On May 31, 2001, the Bureau of Internal Revenue, in reply to CODENGO’s letters dated May 10,
15, and 25, 2001, issued BIR Ruling No. 020-2001 17 on the tax treatment of the proposed PEACe
Bonds. BIR Ruling No. 020-2001, signed by then Commissioner ofInternal Revenue René G. Bañez
confirmed that the PEACe Bonds would not be classified as deposit substitutes and would not be
subject to the corresponding withholding tax:
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Thus, to be classified as "deposit substitutes", the borrowing of funds must be obtained from
twenty (20) or more individuals or corporate lenders at any one time. In the light of your
representation that the PEACe Bonds will be issued only to one entity, i.e., Code NGO, the same
shall not be considered as "deposit substitutes" falling within the purview of the above definition.
Hence, the withholding tax on deposit substitutes will not apply. 18 (Emphasis supplied)
The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001 was subsequently
reiterated in BIR Ruling No. 035-2001 19 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.
Meanwhile, in the memorandum21 dated July 4, 2001, Former Treasurer Eduardo Sergio G. Edeza
(Former Treasurer Edeza) questioned the propriety of issuing the bonds directly to a special
purpose vehicle considering that the latter was not a Government Securities Eligible Dealer
(GSED).22 Former Treasurer Edeza recommended that the issuance of the Bonds "be done through
the ADAPS"23 and that CODE-NGO "should get a GSED to bid in [sic] its behalf." 24
Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury Bonds 25 (Public
Offering) dated October 9, 2001, the Bureau of Treasury announced that "₱30.0B worth of 10-year
Zero[-] Coupon Bonds [would] be auctioned on October 16, 2001[.]" 26 The notice stated that the
Bonds "shall be issued to not morethan 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
limitedto 19 lenders and while taxable shall not be subject to the 20% final withholding [tax]." 29
On October 12, 2001, the Bureau of Treasury released a memo 30 on the "Formula for the Zero-
Coupon Bond." The memo stated inpart that the formula (in determining the purchase price and
settlement amount) "is only applicable to the zeroes that are not subject to the 20% final
withholding due to the 19 buyer/lender limit."31
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 Bonds are "[e]ligible as liquidity reserves (pursuant to MB Resolution No.
1545 dated 27 September 2001)[.]"34
On October 16, 2001, the Bureau of Treasury held an auction for the 10-year zero-coupon
bonds.35 Also on the same date, the Bureau of Treasury issued another memorandum 36 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. 37
During the auction, there were 45 bids from 15 GSEDs. 38 The bidding range was very wide, from as
low as 12.248% to as high as 18.000%.39 Nonetheless, the Bureau of Treasury accepted the
auction results.40 The cut-off was at 12.75%.41
After the auction, RCBC which participated on behalf of CODE-NGO was declared as the winning
bidder having tendered the lowest bids. 42 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,43 resulting in a discount of approximately ₱24.83 billion.
Also on October 16, 2001, RCBC Capital entered into an underwriting Agreement 44 with CODE-NGO,
whereby RCBC Capital was appointed as the Issue Manager and Lead Underwriter for the offering
of the PEACe Bonds.45 RCBC Capital agreed to underwrite 46 on a firm basis the offering, distribution
and sale of the 35 billion Bonds at the price of ₱11,995,513,716.51. 47 In Section 7(r) of the
underwriting agreement, CODE-NGO represented that "[a]ll income derived from the Bonds,
inclusive of premium on redemption and gains on the trading of the same, are exempt from all
forms of taxation as confirmed by Bureau of Internal Revenue (BIR) letter rulings dated 31 May
2001 and 16 August 2001, respectively." 48
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RCBC Capital sold the Government Bonds in the secondary market for an issue price of
₱11,995,513,716.51. Petitioners purchased the PEACe Bonds on different dates. 49
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 bond holders, 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. 008-05 54 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. . . .
....
However, at the time of the issuance of the PEACe Bonds in 2001, the BTr was not able tocollect
the final tax on the discount/interest income realized by RCBC as a result of the 2001 Rulings.
Subsequently, the issuance of BIR Ruling No. 007-04 dated July 16, 2004 effectively modifies and
supersedes the 2001 Rulings by stating that the [1997] Tax Code is clear that the "term public
means borrowing from twenty (20) or more individual or corporate lenders at any one time." The
word "any" 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 11, 2011, a "Memo for Trading Participants No. 58-2011 was issued by the Philippine
Dealing System Holdings Corporation and Subsidiaries ("PDS Group"). The Memo provides that in
view of the pronouncement of the DOF and the BIR on the applicability of the 20% FWT on the
Government Bonds, no transferof the same shall be allowed to be recorded in the Registry of
Scripless Securities ("ROSS") from 12 October 2011 until the redemption payment date on 18
October 2011. Thus, the bondholders of record appearing on the ROSS as of 18 October 2011,
which include the Petitioners, shall be treated by the BTr asthe beneficial owners of such securities
for the relevant [tax] payments to be imposed thereon." 56
On October 17, 2011, replying to anurgent query from the Bureau of Treasury, the Bureau of
Internal Revenue issued BIR Ruling No. DA 378-2011 57 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 RCBC/CODE NGO but also [on] ‘all subsequent holders of the Bonds.’"58
On October 17, 2011, petitioners filed a petition for certiorari, prohibition, and/or mandamus (with
urgent application for a temporary restraining order and/or writ of preliminary injunction) 59 before
this court.
On October 18, 2011, this court issued a temporary restraining order (TRO) 60 "enjoining the
implementation of BIR Ruling No. 370-2011 against the [PEACe Bonds,] . . . subject to the
condition that the 20% final withholding tax on interest income there from shall be withheld by the
petitioner banks and placed in escrow pending resolution of [the] petition." 61
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
Meanwhile, on November 9, 2011, petitioners filed their "Manifestation with Urgent Ex Parte Motion
to Direct Respondents to Comply with the TRO." 64 They alleged that on the same day that the
temporary restraining order was issued, the Bureau of Treasury paid to petitioners and other
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bondholders the amounts representing the face value of the Bonds, net however of the amounts
corresponding to the 20% final withholding tax on interest income, and that the Bureau of Treasury
refused to release the amounts corresponding to the 20% final withholding tax. 65 On November 15,
2011, this court directed respondents to: "(1) SHOW CAUSE why they failed to comply with the
October 18, 2011 resolution; and (2) COMPLY with the Court’s resolution in order that petitioners
may place the corresponding funds in escrow pending resolution of the petition." 66
On the same day, CODE-NGO filed a motion for leave to intervene (and to admit attached petition-
in-intervention with comment on the petitionin-intervention of RCBC and RCBC Capital). 67 The
motion was granted by this court on November 22, 2011.68
On December 1, 2011, public respondents filed their compliance. 69 They explained that: 1) "the
implementation of [BIR Ruling No. 370-2011], which has already been performed on October 18,
2011 with the withholding of the 20% final withholding tax on the face value of the PEACe bonds,
is already fait accompli . . . when the Resolution and TRO were served to and received by
respondents BTr and National Treasurer [on October 19, 2011]"; 70 and 2) the withheld amount has
ipso facto become public funds and cannot be disbursed or released to petitioners without
congressional appropriation.71 Respondents further aver that"[i]nasmuch as the . . . TRO has
already become moot . . . the condition attached to it, i.e., ‘that the 20% final withholding tax on
interest income therefrom shall be withheld by the banks and placed in escrow . . .’has also been
rendered moot[.]"72
On December 6, 2011, this court noted respondents' compliance. 73
On February 22, 2012, respondents filed their consolidated comment 74 on the petitions-in-
intervention filed by RCBC and RCBC Capital and On November 27, 2012, petitioners filed their
"Manifestation with Urgent Reiterative Motion (To Direct Respondents to Comply with the
Temporary Restraining Order)."75
On December 4, 2012, this court: (a) noted petitioners’ manifestation with urgent reiterative
motion (to direct respondents to comply with the temporary restraining order); and (b) required
respondents to comment thereon.76
Respondents’ comment77 was filed on April 15,2013, and petitioners filed their reply 78 on June 5,
2013.
Issues
The main issues to be resolved are:
I. Whether the PEACe Bonds are "deposit substitutes" and thus subject to 20% final
withholding tax under the 1997 National Internal Revenue Code. Related to this question is
the interpretation of the phrase "borrowing from twenty (20) or more individual or corporate
lenders at any one time" under Section 22(Y) of the 1997 National Internal Revenue Code,
particularly on whether the reckoning of the 20 lenders includes trading of the bonds in the
secondary market; and
II. If the PEACe Bonds are considered "deposit substitutes," whether the government or the
Bureau of Internal Revenue is estopped from imposing and/or collecting the 20% final
withholding tax from the face value of these Bonds
a. Will the imposition of the 20% final withholding tax violate the non-impairment
clause of the Constitution?
b. Will it constitute a deprivation of property without due process of law?
c. Will it violate Section 245 of the 1997 National Internal Revenue Code on non-
retroactivity of rulings?
Arguments of petitioners, RCBC and RCBC

