Title
Banco De Oro vs. Republic
Case
G.R. No. 198756
Decision Date
Aug 16, 2016
PEACe Bonds issued in 2001 were initially tax-exempt but later ruled subject to 20% withholding tax, leading to Supreme Court intervention and release of withheld funds with interest.

Case Summary (G.R. No. 198756)

Key Dates

– October 9, 2001: Public Offering notice limiting the October 16 auction to 19 lenders, exempting the bonds from 20% withholding tax.
– October 16–18, 2001: Auction and issuance of P35 billion zero-coupon bonds; primary distribution to RCBC for CODE-NGO; RCBC Capital engages in underwriting and distribution to final investors.
– October 7 and 17, 2011: BIR Ruling Nos. 370-2011 and DA 378-2011 declare PEACe Bonds as “deposit substitutes” taxable at 20%, extending liability to all subsequent holders.
– October 18–November 15, 2011: Supreme Court issues TRO enjoining implementation and orders respondents to place withheld funds in escrow.
– January 13, 2015: En Banc Decision nullifying the BIR rulings, construing the 20-lender rule, and directing release of withheld amounts.
– March–July 2015: Motions for reconsideration and clarification filed by respondents and intervenors.
– August 16, 2016: Resolution denying reconsideration and ordering immediate release of withheld funds with legal interest.

Applicable Law

– 1987 Philippine Constitution (Article VIII, Section 1 – Judicial power, due process, non-impairment of contracts).
– National Internal Revenue Code (NIRC), Sections 22(X), 22(Y) (definitions of quasi-banking activities and deposit substitutes), Section 57 (withholding at source), Section 59 (liability for tax), Sections 204 & 229 (refund and assessment periods).
– Republic Act No. 1125 as amended by RA 9282 (exclusive jurisdiction of the Court of Tax Appeals over BIR rulings).
– Revenue Regulations No. 2-98 (final withholding tax rules).
– DOF Department Orders on government securities issuance and withholding procedures.

Procedural Background

Petitioners and intervenors sought certiorari, prohibition, and/or mandamus relief directly from the Supreme Court to nullify BIR Ruling Nos. 370-2011 and DA 378-2011, asserting they disregarded the statutory “20-lender rule.” The Court granted a TRO, then issued a Decision in January 2015 granting the petition, voiding the BIR rulings, and ordering the Bureau of the Treasury to release the withheld amounts to bondholders. Respondents and intervenors filed separate motions for reconsideration and clarification, raising issues on statutory interpretation, constitutional protections, estoppel, prescription, and the Court’s jurisdiction.

Jurisdictional Clarification

While NIRC Section 4 generally requires administrative appeals to the Secretary of Finance, the Court recognized an exception where (a) the question is purely legal, (b) urgency demands immediate relief due to imminent bond maturity, and (c) appeal to the Secretary of Finance would be futile. The Court reaffirmed that BIR rulings are appealable exclusively to the Court of Tax Appeals, but accepted direct resort in view of the special circumstances, invoking its constitutional duty under Article VIII, Section 1 to settle enforceable rights and remedy grave abuses of discretion.

Definition and Application of the 20-Lender Rule

Section 22(Y) of the NIRC defines “deposit substitutes” as debt instruments “obtaining funds from the public (the term ‘public’ means borrowing from twenty (20) or more individual or corporate lenders at any one time) … for the borrower’s own account.” The Court held that:

  1. “Public” unambiguously requires a head count of actual lenders—20 or more—at the time of each transaction.
  2. Government securities must be evaluated under the same statutory text; the 1987 Constitution’s non-impairment clause does not justify deviation.
  3. The provision is strictly construed against the government; no implied exceptions for intended distributions or confidentiality under the Bank Secrecy Law may override the explicit lender count.

Mechanics of Government Securities Distribution

The Bureau of the Treasury issues securities only to Government Securities Eligible Dealers (GSEDs), particularly primary dealers, which act as the government’s agents to underwrite and distribute newly issued bonds. Underwriting agreements and book-building processes undertaken by RCBC Capital for CODE-NGO constituted the moment when the actual number of final investors was determinative. If RCBC Capital sold the PEACe Bonds to 20 or more investors on issuance date, the transaction fits the “deposit substitute” definition.

Withholding Agent Responsibilities

Under NIRC Section 57 and Revenue Regulations No. 2-98, the borrowing party (payor) is primarily responsible for withholding 20% of interest income on deposit substitutes. Section 59 extends liability to “any person having receipt, custody, control or disposal” of the income, making the GSED and underwriter withholding agents upon distribution to final investors. In zero-coupon bonds, the entire discount is treated as i



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