FACTS: 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 (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 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.

PETITIONER’S ARGUMENT: 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;

● 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.


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.





A.) NO. 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.

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.

B.) YES. 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 agreement and RCBC term sheet reveals that the settlement dates for the sale and distribution by RCBC Capital (as underwriter for CODE-NGO) of the PEACe Bonds to various undisclosed investors at a purchase price of approximately ₱11.996 would fall on the same day, October 18, 2001, when the PEACe Bonds were supposedly issued to CODE-NGO/RCBC. In reality, therefore, the entire ₱10.2 billion borrowing received by the Bureau of Treasury in exchange for the ₱35 billion worth of PEACe Bonds was sourced directly from the undisclosed number of investors to whom RCBC Capital/CODE-NGO distributed the PEACe Bonds — all at the time of origination or issuance. At this point, however, we do not know as to how many investors the PEACe Bonds were sold to by RCBC Capital.

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 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.

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