Capital, and CODE-NGO
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 Ph₱35 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
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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
Petitioners further argue that their income from the Bonds is a "trading gain," which is exempt
from income tax.88 They insist that "[t]hey are not lenders whose income is considered as ‘interest
income or yield’ subject to the 20% FWT under Section 27 (D)(1) of the [1997 National Internal
Revenue Code]"89 because they "acquired the Government Bonds in the secondary or tertiary
market."90
Even assuming without admitting that the Government Bonds are deposit substitutes, petitioners
argue that the collection of the final tax was barred by prescription. 91 They point out that under
Section 7 of DOF Department Order No. 141-95, 92 the final withholding tax "should have been
withheld at the time of their issuance[.]" 93 Also, under Section 203 of the 1997 National Internal
Revenue Code, "internal revenuetaxes, such as the final tax, [should] be assessed within three (3)
years after the last day prescribed by law for the filing of the return." 94
Moreover, petitioners contend that the retroactive application of the 2011 BIR Ruling without prior
notice to them was in violation of their property rights, 95 their constitutional right to due
process96 as well as Section 246 of the 1997 National Internal Revenue Code on non-retroactivity of
rulings.97 Allegedly, it would also have "an adverse effect of colossal magnitude on the investors,
both localand foreign, the Philippine capital market, and most importantly, the country’s standing
in the international commercial community."98 Petitioners explained that "unless enjoined, the
government’s threatened refusal to pay the full value of the Government Bonds will negatively
impact on the image of the country in terms of protection for property rights (including financial
assets), degree of legal protection for lender’s rights, and strength of investor protection." 99 They
cited the country’s ranking in the World Economic Forum: 75th in the world in its 2011–2012
Global Competitiveness Index, 111th out of 142 countries worldwide and 2nd to the last among
ASEAN countries in terms of Strength of Investor Protection, and 105th worldwide and last among
ASEAN countries in terms of Property Rights Index and Legal Rights Index. 100 It would also
allegedly "send a reverberating message to the whole world that there is no certainty,
predictability, and stability of financial transactions in the capital markets[.]" 101 "[T]he integrity of
Government-issued bonds and notes will be greatly shattered and the credit of the Philippine
Government will suffer"102 if the sudden turnaround of the government will be allowed, 103 and it will
reinforce "investors’ perception that the level of regulatory risk for contracts entered into by the
Philippine Government is high,"104 thus resulting in higher interestrate for government-issued debt
instruments and lowered credit rating.105
Petitioners-intervenors RCBC and RCBC Capital contend that respondent Commissioner of Internal
Revenue "gravely and seriously abused her discretion in the exercise of her rule-making
power"106 when she issued the assailed 2011 BIR Ruling which ruled that "all treasury bonds are
‘deposit substitutes’ regardless of the number of lenders, in clear disregard of the requirement of
twenty (20)or more lenders mandated under the NIRC." 107 They argue that "[b]y her blanket and
arbitrary classification of treasury bonds as deposit substitutes, respondent CIR not only amended
and expanded the NIRC, but effectively imposed a new tax on privately-placed treasury
bonds."108 Petitioners-intervenors RCBC and RCBC Capital further argue that the 2011 BIR Ruling
will cause substantial impairment of their vested rights 109 under the Bonds since the ruling imposes
new conditions by "subjecting the PEACe Bonds to the twenty percent (20%) final withholding tax
notwithstanding the fact that the terms and conditions thereof as previously represented by the
Government, through respondents BTr and BIR, expressly state that it is not subject to final
withholding tax upon their maturity."110 They added that "[t]he exemption from the twenty percent
(20%) final withholding tax [was] the primary inducement and principal consideration for [their]
participat[ion] in the auction and underwriting of the PEACe Bonds." 111
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Like petitioners, petitioners-intervenors RCBC and RCBC Capital also contend that respondent
Commissioner of Internal Revenue violated their rights to due process when she arbitrarily issued
the 2011 BIR Ruling without prior notice and hearing, and the oppressive timing of such ruling
deprived them of the opportunity to challenge the same.112
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
Finally, petitioners-intervenors RCBC and RCBC Capital argue that "the implementation of the
[2011 assailed BIR Ruling and BIR Ruling No. DA 378-2011] will have pernicious effects on the
integrity of existing securities, which is contrary to the State policies of stabilizing the financial
system and of developing capital markets."114
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
Respondents argue that petitioners’ direct resort to this court to challenge the 2011 BIR Ruling
violates the doctrines of exhaustion of administrative remedies and hierarchy ofcourts, resulting in
a lack of cause of action that justifies the dismissal of the petition. 121 According to them, "the
jurisdiction to review the rulings of the [Commissioner of Internal Revenue], after the aggrieved
party exhausted the administrative remedies, pertains to the Court of Tax Appeals." 122 They point
out that "a case similar to the present Petition was [in fact] filed with the CTA on October 13,
2011[,] [docketed as] CTA Case No. 8351 [and] entitled, ‘Rizal Commercial Banking Corporation
and RCBC Capital Corporation vs. Commissioner of Internal Revenue, et al.’" 123
Respondents further take issue on the timeliness of the filing of the petition and petitions-in-
intervention.124 They argue that under the guise of mainly assailing the 2011 BIR Ruling, petitioners
are indirectly attacking the 2004 and 2005 BIR Rulings, of which the attack is legally prohibited,
and the petition insofar as it seeks to nullify the 2004 and 2005 BIR Rulings was filed way out of
time pursuant to Rule 65, Section 4.125
Respondents contend that the discount/interest income derived from the PEACe Bonds is not a
trading gain but interest income subject to income tax. 126 They explain that "[w]ith the payment of
the Ph₱35 Billion proceeds on maturity of the PEACe Bonds, Petitioners receive an amount of
money equivalent to about Ph₱24.8 Billion as payment for interest. Such interest is clearly an
income of the Petitioners considering that the same is a flow of wealth and not merely a return of
capital – the capital initially invested in the Bonds being approximately Ph₱10.2 Billion[.]" 127
Maintaining that the imposition of the 20% final withholding tax on the PEACe Bonds does not
constitute an impairment of the obligations of contract, respondents aver that: "The BTr has no
power to contractually grant a tax exemption in favour of Petitioners thus the 2001 BIR Rulings
cannot be considered a material term of the Bonds"[;] 128 "[t]here has been no change in the laws
governing the taxability of interest income from deposit substitutes and said laws are read into
every contract"[;]129 "[t]he assailed BIR Rulings merely interpret the term "deposit substitute" in
accordance with the letter and spirit of the Tax Code"[;] 130 "[t]he withholding of the 20% FWT does
not result in a default by the Government as the latter performed its obligations to the bondholders
in full"[;]131 and "[i]f there was a breach of contract or a misrepresentation it was between
RCBC/CODE-NGO/RCBC Cap and the succeeding purchasers of the PEACe Bonds."132
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Similarly, respondents counter that the withholding of "[t]he 20% final withholding tax on the
PEACe Bonds does not amount to a deprivation of property without due process of law." 133 Their
imposition of the 20% final withholding tax is not arbitrary because they were only performing a
duty imposed by law;134 "[t]he 2011 BIR Ruling is aninterpretative rule which merely interprets the
meaning of deposit substitutes [and upheld] the earlier construction given to the termby 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
Nonetheless, respondents add that "there is every reason to believe that Petitioners — all major
financial institutions equipped with both internal and external accounting and compliance
departments as wellas access to both internal and external legal counsel; actively involved in
industry organizations such as the Bankers Association of the Philippines and the Capital Market
Development Council; all actively taking part in the regular and special debt issuances of the BTr
and indeed regularly proposing products for issue by BTr — had actual notice of the 2004 and 2005
BIR Rulings."137 Allegedly, "the sudden and drastic drop — including virtually zero trading for
extended periods of six months to almost a year — in the trading volume of the PEACe Bonds after
the release of BIR Ruling No. 007-04 on July 16, 2004 tend to indicate that market participants,
including the Petitioners herein, were aware of the ruling and its consequences for the PEACe
Bonds."138
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
Respondents further argue that a retroactive application of the 2011 BIR Ruling will not
unjustifiably prejudice petitioners.142 "[W]ith or without the 2011 BIR Ruling, Petitioners would be
liable topay a 20% final withholding tax just the same because the PEACe Bonds in their possession
are legally in the nature of deposit substitutes subject to a 20% final withholding tax under the
NIRC."143 Section 7 of DOF Department Order No. 141-95 also provides that incomederived from
Treasury bonds is subject to the 20% final withholding tax. 144 "[W]hile revenue regulations as a
general rule have no retroactive effect, if the revocation is due to the fact that the regulation is
erroneous or contrary to law, such revocation shall have retroactive operation as to affect past
transactions, because a wrong construction of the law cannot give rise to a vested right that can be
invoked by a taxpayer."145
Finally, respondents submit that "there are a number of variables and factors affecting a capital
market."146 "[C]apital market itself is inherently unstable." 147 Thus, "[p]etitioners’ argument that
the 20% final withholding tax . . . will wreak havoc on the financial stability of the country is a
mere supposition that is not a justiciable issue."148
On the prayer for the temporary restraining order, respondents argue that this order "could no
longer be implemented [because] the acts sought to be enjoined are already fait accompli." 149 They
add that "to disburse the funds withheld to the Petitioners at this time would violate Section 29[,]
Article VI of the Constitution prohibiting ‘money being paid out of the Treasury except in pursuance
of an appropriation made by law[.]’" 150 "The remedy of petitioners is to claim a tax refund under
Section 204(c) of the Tax Code should their position be upheld by the Honorable Court." 151
Respondents also argue that "the implementation of the TRO would violate Section 218 of the Tax
Code in relation to Section 11 of Republic Act No. 1125 (as amended by Section 9 of Republic Act
No. 9282) which prohibits courts, except the Court of Tax Appeals, from issuing injunctions to
restrain the collection of any national internal revenue tax imposed by the Tax Code." 152
Summary of arguments
In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC Capital, and CODE-NGO
argue that:
1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997 National Internal
Revenue Code when it declared that all government debt instruments are deposit
substitutes regardless of the 20-lender rule; and
2. The 2011 BIR Ruling cannot be applied retroactively because:
a) It will violate the contract clause;

