Facts:

This case involves several major Philippine banks and financial institutions, including 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, together with Rizal Commercial Banking Corporation (RCBC) and RCBC Capital Corporation, and the Caucus of Development NGO Networks (CODE-NGO) as petitioners and petitioners-intervenors. The respondents were the Republic of the Philippines, Commissioner of Internal Revenue (CIR), Bureau of Internal Revenue (BIR), Secretary of Finance, Department of Finance, the National Treasurer, and Bureau of Treasury. The case arose from the October 2001 auction of P30 billion worth of 10-year Zero-Coupon Treasury Bonds (PEACe Bonds), initially limited to 19 lenders, which, according to government-issued memoranda and rulings, were considered not subject to the 20% final withholding tax under th

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Facts:

Background of the Auction and Issuance of PEACe Bonds

• The Bureau of Treasury, in its October 9, 2001 notice, announced a public offering of P30.0 billion worth of 10‐year zero‑coupon bonds with the explicit condition that, due to a cap of 19 buyer/lenders in the primary market, the bonds were not to be subject to a 20% final withholding tax.
• A memo issued on October 12, 2001 explained the formula for computing the purchase price and settlement amount of the bonds and clarified that the formula applied only to those bonds not subject to the 20% tax because of the 19‑lender limit.
• On October 15, 2001, the Auction Guidelines were released, reiterating the 19 buyer/lender limitation and the resultant non‑application of the tax.

The Auction and Subsequent Transactions

• At the auction held on October 16, 2001, Rizal Commercial Banking Corporation (RCBC) participated on behalf of Caucus of Development NGO Networks (CODE‑NGO) and emerged as the winning bidder.
• On October 18, 2001, the Bureau of Treasury issued bonds with a significant discount (P35 billion face value vs. an issue price approximating P10.17 billion), effectively creating a sizable discount component that was later subject to tax controversy.
• RCBC Capital entered an underwriting agreement with CODE‑NGO to manage the distribution, whereby under Section 7(r) of the agreement, CODE‑NGO assured that all incomes derived from the bonds were exempt from taxation based on previous BIR letter rulings.

Tax Withholding Controversy and Administrative Rulings

• On October 7, 2011, the Commissioner of Internal Revenue (BIR) issued a ruling declaring that the government bonds, deemed “deposit substitutes,” were subject to a 20% final withholding tax.
• A subsequent ruling on October 17, 2011 clarified that the withholding was to extend to not only the original holder but also all subsequent holders of the bonds in view of the imputed discount/interest income.
• Petitioners promptly filed a petition and, after a temporary restraining order (TRO) was issued enjoining the implementation of the disputed BIR rulings, petitioners-intervenors and other parties later moved for intervention to clarify and contest the application of the tax.

Procedural History and Subsequent Motions

• A petition for certiorari, prohibition, and/or mandamus was filed on October 17, 2011, with the TRO issued on the following day, stopping the enforcement of the BIR rulings pending litigation.
• Both RCBC/CODE‑NGO and RCBC Capital moved to intervene in the case.
• Respondents (including the BIR, Bureau of Treasury, and others) later filed motions for reconsideration and clarification, prompting an extended review of the administrative and judicial aspects of the controversy by the Supreme Court.

Issue:

Interpretation and Application of the 20‑Lender Rule

• Whether Section 22(Y) of the National Internal Revenue Code should be interpreted to require that an issuance of a government debt instrument be classified as a “deposit substitute” only if, at any one time, twenty or more individual or corporate lenders hold it.
• Whether the determination must be based on the actual head count (rather than the intended market distribution) at the time of the issuance or in subsequent secondary market transactions.

Taxability and Withholding Agent Designation

• Whether the PEACe Bonds, given the representations in the underwriting agreement and previous BIR rulings, should be considered exempt from the 20% final withholding tax.
• Whether the seller in secondary market transactions could or should be designated as the proper withholding agent for the final tax on imputed interest income.

Constitutional and Due Process Considerations

• Whether the imposition of the tax—and the retroactive application of a revised interpretation of “at any one time”—violates the non‑impairment clause of the Constitution or amounts to a deprivation of property without due process.
• Whether reliance on prior BIR letter rulings and the representations by government agencies should shield petitioners from retroactive tax impositions.

Jurisdiction and Procedural Issues

• The proper forum for review of the administrative rulings of the Commissioner of Internal Revenue as dictated by the National Internal Revenue Code.
• Whether the petitioners’ resort to the regular courts was justified given the issues' urgency and the limitations inherent in exhausting all administrative remedies.

Ruling:

• (Subscriber-Only)

Ratio:

• (Subscriber-Only)

Doctrine:

• (Subscriber-Only)