Title
Banco De Oro vs. Republic
Case
G.R. No. 198756
Decision Date
Jan 13, 2015
PEACe Bonds issued in 2001 were retroactively classified as deposit substitutes, subject to 20% withholding tax, upheld by the Supreme Court in 2011.

Case Summary (G.R. No. 118828)

Petition and Relief Sought

Petitioners filed a Rule 65 petition (certiorari, prohibition, and/or mandamus) seeking: (a) annulment of BIR Ruling No. 370‑2011 and related rulings for lack/abuse of jurisdiction and unconstitutionality; (b) prohibition against respondents, especially BTr, from withholding the 20% FWT on maturity payments; (c) command to pay full face value on maturity; and (d) temporary and preliminary injunctive relief to restrain enforcement of the BIR ruling and collection of the 20% FWT.

Key Dates and Procedural Posture

Relevant events: issuance of PEACe Bonds in October 2001; earlier BIR rulings in 2001 (BIR Rulings Nos. 020‑2001, 035‑2001, DA‑175‑01) declaring the bonds not deposit substitutes; subsequent BIR rulings in 2004–2005 altering that interpretation; BIR Ruling No. 370‑2011 issued October 7, 2011; DOF directive to BTr to withhold 20% on maturity (October 2011); TRO issued by the Court on October 18, 2011 with condition that banks withhold and place the 20% in escrow; controversy over service and remittance; final decision applying the 1987 Constitution as basis for constitutional issues.

Applicable Law and Constitutional Basis

The Court analyzed the case under the 1997 National Internal Revenue Code (NIRC) provisions for final withholding tax on interest and deposit substitutes (Sections 22(Y), 24(B)(1), 27(D)(1), 28(A)(7)), relevant revenue regulations and historic implementing issuances, and constitutional protections under the 1987 Constitution (notably the non‑impairment clause and due process). Procedural jurisdictional rules involving the Court of Tax Appeals (CTA) under Republic Act No. 1125, as amended, and rules on exhaustion of administrative remedies were applied.

Factual Background — Product Structure and Purpose

CODE‑NGO, assisted by financial advisors (RCBC, RCBC Capital, CAPEX, SEED), requested DOF approval for issuance by BTr of 10‑year zero‑coupon Treasury Certificates in March–May 2001. Plan was for a special purpose vehicle to acquire the T‑notes, repackage and sell them as PEACe Bonds to fund an NGO endowment (Hanapbuhay Fund). The zero‑coupon feature meant purchase at a deep discount with no periodic coupons; the discount at maturity represents the bondholder’s return.

2001 BIR Rulings and Auction Preparations

In May–September 2001 the BIR issued rulings (020‑2001, 035‑2001, DA‑175‑01) holding PEACe Bonds were not deposit substitutes because issuance was represented to be to a single entity (CODE‑NGO), and the statutory “public” threshold in Section 22(Y) (borrowing from 20 or more lenders at any one time) should be determined at original issuance. The BTr announced auction mechanics limiting primary market purchasers to not more than 19 buyers, memos and auction guidelines reiterated non‑coverage by 20% FWT and discussed reserve eligibility. On October 16–18, 2001 the auction occurred; RCBC was declared winning bidder and BTr issued P35B bonds at 12.75% YTM to RCBC for ~P10.17B, producing ~P24.83B discount. RCBC Capital underwrote and distributed the bonds in the secondary market for approx. P11.996B. Representations in underwriting agreement referenced BIR rulings confirming tax‑exempt status.

Later BIR Rulings, DOF Direction, and Withholding at Maturity

BIR rulings in 2004–2005 interpreted Section 22(Y) to read “at any one time” as meaning during the bond’s entire term (so that subsequent distribution/trading bringing 20+ owners renders instruments deposit substitutes). On October 7, 2011 BIR Ruling No. 370‑2011 concluded PEACe Bonds were deposit substitutes and the P24.3B discount constituted interest subject to 20% FWT; DOF directed BTr to withhold 20% from maturity payments due October 18, 2011. BIR subsequently clarified (DA 378‑2011) that withholding applied to RCBC/CODE‑NGO and all subsequent holders. A PDS memorandum froze transfers so holders of record on maturity would be treated as beneficial owners for tax purposes.

Procedural Responses and TRO

Petitioners sought emergency relief on October 17, 2011; the Court issued a TRO on October 18, 2011 enjoining implementation of BIR Ruling No. 370‑2011 but conditioned that banks withhold the 20% FWT and place the amount in escrow pending resolution. Despite the TRO, BTr withheld the 20% when paying holders on October 18, 2011; service issues arose because the TRO was received by respondents on October 19, 2011, after withholding.