Page 11 of 27
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● It constitutes a unilateral amendment of a material term (tax exempt status) in the
Bonds, represented by the government as an inducement and important
consideration for the purchase of the Bonds;
b) It constitutes deprivation ofproperty without due process because there was no

prior notice to bondholders and hearing and publication;
c) It violates the rule on non-retroactivity under the 1997 National Internal Revenue
Code;
d) It violates the constitutional provision on supporting activities of non-government

organizations and development of the capital market; and
e) The assessment had already prescribed.
Respondents counter that:
1) Respondent Commissioner of Internal Revenue did not act with grave abuse of discretion in
issuing the challenged 2011 BIR Ruling:
a. The 2011 BIR Ruling, being an interpretative rule, was issued by virtue of the
Commissioner of Internal Revenue’s power to interpret the provisions of the 1997 National
Internal Revenue Code and other tax laws;
b. Commissioner of Internal Revenue merely restates and confirms the interpretations

contained in previously issued BIR Ruling Nos. 007-2004, DA-491-04,and 008-05, which
have already effectively abandoned or revoked the 2001 BIR Rulings;
c. Commissioner of Internal Revenue is not bound by his or her predecessor’s rulings

especially when the latter’s rulings are not in harmony with the law; and
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.
2) Rule 65 can be resorted to only if there is no appeal or any plain, speedy, and adequate remedy
in the ordinary course of law:
a. Petitioners had the basic remedy offiling a claim for refund of the 20% final withholding tax they
allege to have been wrongfully collected; and
b. Non-observance of the doctrine of exhaustion of administrative remedies and of hierarchy of

courts.
COURT’S RULING
Procedural Issues: Non-exhaustion of administrative remedies proper
Under Section 4 of the 1997 National Internal Revenue Code, interpretative rulings are reviewable
by the Secretary of Finance.
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. -The power to
interpret the provisions of this Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the Secretary of Finance. (Emphasis
supplied)
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
Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of administrative

remedies:
[The doctrine of exhaustion of administrative remedies] is a relative one and its flexibility is called
upon by the peculiarity and uniqueness of the factual and circumstantial settings of a case. Hence,
Page 12 of 27
TAX II
it is disregarded (1) when there is a violation of due process, (2) when the issue involved is purely
a legal question,155 (3) when the administrative action is patently illegal amounting to lack or
excess of jurisdiction,(4) when there is estoppel on the part of the administrative agency
concerned,(5) when there is irreparable injury, (6) when the respondent is a department secretary
whose acts as an alter ego of the President bears the implied and assumed approval of the latter,
(7) when to require exhaustion of administrative remedies would be unreasonable, (8) when it
would amount to a nullification of a claim, (9) when the subject matter is a private land in land
case proceedings, (10) when the rule does not provide a plain, speedy and adequate remedy, (11)
when there are circumstances indicating the urgency of judicial intervention. 156 (Emphasis supplied,
citations omitted)
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.
The rule on exhaustion of administrative remedies also finds no application when the exhaustion
will result in an exercise in futility.157
In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR Ruling would be a
futile exercise because it was upon the request of the Secretary of Finance that the 2011 BIR
Ruling was issued by the Bureau of Internal Revenue. It appears that the Secretary of Finance
adopted the Commissioner of Internal Revenue’s opinions as his own. 158 This position was in fact
confirmed in the letter159 dated October 10, 2011 where he ordered the Bureau of Treasury to
withhold the amount corresponding to the 20% final withholding tax on the interest or discounts
allegedly due from the bondholders on the strength of the 2011 BIR Ruling. Doctrine on hierarchy
of courts
We agree with respondents that the jurisdiction to review the rulings of the Commissioner of
Internal Revenue pertains to the Court of Tax Appeals. The questioned BIR Ruling Nos. 370-2011
and DA 378-2011 were issued in connection with the implementation of the 1997 National Internal
Revenue Code on the taxability of the interest income from zero-coupon bonds issued by the
government.
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:
SEC. 7.Jurisdiction.- The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,

refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue or other laws administered by the Bureau of
Internal Revenue;
....
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely affected by a
decision, ruling or inaction of the Commissioner of Internal Revenue, the Commissioner of
Customs, the Secretary of Finance, the Secretary of Trade and Industry or the Secretary of
Agriculture or the Central Board of Assessment Appeals or the Regional Trial Courts may file an
appeal with the CTA within thirty (30) days after the receipt of such decision or rulingor after the
expiration of the period fixed by law for action as referred toin Section 7(a)(2) herein.
....
SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving matters
arising under the National Internal Revenue Code, the Tariff and Customs Code or the Local
Government Code shall be maintained, except as herein provided, until and unless an appeal has
been previously filed with the CTA and disposed of in accordance with the provisions of this Act.
Page 13 of 27
TAX II
In Commissioner of Internal Revenue v. Leal, 161 citing Rodriguez v. Blaquera, this court 162
emphasized the jurisdiction of the Court of Tax Appeals over rulings of the Bureau of Internal
Revenue, thus:
While the Court of Appeals correctly took cognizance of the petition for certiorari, however, let it be
stressed that the jurisdiction to review the rulings of the Commissioner of Internal Revenue
pertains to the Court of Tax Appeals, not to the RTC.
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.. . .
....
Such revenue orders were issued pursuant to petitioner's powers under Section 245 of the Tax
Code, which states:
"SEC. 245. Authority of the Secretary of Finance to promulgate rules and regulations. — The
Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all needful
rules and regulations for the effective enforcement of the provisions of this Code.
The authority of the Secretary of Finance to determine articles similar or analogous to those
subject to a rate of sales tax under certain category enumerated in Section 163 and 165 of this
Code shall be without prejudice to the power of the Commissioner of Internal Revenue to make
rulings or opinions in connection with the implementation of the provisionsof internal revenue laws,
including ruling on the classification of articles of sales and similar purposes." (Emphasis in the
original)
....
The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:
"Plaintiff maintains that this is not an appeal from a ruling of the Collector of Internal Revenue, but
merely an attempt to nullify General Circular No. V-148, which does not adjudicate or settle any
controversy, and that, accordingly, this case is not within the jurisdiction of the Court of Tax
Appeals.
We find no merit in this pretense. General Circular No. V-148 directs the officers charged with the
collection of taxes and license fees to adhere strictly to the interpretation given by the defendant
tothe statutory provisions abovementioned, as set forth in the Circular. The same incorporates,
therefore, a decision of the Collector of Internal Revenue (now Commissioner of Internal Revenue)
on the manner of enforcement of the said statute, the administration of which is entrusted by law
to the Bureau of Internal Revenue. As such, it comes within the purview of Republic Act No. 1125,
Section 7 of which provides that the Court of Tax Appeals ‘shall exercise exclusive appellate
jurisdiction to review by appeal . . . decisions of the Collector of Internal Revenue in . . . matters
arising under the National Internal Revenue Code or other law or part of the law administered by
the Bureau of Internal Revenue.’"163
In exceptional cases, however, this court entertained direct recourse to it when "dictated by public
welfare and the advancement of public policy, or demanded by the broader interest of justice, or
the orders complained of were found to be patent nullities, or the appeal was considered as clearly
an inappropriate remedy."164
In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary,

Department of Interior and Local Government, 165 this court noted that the petition for prohibition
was filed directly before it "in disregard of the rule on hierarchy of courts. However, [this court]
opt[ed] to take primary jurisdiction over the . . . petition and decide the same on its merits in
viewof the significant constitutional issues raised by the parties dealing with the tax treatment of
cooperatives under existing laws and in the interest of speedy justice and prompt disposition of the
matter."166
Here, the nature and importance of the issues raised 167 to the investment and banking industry
with regard to a definitive declaration of whether government debt instruments are deposit
substitutes under existing laws, and the novelty thereof, constitute exceptional and compelling
circumstances to justify resort to this court in the first instance.
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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 isa need for a final ruling from this
court to stabilize the expectations in the financial market.
Finally, non-compliance with the rules on exhaustion of administrative remedies and hierarchy of
courts had been rendered moot by this court’s issuance of the temporary restraining order
enjoining the implementation of the 2011 BIR Ruling. The temporary restraining order effectively
recognized the urgency and necessity of direct resort to this court.
Substantive issues: Tax treatment of deposit substitutes
Under Sections 24(B)(1), 27(D)(1),and 28(A)(7) of the 1997 National Internal Revenue Code, a
final withholdingtax at the rate of 20% is imposed on interest on any currency bank deposit and
yield or any other monetary benefit from deposit substitutes and from trust funds and similar
arrangements. These provisions read:
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 fromany currency bank deposit and yield or
any other monetary benefit from deposit substitutes and from trust funds and similar
arrangements; . . . 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)
SEC. 27. Rates of Income Tax on Domestic Corporations. -
....
(D) Rates of Tax on Certain Passive Incomes. -
(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and
from Trust Funds and Similar Arrangements, and Royalties. - A final tax at the rate of twenty
percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield
or any other monetary benefit from deposit substitutes and from trust funds and similar
arrangements received by domestic corporations, and royalties, derived from sources within the
Philippines: Provided, however, That interest income derived by a domestic corporation 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. (Emphasis
supplied)
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
....
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -
Page 15 of 27
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(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust
Funds and Similar Arrangements and Royalties. - Interest from any currency bank deposit and
yield or any other monetary benefit from deposit substitutes and from trust funds and similar
arrangements and royalties derived from sources within the Philippines shall be subject to a final
income tax at the rate of twenty percent (20%) of such interest: Provided, however, That interest
income derived by a resident foreign corporation 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. (Emphasis supplied)
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:
(y) ‘Deposit substitutes’ shall mean an alternative form of obtaining funds from the public, other
than deposits, through the issuance, endorsement, or acceptance of debt instruments for the
borrower's own account, for the purpose of relending or purchasing of receivables and other
obligations, or financing their own needs or the needs of their agent or dealer.These promissory
notes, repurchase agreements, certificates of assignment or participation and similar instrument
with recourse as may be authorized by the Central Bank of the Philippines, for banks and non-bank
financial intermediaries or by the Securities and Exchange Commission of the Philippines for
commercial, industrial, finance companies and either non-financial companies: Provided, however,
that only debt instruments issued for inter-bank call loans to cover deficiency in reserves against
deposit liabilities including those between or among banks and quasi-banks shall not be considered
as deposit substitute debt instruments. (Emphasis supplied)
Revenue Regulations No. 17-84, issued to implement Presidential Decree No. 1959, adopted
verbatim the same definition and specifically identified the following borrowings as "deposit
substitutes":
SECTION 2. Definitions of Terms. . . .
(h) "Deposit substitutes" shall mean –
....
(a) All interbank borrowings by or among banks and non-bank financial institutions
authorized to engage in quasi-banking functions evidenced by deposit substitutes
instruments, except interbank call loans to cover deficiency in reserves against deposit
liabilities as evidenced by interbank loan advice or repayment transfer tickets.
(b) All borrowings of the national and local government and its instrumentalities including
the Central Bank of the Philippines, evidenced by debt instruments denoted as treasury
bonds, bills, notes, certificates of indebtedness and similar instruments.
(c) All borrowings of banks, non-bank financial intermediaries, finance companies,

investment companies, trust companies, including the trust department of banks and
investment houses, evidenced by deposit substitutes instruments. (Emphasis supplied)
The definition of deposit substitutes was amended under the 1997 National 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. Under Section 22(Y), deposit substitute is defined thus: SEC.
22. Definitions- When used in this Title:
....
(Y) The term ‘deposit substitutes’ shall mean an alternative form of obtaining funds from the
public(the term 'public' means borrowing from twenty (20) or more individual or corporate lenders
at any one time) other than deposits, through the issuance, endorsement, or acceptance of debt
instruments for the borrower’s own account, for the purpose of relending or purchasing of
receivables and other obligations, or financing their own needs or the needs of their agent or
dealer. These instruments may include, but need not be limited to, bankers’ acceptances,
promissory notes, repurchase agreements, including reverse repurchase agreements entered into
by and between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates
of assignment or participation and similar instruments with recourse: Provided, however, That debt
instruments issued for interbank call loans with maturity of not more than five (5) days to cover
Page 16 of 27
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deficiency in reserves against deposit liabilities, including those between or among banks and
quasi-banks, shall not be considered as deposit substitute debt instruments. (Emphasis supplied)
Under the 1997 National Internal Revenue Code, Congress specifically defined "public" to mean
"twenty (20) or more individual or corporate lenders at any one time." Hence, the number of
lenders is determinative of whether a debt instrument should be considered a deposit substitute
and consequently subject to the 20% final withholding tax.
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, insuch 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 long-term funds (with maturities of more than one year). 174
Whether referring to money marketsecurities or capital market securities, transactions occur either
in the primary market or in the secondary market. 175 "Primary markets facilitate the issuance of
new securities. Secondary markets facilitate the trading of existing securities, which allows for a
change in the ownership of the securities." 176 The transactions in primary markets exist between
issuers and investors, while secondary market transactions exist among investors.177
"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 returnfor
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
In semidirect financing, a securities broker or dealer brings surplus and deficit units together,
thereby reducing information costs.184 A Broker185 is "an individual or financial institution who
provides information concerning possible purchases and sales of securities. Either a buyer or a
seller of securities may contact a broker, whose job is simply to bring buyers and sellers
together."186 A dealer187 "also serves as a middleman between buyers and sellers, but the dealer
actually acquires the seller’s securities in the hope of selling them at a later time at a more
favorable price."188 Frequently, "a dealer will split up a large issue of primary securities into smaller
units affordable by . . . buyers . . . and thereby expand the flow of savings into investment." 189 In
semi direct financing, "[t]he ultimate lender still winds up holding the borrower’s securities, and
therefore the lender must be willing to accept the risk, liquidity, and maturity characteristics of the
borrower’s [debt security]. There still must be a fundamental coincidence of wants and needs
between [lenders and borrowers] for semidirect financial transactions to take place." 190
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"The limitations of both direct and semidirect finance stimulated the development of indirect
financial transactions, carried out with the help of financial intermediaries" 191 or financial
institutions, like banks, investment banks, finance companies, insurance companies, and mutual
funds.192 Financial intermediaries accept funds from surplus units and channel the funds to deficit
units.193 "Depository institutions [such as banks] accept deposits from surplus units and provide
credit to deficit units through loans and purchase of [debt] securities." 194 Nondepository
institutions, like mutual funds, issue securities of their own (usually in smaller and affordable
denominations) to surplus units and at the same time purchase debt securities of deficit
units.195 "By pooling the resources of[small savers, a financial intermediary] can service the credit
needs of large firms simultaneously."196
The financial market, therefore, is an agglomeration of financial transactions in securities

performed by market participants that works to transfer the funds from the surplus units (or
investors/lenders) to those who need them (deficit units or borrowers).
Meaning of "at any one time"
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.
For example, where the financial assets involved are government securities 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 Bonds, such as:
1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the primary market;
2. Sale and distribution by GSEDs to various lenders/investors in the secondary market;
3. Subsequent sale or trading by a bondholder to another lender/investor in the secondary

market usually through a broker or dealer; or
4. Sale by a financial intermediary-bondholder of its participation interests in the bonds to

individual or corporate lenders in the secondary market.
When, through any of the foregoing transactions, funds are simultaneously obtained from 20 or
morelenders/investors, there is deemed to be a public borrowing and the bonds at that point intime
are deemed deposit substitutes. Consequently, the seller is required to withhold the 20% final
withholding tax on the imputed interest income from the bonds.
For debt instruments that are not deposit substitutes, regular income tax applies
It must be emphasized, however, that debt instruments that do not qualify as deposit substitutes
under the 1997 National Internal Revenue Code are subject to the regular income tax.
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 definition of gross income isbroad enough to include all passive incomes subject to specific tax
rates or final taxes."197 Hence, interest income from deposit substitutes are necessarily part of
taxable income. "However, since these passive incomes are already subject to different rates and
taxed finally at source, they are no longer included in the computation of gross income, which
determines taxable income."198 "Stated otherwise . . . 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 be paid to the [creditors/lenders] and then remitted by them to the government in
payment of their income tax."199
This court, in Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo, 200 explained the
rationale behind the withholding tax system:
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
Page 18 of 27
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reduction of governmental effort to collect taxes through more complicated means and
remedies.201 (Citations omitted)
"The application of the withholdings system to interest on bank deposits or yield from deposit
substitutes is essentially to maximize and expedite the collection of income taxes by requiring its
payment at the source."202
Hence, when there are 20 or more lenders/investors in a transaction for a specific bond issue, the
seller isrequired to withhold the 20% final income tax on the imputed interest income from the
bonds.
Interest income v. gains from sale or redemption
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.
The term "gain" as used in Section 32(B)(7)(g) does not include interest, which represents
forbearance for the use of money. Gains from sale or exchange or retirement of bonds orother
certificate of indebtedness fall within the general category of "gainsderived from dealings in
property" under Section 32(A)(3), while interest from bonds or other certificate of indebtedness
falls within the category of "interests" under Section 32(A)(4). 204 The use of the term "gains from
sale" in Section 32(B)(7)(g) shows the intent of Congress not toinclude interest as referred under
Sections 24, 25, 27, and 28 in the exemption.205
Hence, the "gains" contemplated in Section 32(B)(7)(g) refers to: (1) gain 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 and the price at which the bonds were purchased by the seller;
and (2) gain realized by the last holder of the bonds when the bonds are redeemed at maturity,
which is the difference between the proceeds from the retirement of the bonds and the price
atwhich such last holder acquired the bonds. For discounted instruments,like the zero-coupon
bonds, the trading gain shall be the excess of the selling price over the book value or accreted
value (original issue price plus accumulated discount from the time of purchase up to the time of
sale) of the instruments.206
The Bureau of Internal Revenue rulings
The Bureau of Internal Revenue’s interpretation as expressed in the three 2001 BIR Rulings is not
consistent with law.207 Its interpretation of "at any one time" to mean at the point of origination
alone is unduly restrictive.
BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying on the 2004 and 2005
BIR Rulings) that "all treasury bonds . . . regardlessof the number of purchasers/lenders at the
time of origination/issuance are considered deposit substitutes." 208 Being the subject of this
petition, it is, thus, declared void because it completely disregarded the 20 or more lender rule
added by Congress in the 1997 National Internal Revenue Code. It also created a distinction for
government debt instruments as against those issued by private corporations when there was none
in the law.
Tax statutes must be reasonably construed as to give effect to the whole act. Their constituent
provisions must be read together, endeavoring to make every part effective, harmonious, and
sensible.209 That construction which will leave every word operative will be favored over one that
leaves some word, clause, or sentence meaningless and insignificant.210
It may be granted that the interpretation of the Commissioner of Internal Revenue in charge of
executing the 1997 National Internal Revenue Code is an authoritative construction ofgreat weight,
but the principle is not absolute and may be overcome by strong reasons to the contrary. If
through a misapprehension of law an officer has issued an erroneous interpretation, the error must
be corrected when the true construction is ascertained.
In Philippine Bank of Communications v. Commissioner of Internal Revenue, 211 this court upheld