Issues Presented

The Court framed central issues: (1) whether PEACe Bonds are “deposit substitutes” subject to 20% FWT under the NIRC; (2) proper interpretation of “borrowing from twenty (20) or more individual or corporate lenders at any one time,” specifically whether secondary market trading is included; (3) whether government/BIR is estopped from imposing/collecting the tax; and related constitutional claims — impairment of contracts, deprivation of property without due process, and violation of NIRC Section 245 on non‑retroactivity of rulings — plus prescription.

Petitioners’ Contentions

Petitioners maintained the government, as issuer, must pay face value without deduction; sudden imposition of withholding 11 days before maturity after consistent 2001 BIR rulings impaired contractual expectations and violated due process and the non‑impairment clause. They argued PEACe Bonds were not deposit substitutes because issuance was to one lender at origination; they relied on 2001 rulings and alleged detrimental reliance. Petitioners also contended the discount was a trading gain exempt under Section 32(B)(7)(g) where acquired in secondary market, and that collection was time‑barred (prescribed) or barred by non‑retroactivity.

Respondents’ Contentions

Respondents argued non‑compliance with exhaustion of administrative remedies and improper first‑instance resort to the Court, asserting the CTA had exclusive appellate jurisdiction over BIR rulings. Substantively, they treated the discount as interest (not trading gain) and interpreted “at any one time” to include the bond’s entire term such that secondary market distribution resulting in 20+ lenders renders instruments deposit substitutes. Respondents maintained the 2011 Ruling merely interpreted the law consistent with prior 2004–2005 rulings and that retroactive correction of an erroneous administrative construction does not create vested rights. They further argued withholding agents acted properly and the proper remedy would be tax refund claims.

Court’s Procedural Analysis — Exhaustion and Hierarchy

The Court acknowledged the rule that interpretations by the Commissioner are reviewable to the Secretary of Finance and then the CTA, but held exhaustion may be excused in exceptional circumstances. Two exceptions applied: the issue was a pure legal question (interpretation of “20 or more lenders at any one time” and constitutional claims), and judicial intervention was urgent given the imminent maturity; appeal to Secretary of Finance would be futile because DOF requested the ruling. Although the CTA normally has exclusive appellate jurisdiction, the Court accepted original resort due to the exceptional, novel, nationwide financial‑market significance and the need for definitive stabilization of expectations, and because a TRO had been issued.

Court’s Substantive Analysis — Statutory Text and Financial Markets

The Court examined the NIRC definition of deposit substitutes (Section 22(Y)) where “public” was specified by Congress as “borrowing from twenty (20) or more individual or corporate lenders at any one time.” The Court interpreted “at any one time” in light of how financial markets operate: primary and secondary markets, and transactions effected by direct, semi‑direct, and indirect finance (including brokers and dealers). From the financial‑market perspective “at any one time” encompasses each transaction at which funds are obtained; thus multiple contemporaneous purchases/distributions in the primary offering or simultaneous secondary market sales that result in 20+ lenders constitute borrowing from the public and render an instrument a deposit substitute at that moment.

Interest Income v. Trading Gains

The Court clarified that “interest” forbearance income and “gains” on sale are distinct under the NIRC. Section 32(B)(7)(g)’s exemption for gains from sale or redemption of long‑term securities excludes interest. For zero‑coupon bonds, trading gain is the excess of selling price over accreted/book value; interest or discount is the return on forbearance and taxable under interest provisions. Thus treating the discount as interest for withholding purposes is consistent with statutory categories when the instrument qualifies as a deposit substitute.

Validity of BIR Rulings and Administrative Interpretation

The Court found the earlier 2001 BIR rulings (which measured the 20‑lender test solely at origination to exclude the PEACe Bonds) inconsistent with the NIRC and therefore invalid. It held BIR Ruling No. 370‑2011’s conclusion that all treasury bonds are deposit substitutes regardless of lender count was also erroneous insofar as it ignored the 20‑lender statutory threshold and created a special rule for government debt not provided by statute; the 2011 ruling was void to the extent it ignored the 20‑lender requirement. The Court reaffirmed that administrative rulings are accorded respect but are not conclusive where clearly inconsistent with statute; administrative overreach that effectively amends statute is invalid.

Application to PEACe Bonds and Withholding Agents’ Duty

Factually, the Court examined underwriting and settlement mechanics and concluded that although BTr issued the bonds to RCBC/ CODE‑NGO at origination, RCBC Capital’s distribution to investors had settlement dates that coincided with issuance such that the borrowing may have been sourced from the undisclosed number of investors at origination. Thus if there was simultaneous distribution to 20 or more investors, the bonds were deposit substitutes and the withhol

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