the nullification of Revenue Memorandum Circular (RMC) No. 7-85 issued by the Acting
Commissioner of Internal Revenue because it was contrary to the express provision of Section 230
of the 1977 National Internal Revenue Codeand, hence, "[cannot] be given weight for to do so
would, in effect, amend the statute."212 Thus:
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When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive
period of two years to ten years on claims of excess quarterly income tax payments, such circular
created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did
not simply interpret the law; rather it legislated guidelines contrary to the statute passed by
Congress.
It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in
the sense of more specific and less general interpretations of tax laws) which are issued from time
to time by the Commissioner of Internal Revenue. It is widely accepted that the interpretation
placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to great
respect by the courts. Nevertheless, such interpretation is not conclusive and will be ignored if
judicially found to be erroneous. Thus, courts will not countenance administrative issuances that
override, instead of remaining consistent and in harmony with, the law they seek to apply and
implement.213 (Citations omitted)
This court further held that "[a] memorandum-circular of a bureau head could 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 law by the administrative officials and such wrong
interpretation could not place the Government in estoppel to correct or overrule the same." 214 In
Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc., 215 this court nullified
Revenue Memorandum Order (RMO) No. 15-91 and RMC No. 43-91, which imposed a 5% lending
investor's tax on pawnshops.216 It was held that "the [Commissioner] cannot, in the exercise of [its
interpretative] power, issue administrative rulings or circulars not consistent with the law sought to
be applied. Indeed, administrative issuances must not override, supplant or modify the law, but
must remain consistent with the law they intend to carry out. Only Congress can repeal or amend
the law."217
In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary, 218 this
court stated that the Commissioner of Internal Revenue is not bound by the ruling of his
predecessors,219 but, to the contrary, the overruling of decisions is inherent in the interpretation of
laws:
[I]n considering a legislative rule a court is free to make three inquiries: (i) whether the rule is
within the delegated authority of the administrative agency; (ii) whether itis reasonable; and (iii)
whether it was issued pursuant to proper procedure. But the court is not free to substitute its
judgment as to the desirability or wisdom of the rule for the legislative body, by its delegation of
administrative judgment, has committed those questions to administrative judgments and not to
judicial judgments. In the case of an interpretative rule, the inquiry is not into the validity but into
the correctness or propriety of the rule. As a matter of power a court, when confronted with an
interpretative rule, is free to (i) 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.
In the case at bar, we find no reason for holding that respondent Commissioner erred in not
considering copra as an "agricultural food product" within the meaning of § 103(b) of the NIRC. As
the Solicitor General contends, "copra per se is not food, that is, it is not intended for human
consumption. Simply stated, nobody eats copra for food." That previous Commissioners considered
it so, is not reason for holding that the present interpretation is wrong. The Commissioner of
Internal Revenue is not bound by the ruling of his predecessors. To the contrary, the overruling of
decisions is inherent in the interpretation of laws.220 (Emphasis supplied, citations omitted)
Tax treatment of income derived from the PEACe Bonds
The transactions executed for the sale of the PEACe Bonds are:
1. The issuance of the 35 billion Bonds by the Bureau of Treasury to RCBC/CODE-NGO at

10.2 billion; and
2. The sale and distribution by RCBC Capital (underwriter) on behalf of CODE-NGO of the
PEACe Bonds to undisclosed investors at ₱11.996 billion.
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,
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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.
Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACe Bonds are
deemed deposit substitutes within the meaning of Section 22(Y) of the 1997 National Internal
Revenue Code and RCBC Capital/CODE-NGO would have been obliged to pay the 20% final
withholding tax on the interest or discount from the PEACe Bonds. Further, the obligation to
withhold the 20% final tax on the corresponding interest from the PEACe Bonds would likewise be
required of any lender/investor had the latter turnedaround and sold said PEACe Bonds, whether in
whole or part, simultaneously to 20 or more lenders or investors.
We note, however, that under Section 24223 of the 1997 National Internal Revenue Code, interest
income received by individuals from longterm deposits or investments with a holding period of not
less than five (5) years is exempt from the final tax.
Thus, should the PEACe Bonds be found to be within the coverage of deposit substitutes, the
proper procedure was for the Bureau of Treasury to pay the face value of the PEACe Bonds to the
bondholders and for the Bureau of Internal Revenue to collect the unpaid final withholding tax
directly from RCBC Capital/CODE-NGO, orany lender or investor if such be the case, as the
withholding agents.
The collection of tax is not barred by prescription
The three (3)-year prescriptive period under Section 203 of the 1997 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) failureto file a return, to be computed
from the time of discovery of the falsity, fraud, or omission. Section 203 states:
SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section
222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed
by law for the filing of the return, and no proceeding in court without assessment for the collection
of such taxes shall be begun after the expiration of such period: Provided, That in a case where a
return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from
the day the return was filed. For purposes of this Section, a return filed before the last day
prescribed by law for the filing thereof shall be considered as filed on such last day. (Emphasis
supplied)
....
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return,
the tax may be assessed, or a proceeding in court for the collection of such tax may be filed
without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or
omission: Provided, That in a fraud assessment which has become final and executory, the fact of
fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof.
Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe Bonds to 20 or more
lenders/investors, the Bureau of Internal Revenue may still collect the unpaid tax from RCBC
Capital/CODE-NGO within 10 years after the discovery of the omission.
In view of the foregoing, there is no need to pass upon the other issues raised by petitioners and
petitioners-intervenors.
Reiterative motion on the temporary restraining order
Respondents’ withholding of the

20% final withholding tax on
October 18, 2011 was justified
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 mail. 225 And, "[p]ersonal service is
complete upon actual delivery [of the order.]" 226 This court’s temporary restraining order was
Page 21 of 27
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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.
Publication of news reports in the print and broadcast media, as well as on the internet, is not a
recognized mode of service of pleadings, court orders, or processes. Moreover, the news
reports227 cited by petitioners were posted minutes before the close of office hours or late in the
evening of October 18, 2011, and they did not givethe exact contents of the temporary restraining
order.
"[O]ne cannot be punished for violating an injunction or an order for an injunction unless it is
shown that suchinjunction or order was served on him personally or that he had notice of the
issuance or making of such injunction or order."228
At any rate, "[i]n case of doubt, a withholding agent may always protect himself or herself by
withholding the tax due"229 and return the amount of the tax withheld should it be finally
determined that the income paid is not subject to withholding. 230 Hence, respondent Bureau of
Treasury was justified in withholding the amount corresponding to the 20% final withholding tax
from the proceeds of the PEACe Bonds, as it received this court’s temporary restraining order only
on October 19, 2011, or the day after this tax had been withheld.
Respondents’ retention of the amounts withheld is a defiance of the temporary

restraining order
Nonetheless, respondents’ continued failure to release to petitioners the amount corresponding to

the 20% final withholding tax in order that it may be placed in escrow as directed by this court
constitutes a defiance of this court’s temporary restraining order.231
The temporary restraining order is not moot. The acts sought to be enjoined 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
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 accomplicannot prosper.
The temporary restraining order enjoins the entire implementation of the 2011 BIR Ruling that
constitutes both the withholding and remittance of the 20% final withholding tax to the Bureau of
Internal Revenue. Even though the Bureau of Treasury had already withheld the 20% final
withholding tax237 when it received the temporary restraining order, it had yet to remit the monies
it withheld to the Bureau of Internal Revenue, a remittance which was due only on November 10,
2011.238 The act enjoined by the temporary restraining order had not yet been fully satisfied and
was still continuing.
Under DOF-DBM Joint Circular No. 1-2000A239 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
ofTax Remittance by government agencies based on its copies of the TRA. 243 Respondents did not
submit any withholding tax return or TRA to provethat the 20% final withholding tax was indeed
remitted by the Bureau of Treasury to the Bureau of Internal Revenue on October 18, 2011.
Respondent Bureau of Treasury’s Journal Entry Voucher No. 11-10-10395 244 dated October 18,
2011 submitted to this court shows:
Account Code Debit Amount Credit Amount

Bonds Payable-L/T, Dom-Zero 442-360 35,000,000,000.00
Coupon T/Bonds
(Peace Bonds) – 10 yr
Sinking Fund-Cash (BSF) 198-001 30,033,792,203.59
Due to BIR 412-002 4,966,207,796.41
To record redemption of 10yr Zero
coupon (Peace Bond) net of the 20% final
Page 22 of 27
TAX II
withholding tax pursuant to BIR Ruling No.

378-2011, value date, October 18, 2011 per
BTr letter authority and BSP Bank
Statements.
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.
We recall the November 15, 2011 resolution issued by this court directing respondents to "show
cause why they failed to comply with the [TRO]; and [to] comply with the [TRO] in order that
petitioners may place the corresponding funds in escrow pending resolution of the petition." 245 The
20% final withholding tax was effectively placed in custodia legiswhen this court ordered the
deposit of the amount in escrow. The Bureau of Treasury could still release the money withheld to
petitioners for the latter to place in escrow pursuant to this court’s directive. There was no legal
obstacle to the release of the 20% final withholding tax to petitioners. Congressional appropriation
is not required for the servicing of public debts in view of the automatic appropriations clause
embodied in Presidential Decree Nos. 1177 and 1967.
Section 31 of Presidential Decree No. 1177 provides:
Section 31. Automatic Appropriations. All expenditures for (a) personnel retirement premiums,
government service insurance, and other similar fixed expenditures, (b) principal and interest on
public debt, (c) national government guarantees of obligations which are drawn upon, are
automatically appropriated: provided, that no obligations shall be incurred or payments made from
funds thus automatically appropriated except as issued in the form of regular budgetary
allotments.
Section 1 of Presidential Decree No. 1967 states:
Section 1. There is hereby appropriated, out of any funds in the National Treasury not otherwise
appropriated, such amounts as may be necessary to effect payments on foreign or domestic loans,
or foreign or domestic loans whereon creditors make a call on the direct and indirect guarantee of
the Republic of the Philippines, obtained by:
a. the Republic of the Philippines the proceeds of which were relent to government-owned
or controlled corporations and/or government financial institutions;
b. government-owned or controlled corporations and/or government financial institutions

the proceeds of which were relent to public or private institutions;
c. government-owned or controlled corporations and/or financial institutions and guaranteed

by the Republic of the Philippines;
d. other public or private institutions and guaranteed by government owned or controlled

corporations and/or government financial institutions.
The amount of ₱35 billion that includes the monies corresponding to 20% final withholding tax is a
lawfuland valid obligation of the Republic under the Government Bonds. Since said obligation
represents a public debt, the release of the monies requires no legislative appropriation.
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:
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 funds provided for the purpose by law, any
interest falling due, or accruing, on any portion of the public debt authorized by law. He shall also
cause to be 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 redemption or for which
redemption has been demanded in accordance with terms prescribed by him prior to date of
issue. . . In the case of interest-bearing obligations, he shall pay not less than their face value; in
the case of obligations issued at a discount he shall pay the face value at maturity; or if redeemed
prior to maturity, such portion of the face value as is prescribed by the terms and conditions under
which such obligations were originally issued. There are hereby appropriated as a continuing
Page 23 of 27
TAX II
appropriation out of any 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. The Secretary of
Finance shall transmit to Congress during the first month of each regular session a detailed
statement of all expenditures made under this section during the calendar year immediately
preceding.
Thus, DOF Department Order No. 141-95, as amended, states that payment for Treasury bills and
bonds shall be made through the National Treasury’s account with the Bangko Sentral ng Pilipinas,
to wit:
Section 38. Demand Deposit Account.– The Treasurer of the Philippines 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. 245, as amended, shall be credited and all payments for
redemption of Treasury Bills and Bonds shall be charged.1âwphi1
Regarding these legislative enactments ordaining an automatic appropriations provision for debt
servicing, this court has held:
Congress . . . deliberates or acts on the budget proposals of the President, 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 inthe 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, butlargely 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 havedelegated 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.247
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.
MARVIC M.V.F. LEONEN

Associate Justice
Footnotes 22
Id.
* On leave. 23
Id. at 474. ADAPS is short for Automated Debt Auction
1
Rollo, pp. 217-230. Processing System as per DOF Department Order 141-95.
2
Id. at 13-83. 24
Id.
3
Id. at 16–17. 25
Id. at 130.
4
Id. at 419–421. 26
Id.
5
Id. at 279. 27
Id.
6
Id. at 419. 28
Id.
7
Id. 29
Id.
8
Id. 30
Id. at 131. The memo states:
9
Id. at 423–439. Below is the formula in determining the purchase price and
10
Id. at 440–451. settlement amount of the ₱30B ZeroCoupon Bond to be auctioned
11
Id. at 452–461. on October 16, 2001. Please be advised that this is only applicable
12
Id. at 462–468. to the zeroes that are not subject to the 20% final withholding due
13
Id. at 281. to the 19 buyer/lender limit.
14
Frank J. Fabozzi with Steven V. Mann, THE HANDBOOK OF FIXED 1. SA = PP * FV
INCOME SECURITIES 310-311 (7th ed., 2005). 2. PP = 1/[1 + i/m]
15
Id. n
16
Id. n = (MP * m) – E/x
17
Rollo, pp. 133–137. x = 360/m
18
Id. at 136. E = Settlement Date – Original Issue Date
19
Id. at 138–140. (Y2 – Y1) 360 + (M2 – M1) 30 + (D2 – D1)
20
Id. at 141–143. Where:
21
Id. at 473–474. Y2 M2 D2 = Settlement Date/Value Date
Page 24 of 27
TAX II
Y1 M1 D1 = Original Issue Date on crucial aspects of the PEACe Bond float that should have been
Note: factored into their bids.
a) Based on 30/360 days count, compounded semi-annually No mention at all was made of Insurance Commission eligibility,
b) If D1 [=]– 31 change it to 30 or that winning bidders could apply to Insurance Commission for
c) Up to at least 10 decimal places eligibility.
Where: Based on this information, we surmise that the GSEDs had far less
SA = Settlement Amount →Cash Out time than CODE-NGO/RCBC to look for investors, price the bonds
PP = Purchase Price accordingly and submit a winning bid. On the other hand, because
FV = Face Value CODE-NGO and RCBC had worked on this flotation since the
i = Yield to Maturity beginning and knew all the details surrounding the auction before
x = days in the present compounding period it was announced to the bidders, they were extremely prepared to
m = no. of conversion per year bid appropriately. They also had a seven-month headstart over
(1 = annual, 2 = semi-annual, 4 = quarterly) their rival bidders, to mobilize the Ph₱10 billion of resources —
MP = Maturity Period (or tenor) in years whose nature has yet to be determined — needed to snag the
E = Bond Lapsed Days entire auction. Between a bank that had seven months to
31
Id. accumulate several billions of pesos and others that had only a
32
Id. at 132. week’s notice — the cost of capital of the latter would be
33
Id. significantly much higher. This cost of quickly liquefying assets
34
Id. contributed to the costs of and the consequent weaker ability of
35
Id. at 292. the other banks to bid aggressively even if they intended to.
36
Id. at 494. ....
37
Id. at 292. If the auction were a ‘level playing field’ where GSEDs have the
38
Id. same competencies and access to the same information, the
39
Id. at 496–497. See Milo Tanchuling, No peace in PEACE bonds, chances of RCBC winning all its four bids is 24 in 3,575,880
INQUIRER, October 22, 2011 (0.0007 percent). Despite such odds RCBC won all its four bids.
<http://opinion.inquirer.net/15839/no-peace-in-peace- This means that RCBC operated on either a tremendous
bonds#ixzz3O1mBfUD8> (visited January 6, 2015): "Financial advantage, or on a dire need far greater than its competitors, or
analysts said the PEACe bonds hold the record for having the both."
widest differential between the highest bid and the lowest bid. 40
Rollo, p. 292.
This is an indication of an information asymmetry in the market. 41
Id.
When the latter exists during an auction, the auction must be 42
Id. at 27.
declared a failure."; 43
Id. at 27 and 497.
See also David Grimes, Revisiting the Peace Bonds, October 7, 44
Id. at 1060–1074.
2011 <http://systemisbroken.blogspot. com/2011/10/revisiting- 45
Id. at 1060.
peace-bonds.html> (visited January 6, 2015): "The bid differential 46
Id. at 1066. Section 5 of the underwriting agreement provides
of 5.752% between the top winning bid and the bottom losing bid that the "underwriting fee and selling commission [shall be] in
stands out as one of the highest ever in the history of 10 year such amount as may be agreed upon between CODE NGO and
Philippine Treasury Bond auctions (65 auctions since 1998 to [RCBC Capital] but not to exceed two percent (2%) of the total
2011). No other auction prior to the PEACe Bond auction on issue price of the total Bonds sold[.]"
October 16, 2001 or after the PEACe Bond auction has ever come 47
Id. at 1062.
close. 48
Id. at 1069.
In fact, the high low differential in auctions of 10 year Philippine 49
Id. at 28.
Treasury Bonds from 1998 to 2001 (prior to the PEACe Bond 50
Id.
auction on October 16, 2001) was a marginal 0.422%. In other 51
Id.
words, the PEACe Bonds differential was over ten times the 52
Id. at 577–583.
historical average. . . . 53
Id. at 611–613.
.... 54
Id. at 614–619.
The Bureau of Treasury has held no less than 8 auctions of zero- 55
Id. at 124–125.
coupon bonds since the PEACe Bond offering in 2001. . . . The bid 56
Id. at 29–30.
differentials for these subsequent zero-coupon bond auctions from 57
Id. at 634–637.
2004 to 2006 averaged 0.601% and ranged from as low as 58
Id. at 637.
0.250% to as high as 1.480%. 59
Id. at 13–83.
.... 60
Id. at 235–237.
[B]ased on the documents furnished by CODE-NGO, the GSEDs 61
Id. at 236.
knew: 62
Id. at 950–1042.
1. Only one week in advance that the auction of the zero-coupon 63
Id. at 1164–1166.
bond issue was pushing through; and 64
Id. at 1094–1109.
2. Only one day before the auction date, the issue's terms, 65
Id. at 1097–1098.
conditions, and eligibilities that would define its market ability, 66
Id. at 1164.
price, and target market, as well as the bidding procedure to be 67
Id. at 1176–1240.
used. 68
Id. at 1306–1307.
In short, the GSEDs had only one day to understand this very new 69
Id. at 1315–1333.
and innovative financial instrument. They had only one day to test 70
Id. at 1319.
its marketability with potential buyers who have the means to 71
Id. at 1327–1328.
place a minimum bid of at least PHP 500.0 million face value or 72
Id. at 1330.
PHP 150.0 million cash value. 73
Id. at 1346–1347.
They had only one day to price it and submit a winning bid. 74
Id. at 1712–1767.
.... 75
Id. at 1938–1962.
On the other hand, CODE-NGO and RCBC, because they had been 76
Id. at 1965.
working on this flotation since March 2001, knew all the details 77
Id. at 1995–2007.
surrounding the auction even before it was announced to the 78
Id. at 2044–2058.
other bidders. They were extremely prepared and fully armed 79
Id. at 50.
information-wise. No wonder that CODENGO/RCBC won the entire 80
Id.
auction." 81
Id.
See also Freedom from Debt Coalition, Annex 1: Anatomy of the 82
Id. at 45.
PEACe Bonds controversy, January 30, 2002 <http://www.fil- 83
Id.
globalfellows.org/anatomybonds.html> (visited January 6, 84
Id. at 46–47.
2015):"Information Gaps Treasurer Edeza made sure to brief 85
Id. at 47.
members of the Investment House Association of the Philippines 86
Id. at 53.
about the bond issue, at one of their regular meetings several 87
Id. at 54.
weeks before the auction. Nevertheless we observe gaps in the 88
Id. at 43.
official notices of the government regarding this flotation and the 89
Id.
auction. 90
Id.
For one, even though this was a maiden issue of a zero-coupon 91
Id. at 49.
bond of the Republic of the Philippines, neither a prospectus nor a 92
Revised Rules and Regulations for the Issuance,Placement,
tombstone was prepared and issued. . . . Sale, Service and Redemption of the Treasury Bills and Bonds
The first written notice of the Treasury to the GSEDs was dated 09 Under R.A. No. 245, as amended (2004).
October 2001, a week before the auction.1âwphi1 This memo 93
Id. at 48.
made no mention of secondary reserve eligibility. It said only that 94
Id. at 49.
the bond issue was limited to the 19-lender rule and therefore 95
Id. at 54.
was exempted from the 20 percent withholding tax. . . . 96
Id. at 58.
The secondary reserve eligibility was finally mentioned in the 97
Id. at 54–55.
Treasury Notice that was released on 15 October 2001, one day 98
Id. at 55.
before the auction. 99
Id. at 63.
On the day of the auction the Treasury gave further clarification 100
Id. at 64–65 and 185–210.
on the tax exemption and secondary reserve eligibility features of 101
Id. at 66.
the PEACe Bonds. 102
Id. at 67.
We do not know what time this memo was released to the 103
Id.
dealers, considering that the cutoff time for submitting bids was 104
Id. at 69.
12 noon. But this memo is also an indication that until the day of 105
Id.
the auction itself, RCBC’s rival bidders needed further clarification 106
Id. at 1004.
107
Id.
Page 25 of 27
TAX II
108
Id. at 1005. 173
Id. at 4.
109
Id. at 1020. 174
Id.
110
Id. at 1013. 175
Id.
111
Id. at 1014. 176
Id.
112
Id. at 1015–1019. 177
Id.
113
Id. at 1032–1033. 178
Peter S. Rose, MONEY AND CAPITAL MARKETS33 (1983).
114
Id. at 1033. 179
Id.
115
Id. at 1212. 180
Id.
116
Id. at 1215. 181
Id. at 34.
117
Id. at 1218. 182
Id.
118
Id. at 1222. 183
Id.
119
Id. at 1235. 184
Id. at 35.
120
Id. at 1235–1236. 185
SECURITIES CODE, sec. 3.3 defines a "Broker" as "a person
121
Id. at 315–331. engaged in the business of buying and selling securities for the
122
Id. at 328. account of others."
123
Id. at 331. The case docketed as CTA Case No. 8351 was 186
deemed withdrawn based on the ruling of the Court of Tax 187
SECURITIES CODE, sec. 3.4 defines a "Dealer" as "any person
Appeals in the resolution dated October 28, 2011 and which who buys and sells securities for his or her own account in the
became final and executory on December 8, 2011. The RCBC and ordinary course of business."
RCBC Capital filed the notice of withdrawal of the petition. 188
124
Id. at 331–333 and 1716. 189
Id.
125
Id. at 332–333. 190
Id.
126
Id. at 333–336. 191
Id. at 36.
127
Id. at 339. 192
Id.
128
Id. at 342. 193
Id.
129
Id. at 344. 194
Jeff Madura, FINANCIAL INSTITUTIONS AND MARKETS14 (9th
130
Id. at 346. ed.).
131
Id. at 350. 195
Id. at 15.
132
Id. at 351. 196
Peter S. Rose, MONEY AND CAPITAL MARKETS36–37 (1983).
133
Id. at 354. 197
Commissioner of Internal Revenue v. Philippine Airlines, Inc.,
134
Id. at 357. 535 Phil. 95, 106 (2006) [Per C.J. Panganiban, First Division].
135
Id. at 362. 198
Id.
136
Id. at 370. 199
Commissioner of Internal Revenue v. Solidbank Corp., 462 Phil.
137
Id. 96, 107 (2003) [Per J. Panganiban, First Division].
138
Id. 200
Chamber of Real Estate and Builders’ Associations, Inc. v.
139
Id. at 360. Romulo, G.R. No. 160756, March 9, 2010, 614 SCRA 605 [Per J.
140
Id. at 362. Corona, En Banc].
141
Id. at 366. 201
Id. at 632–633.
142
Id. at 383. 202
Commissioner of Internal Revenue v. Court of Appeals, G.R. No.
143
Id. at 384. 95022, March 23, 1992, 207 SCRA 487, 496 [Per J. Melencio-
144
Id. at 392. Herrera, En Banc].
145
Id. at 384–385. 203
Sec. 32. Gross Income. -
146
Id. at 393. ....
147
Id. (B) Exclusions from Gross Income. - The following items shall not
148
Id. at 392. be included in gross income and shall be exempt from taxation
149
Id. at 394. under this title:
150
Id. at 396. ....
151
Id. at 396–397. (7) Miscellaneous Items. -
152
Id. at 397. ....
153
Militante v. Court of Appeals, 386 Phil. 522, 538 (2000) [Per J. (g) Gains from the Sale of Bonds, Debentures or other Certificate
Puno, En Banc], cited in Gorospe v. Vinzons-Chato, G.R. No. of Indebtedness. - Gains realized from the sale or exchange or
132228, January 21, 2003 <http://nlpdl.nlp.gov.ph:9000/ retirement of bonds, debentures or other certificate of
rpc/cat/finders/SC02/2003jan/132228.htm> [En Banc]. indebtedness with a maturity of more than five (5) years.
154
Asia International Auctioneers,Inc. v. Hon. Parayno, Jr.,565 Phil. 204
The Court of Tax Appeals, beginning in the case of Nippon Life
255, 270 (2007) [Per C.J. Puno, First Division]; Laguna CATV Insurance Company Philippines, Inc. v. Commissioner of Internal
Network, Inc. v. Hon. Maraan, 440 Phil. 734, 741 (2002) [Per J. Revenue, C.T.A. Case No. 6142, February 4, 2002 (which was
Sandoval-Gutierrez, Third Division]. affirmed by the Court of Appeals in CA-G.R. SP No. 69224,
155
Dueñas v. Santos Subdivision Homeowners Association, G.R. November 15, 2002), has consistently ruled that only the gain
No. 149417, June 4, 2004, 431 SCRA 76, 84–85 [Per J. from sale (as distinguished from interest) of bonds, debentures, or
Quisumbing,Second Division]; Republic of the Philippines v. Lacap, other certificates of indebtedness with maturity of more than five
546 Phil. 87, 97 (2007) [Per J. Austria-Martinez, Third Division]; (5) years is exempt from income tax. This ruling was reiterated in
Cebu Oxygen and Acetylene Co., Inc. (COACO) v. Secretary Drilon, Malayan Reinsurance Corp. (formerly Eastern General
257 Phil. 23, 29 (1989) [Per J. Gancayco, En Banc]. Reinsurance Corp.) v. Commissioner of Internal Revenue, C.T.A.
156
Paat v. Court of Appeals, 334 Phil. 146, 153 (1997) [Per J. Case No. 6252, July 24, 2002; Malayan Zurich Insurance Co., Inc.
Torres, Jr., Second Division]. v. Commissioner of Internal Revenue, C.T.A. Case No. 6251,
157
Castro v. Sec. Gloria, 415 Phil. 645, 652 (2001) [Per J. September 30, 2002; First Nationwide Assurance Corp. v.
Sandoval-Gutierrez, Third Division]. Commissioner of Internal Revenue, C.T.A. Case No. 6253, October
158
DOF News Correspondent, PEACe Bonds Subject to 20% Final 3, 2002; Rizal Commercial Banking Corp. v. Commissioner of
Withholding Tax, October 7, 2011 <http://www.dof.gov.ph/? Internal Revenue, C.T.A. Case No. 6228, December 4, 2002;
p=3199> (visited January 27, 2015): "Sought for comment, Malayan Insurance Co., Inc. v. Commissioner of Internal Revenue,
Finance Secretary Cesar V. Purisima stated that the recent BIR C.T.A. Case No. 6243, December 16, 2002; Tokio Marine Malayan
Ruling merely confirms that existing rulings on the tax treatment Insurance Company, Inc. (formerly Pan Malayan Insurance Corp.)
of Treasury Bills and Treasury Bonds apply to the PEACe Bonds v. Commissioner of Internal Revenue, C.T.A. Case No. 6254,
and provides appropriate legal basis for the Treasury to withhold January 13, 2003; RCBC Savings Bank, Inc. v. Commissioner of
the tax." Internal Revenue, C.T.A. Case No. 6341, May 5, 2003; Nippon Life
159
Rollo, p. 1114. Insurance Company of the Philippines, Inc. v. Commissioner of
160
An Act Expanding the Jurisdiction of the Court ofTax Appeals Internal Revenue, C.T.A. No. 6323, July 24, 2003; Nippon Life
(CTA), Elevating its Rank to the Level of a Collegiate Court with Insurance Company of the Philippines, Inc. v. Commissioner of
Special Jurisdiction and Enlarging its Membership, Amending for Internal Revenue, C.T.A. Case No. 6289, September 22, 2003;
the Purpose Certain Sections of Republic Act No. 1125, As Nippon Life Insurance Company of the Philippines, Inc.
Amended, Otherwise Known as The Law Creating the Court of Tax v.Commissioner of Internal Revenue, C.T.A. Case No. 6348,
Appeals, and for Other Purposes (2004). September 12, 2003; Tokio Marine Malayan Insurance Company,
161
440 Phil. 477 (2002) [Per Sandoval-Gutierrez, Third Division], Inc. (formerly Pan Malayan Insurance Corp.) v. Commissioner of
cited in Asia International Auctioneers, Inc. v. Hon. Parayno, Internal Revenue, C.T.A. Case No. 6472, December 1, 2003; First
Jr.,565 Phil. 255, 268–269 (2007) [Per C.J. Puno, First Division]. Nationwide Assurance Corp. v. Commissioner of Internal Revenue,
162
109 Phil. 598 (1960) [Per J. Concepcion, En Banc]. C.T.A. Case No. 6473, December 22, 2003.
163
Commissioner of Internal Revenue v. Leal, 440 Phil. 477, 485– 205
See Malayan Zurich Insurance Co., Inc. v. Comm.,CA-G.R. SP
487 (2002) [Per J. Sandoval-Gutierrez, Third Division]. No. 77070, March 28, 2005.
164
Congressman Chong, et al. v. Hon. Dela Cruz, et al., 610 Phil. 206
See BIR Ruling No. 026-02 (2002).
725, 728 (2009) [Per J. Nachura, Third Division]. 207
See Fort Bonifacio Dev’t Corp. v.Commissioner of Internal
165
451 Phil. 683 (2003) [Per J. Puno, En Banc]. Revenue, 617 Phil. 358, 369 (2009) [Per J. Leonardo-De Castro, En
166
Id. at 689. Banc]; Executive Secretary v. Southwing Heavy Industries, Inc.,
167
See John Hay Peoples Alternative Coalition v. Lim, 460 Phil. 518 Phil. 103, 129 (2006) [Per J. Ynares-Santiago, En Banc];
530, 542–543 (2003) [Per J. Carpio Morales, En Banc]. Philippine Bank of Communications v. Commissioner of Internal
168
Providing Fiscal Incentives by Amending Certain Provisions of Revenue, 361 Phil. 916, 930 (1999) [Per J. Quisumbing, Second
the National Internal Revenue Code, and for Other Purposes Division].
(1980). 208
Rollo, p. 225.
169
Rollo, p. 47. 209
Fort Bonifacio Dev’t Corp. v. Commissioner of Internal
170
Id. at 346. Revenue, 617 Phil. 358, 366–367 (2009) [Per J. Leonardo-De
171
Id. at 346–347. Castro, En Banc].
172
Jeff Madura, FINANCIAL INSTITUTIONS AND MARKETS3–4 (9th
ed.).
Page 26 of 27
TAX II
210
Philippine Health Care Providers, Inc. v. Commissioner of 239
Amendments to Joint Circular No. 1-2000 dated January 3, 2000
Internal Revenue, 616 Phil. 387, 401–402 (2009) [Per J. Corona, Re: Guidelines in the Remittance of All Taxes Withheld by National
Special First Division]. Government Agencies (NGAs) to the Bureauof Internal Revenue
211
361 Phil. 916 (1999) [Per J. Quisumbing, Second Division]. (BIR).
212
Id. at 930. 240
DOF-DBM Joint Circular 1-2000A, sec. 3.5.3.
213
Id. at 928–929. 241
214
Id. at 931. 242
215
453 Phil. 1043 (2003) [Per C.J. Davide, Jr., First Division]. 243
216
Id. at 1059. 244
Rollo, p. 2008.
217
Id. at 1052. 245
Id. at 1164.
218
G.R. No. 108524, November 10, 1994, 238 SCRA 63 [Per J. 246
Spouses Constantino, Jr. v. Cuisia, 509 Phil. 486, 513–514 [Per
Mendoza, Second Division]. J. Tinga, En Banc].
219
BPI Family Bank v. Court of Appeals, G.R. No. 117319, July 19, 247
Kibad v. Commission on Elections, 134 Phil. 846, 849-850
2006, resolution. (1968) [Per J. Fernando, En Banc]; Commissioner of Immigration v.
220
Misamis Oriental Association of Coco Traders,Inc. v. Cloribel, 127 Phil. 716 (1967) [Per Curiam, En Banc].
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.
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 (₱10,000) 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)
224
RULES OF COURT, Rule 13, sec. 4.
225
226
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].
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)
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XI. BDO vs. Republic

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TAX II

XI. BDO vs. Republic

REMEDIAL LAW; CIVIL PROCEDURE; EXHAUSTION OF ADMINISTRATIVE REMEDIES; The remedy

SAME; The financial market, therefore, is an agglomeration of financial transactions in securities

Odel Sarmiento Janda for petitioner Planters Development Bank.

d. SECURE a temporary restraining order (TRO), and subsequently a writ of preliminary

On December 6, 2011, this court noted respondents' compliance. 73

The main issues to be resolved are:

b. Will it constitute a deprivation of property without due process of law?

Arguments of petitioners, RCBC and RCBC

2. The 2011 BIR Ruling cannot be applied retroactively because:

a) It will violate the contract clause;

b) It constitutes deprivation ofproperty without due process because there was no

d) It violates the constitutional provision on supporting activities of non-government

e) The assessment had already prescribed.

Respondents counter that:

b. Commissioner of Internal Revenue merely restates and confirms the interpretations

c. Commissioner of Internal Revenue is not bound by his or her predecessor’s rulings

b. Non-observance of the doctrine of exhaustion of administrative remedies and of hierarchy of

Procedural Issues: Non-exhaustion of administrative remedies proper

Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of administrative

SEC. 7.Jurisdiction.- The CTA shall exercise:

a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,

The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:

In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary,

Substantive issues: Tax treatment of deposit substitutes

SEC. 24. Income Tax Rates.

(B) Rate of Tax on Certain Passive Income.

Four (4) years to less than five (5) years - 5%;

Less than three (3) years - 20%. (Emphasis supplied)

SEC. 27. Rates of Income Tax on Domestic Corporations. -

(D) Rates of Tax on Certain Passive Incomes. -

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -

SECTION 2. Definitions of Terms. . . .

(h) "Deposit substitutes" shall mean –

(c) All borrowings of banks, non-bank financial intermediaries, finance companies,

The financial market, therefore, is an agglomeration of financial transactions in securities

Meaning of "at any one time"

2. Sale and distribution by GSEDs to various lenders/investors in the secondary market;

3. Subsequent sale or trading by a bondholder to another lender/investor in the secondary

4. Sale by a financial intermediary-bondholder of its participation interests in the bonds to

Interest income v. gains from sale or redemption

The Bureau of Internal Revenue rulings

In Philippine Bank of Communications v. Commissioner of Internal Revenue, 211 this court upheld

Tax treatment of income derived from the PEACe Bonds

1. The issuance of the 35 billion Bonds by the Bureau of Treasury to RCBC/CODE-NGO at

The collection of tax is not barred by prescription

SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.

Reiterative motion on the temporary restraining order

Respondents’ withholding of the

Respondents’ retention of the amounts withheld is a defiance of the temporary

Nonetheless, respondents’ continued failure to release to petitioners the amount corresponding to

Account Code Debit Amount Credit Amount

withholding tax pursuant to BIR Ruling No.

Section 31 of Presidential Decree No. 1177 provides:

Section 1 of Presidential Decree No. 1967 states: