BDO v. Republic

 

 

BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION, METROPOLITAN BANK & TRUST COMPANY, PHILIPPINE BANK OF COMMUNICATIONS, PHILIPPINE NATIONAL, PHILIPPINE VETERANS BANK, AND PLANTERS DEVELOPMENT, petitioners 

RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CORPORATION, petitioners-intervenors

CAUCUS OF DEVELOPMENT NGO NETWORKS, petitioner-intervenor v.  REPUBLIC OF THE PHILIPPINES, COMMISSIONER OF INTERNAL REVENUE, BUREAU OF INTERNAL REVENUE, SECRETARY OF FINANCE, DEPARTMENT OF FINANCE, THE NATIONAL TREASURER, AND BUREAU OF TREASURY, respondents

[G.R. No. 198756. August 16, 2016.]

 

FACTS:

In the notice to all Government Securities Eligible Dealers (GSEDs) entitled Public Offering of Treasury Bonds (Public Offering), the Bureau of Treasury announced that "P30.0 [billion] worth of 10-year Zero[-]Coupon Bonds [would] be auctioned on October 16, 2001[.]" It stated that "the issue being limited to 19 lenders and while taxable shall not be subject to the 20% final withholding [tax]." 

On October 12, 2001, the Bureau of Treasury released a memo on the Formula for the Zero-Coupon Bond.

The memo stated in part 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."

One (1) day before the auction date, 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).

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 Regulations No. 020-2001).

At the auction held on October 16, 2001, RCBC participated on behalf of Caucus of Development NGO Networks (CODE-NGO) and won the bid.

 

Likewise, on October 16, 2001, RCBC Capital entered into an underwriting agreement with CODE-NGO, where RCBC Capital was appointed as the Issue Manager and Lead Underwriter for the offering of the PEACe Bonds.

RCBC Capital agreed to underwrite on a firm basis the offering, distribution, and sale of the P35 billion Bonds at the price of P11,995,513,716.51. 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 [the] Bureau of Internal Revenue . . . letter rulings dated 31 May 2001 and 16 August 2001, respectively."

 

RCBC Capital sold and distributed the Government Bonds for an issue price of P11,995,513,716.51.

BDO, et al. purchased the PEACe Bonds on different dates. Barely 11 days before maturity of the PEACe Bonds, the Commissioner of Internal Revenue issued BIR Ruling No. 370-2011 declaring that the PEACe Bonds, being deposit substitutes, were subject to 20% final withholding tax.

Replying to an urgent query from the Bureau of Treasury, the Bureau of Internal Revenue issued BIR Ruling No. DA 378-2011 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.”

Petitioners filed before this Court a Petition for Certiorari, Prohibition, and/or Mandamus (with urgent application for a temporary restraining order and/or writ of preliminary injunction).

SC issued a TRO to enjoin the implementation of BIR Ruling No. 370-2011.

RCBC and RCBC Capital, as well as CODE-NGO separately moved for leave of court to intervene and to admit the Petition-in-Intervention. The Motions were granted by this Court.

On January 13, 2015, this Court promulgated the Decision granting the Petition and the Petitions-in-Intervention. Applying Section 22 (Y) of the National Internal Revenue Code, we held that the number of lenders/investors at every transaction is determinative of whether a debt instrument is a deposit substitute subject to 20% final withholding tax.

When at any transaction, funds are simultaneously obtained from 20 or more lenders/investors, there is deemed to be a public borrowing and the bonds at that point in time are deemed deposit substitutes. Consequently, the seller is required to withhold the 20% final withholding tax on the imputed interest income from the bonds. We further declared void BIR Ruling Nos. 370-2011 and DA 378-2011 for having disregarded the 20-lender rule provided in Section 22 (Y).

Respondents and petitioners-intervenor filed for motions for reconsideration.


ISSUE:

W/N petitioners and petitioner-intervenors, who purchased the PEACe bonds, are liable for the 20% final withholding tax


RULING:

No, the petitioners-intervenor, who purchased the PEACe bonds, are not liable for the 20% final withholding tax.

Applicability of the 20-lender rule

RESPONDENTS

PETITIONERS

The 20-lender rule should not strictly apply to issuances of government debt instruments, which by nature, are borrowings from the public. Applying the rule otherwise leads to an absurd result.

 

Considering that the PEACe Bonds were intended to be freely tradable in the secondary market to 20 or more lenders/investors, respondents contend that they, like other similarly situated government securities — awarded to 19 or less GSEDs in the primary market but freely tradable to 20 or more lenders/investors in the secondary market — should be treated as deposit substitutes subject to the 20% final withholding tax.

Section 22 (Y) of the National Internal Revenue Code applies to all types of securities, including those issued by government.

 

They add that under this provision, it is the actual number of lenders at any one time that is material in determining whether an issuance is to be considered a deposit substitute and not the intended distribution plan of the issuer.

 

The real intent behind the issuance of the PEACe Bonds, as reected by the representations and assurances of government in various issuances and rulings, was to limit the issuance to 19 lenders and below. Hence, they contend that government cannot now take an inconsistent position.


Respondents' proposition
to consider the intended public distribution of government securities — in this case, the PEACe Bonds — in place of an actual head count to be UNTENABLE.

The definition of deposit substitutes in Section 22 (Y) specifically defined "public" to mean "twenty (20) or more individual or corporate lenders at any one time." The qualifying phrase for public introduced by the NIRC shows that a change in the meaning of the provision was intended, and this Court should construe the provision as to give effect to the amendment. Hence, in light of Section 22 (Y), the reckoning of whether there are 20 or more individuals or corporate lenders is crucial in determining the tax treatment of the yield from the debt instrument. In other words, if there are 20 or more lenders, the debt instrument is considered a deposit substitute and subject to 20% final withholding tax.

Definition of deposit substitutes

Under the NIRC, deposit substitutes include not only the issuances and sales of banks and quasi-banks for relending or purchasing receivables and other similar obligations, but also debt instruments issued by commercial, industrial, and other non-financial companies to finance their own needs or the needs of their agents or dealers. This can be deduced from a reading together of Section 22 (X) and (Y):

 

(X) The term 'quasi-banking activities' means borrowing funds from twenty (20) or more personal or corporate lenders at any one time, through the issuance, endorsement, or acceptance of debt instruments of any kind other than deposits for the borrower's own account, or through the issuance of certificates of assignment or similar instruments, with recourse, or of repurchase agreements for purposes of relending or purchasing receivables and other similar obligations: Provided, however, That commercial, industrial and other non-financial companies, which borrow funds through any of these means for the limited purpose of financing their own needs or the needs of their agents or dealers, shall not be considered as performing quasi-banking functions.

 

(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.

 

For internal revenue tax purposes, therefore, even debt instruments issued and sold to 20 or more lenders/investors by commercial or industrial companies to finance their own needs are considered deposit substitutes, taxable as such.

at any one time”

RESPONDENTS

PETITIONERS

It must be given its ordinary meaning, i.e."at any given time" or "during any particular point or moment in the day."

 

They submit that the correct interpretation of Section 22 (Y) does not look at any specific transaction concerning the security; instead, it considers the existing number of lenders/investors of such security at any moment in time, whether in the primary or secondary market. Hence, when during the lifetime of the security, there was any one instance where twenty or more individual or corporate lenders held the security, the borrowing becomes "public" in character and is ipso facto subject to 20% final withholding tax.

It only refers to transactions made in the primary market. According to them, the PEACe Bonds are not deposit substitutes since CODE-NGO, through petitioner-intervenor RCBC, is the sole lender in the primary market, and all subsequent transactions in the secondary market merely pertain to a sale and/or assignment of credit and not borrowings from the public.


The reckoning of the phrase "20 or more lenders" should be at the time when petitioner-intervenor RCBC Capital sold the PEACe bonds to investors.

Should the number of investors to whom petitioner-intervenor RCBC Capital distributed the PEACe bonds, therefore, be found to be 20 or more, the PEACe Bonds are considered deposit substitutes subject to the 20% final withholding tax.

Petitioner-intervenors RCBC/CODENGO and RCBC Capital, as well as the final bondholders who have recourse to government upon maturity, are liable to pay the 20% final withholding tax.

    Application of withholding tax on deposit substitutes

The developments in the NIRC reflect the rationale for the application of the withholding system to yield from deposit substitutes, which is essentially to maximize and expedite the collection of income taxes by requiring its payment at the source, as with the case of the interest on bank deposits. When banks sell deposit substitutes to the public, the final withholding tax is imposed on the interest income because it would be difficult to collect from the public. Thus, the incipient scheme in the final withholding tax is to achieve an effective administration in capturing the interest-income windfall from deposit substitutes as a source of revenue.

It must be emphasized, however, that withholding tax is merely a method of collecting income tax in advance. The perceived tax is collected at the source of income payment to ensure collection. Consequently, those subjected to the final withholding tax are no longer subject to the regular income tax.

As explained by respondents, "the discount is the imputed interest earned on the security, and since payment is made at maturity, there is an accreted interest that causes the price of a zero coupon instrument to accordingly increase with time, all things being constant."

In a 10-year zero-coupon bond, for instance, the discount (or interest) is not earned in the first period, i.e. the value of the instrument does not equal par at the end of the first period. The total discount is earned over the life of the instrument. Nonetheless, the total discount is considered earned on the year of sale based on current value.

In view of this, the successful GSED-bidder, as agent of the Bureau of Treasury, has the primary responsibility to withhold the 20% final withholding tax on the interest valued at present value, when its sale and distribution of the government securities constitutes a deposit substitute transaction.

The 20% final tax is deducted by the buyer from the discount of the bonds and included in the remittance of the purchase price. The final tax withheld by the withholding agent is considered as a "full and final payment of the income tax due from the payee on the said income [and the] payee is not required to le an income tax return for the particular income." Section 10 of Department of Finance Department Order No. 020-10 140 in relation to the National Internal Revenue Code also provides that no other tax shall be collected on subsequent trading of the securities that have been subjected to the final tax.


 PETITIONERS-INTERVENOR ARE NOT LIABLE FOR 20% WITHHOLDING TAX

Petitioners-intervenors RCBC and RCBC Capital contend that they cannot be held liable for the 20% final withholding tax for two (2) reasons.

First, at the time the required withholding should have been made, their obligation was not clear since BIR Ruling Nos. 370-2011 and DA 378-2011 stated that the 20% final withholding tax does not apply to PEACe Bonds.

Second, to punish them under the circumstances (i.e. when they secured the PEACe Bonds from the Bureau of Treasury and sold the Bonds to the lenders/investors, they had no obligation to remit the 20% final withholding tax) would violate due process of law and the constitutional proscription on ex post facto law.

CODE-NGO likewise contends that it merely relied in good faith on the 2001 BIR Rulings confirming that the PEACe Bonds were not subject to the 20% final withholding tax. Therefore, it should not be prejudiced if the BIR Rulings are found to be erroneous and reversed by the Commissioner or this court. CODE-NGO argues that this Court's Decision construing the phrase "at any one time" to determine the phrase "20 or more lenders" to include both the primary and secondary market should be applied prospectively.

We find merit on the claim of petitioners-intervenors RCBC, RCBC Capital, and CODE-NGO for PROSPECTIVE APPLICATION of our Decision.

The phrase "at any one time" is ambiguous in the context of the financial market. Hence, petitioner-intervenor RCBC and the rest of the investors relied on the opinions of the Bureau of Internal Revenue in BIR Ruling Nos. 020-2001, 035-2001 160 dated August 16, 2001, and DA-175-01 161 dated September 29, 2001 to vested their rights in the exemption from the final withholding tax. In sum, these rulings pronounced that 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" to determine the "20 or more lenders" is to be determined at the time of the original issuance. This being the case, the PEACe Bonds were not to be treated as deposit substitutes.

The previous interpretations given to an ambiguous law by the Commissioner of Internal Revenue, who is charged to carry out its provisions, are entitled to great weight, and taxpayers who relied on the same should not be prejudiced in their rights. Hence, this Court's construction should be prospective; otherwise, there will be a violation of due process for failure to accord persons, especially the parties affected by it, fair notice of the special burdens imposed on them.

WHEREFORE, respondents' Motion for Reconsideration and Clarification is DENIED, and petitioners-intervenors RCBC and RCBC Capital Corporation's Motion for Clarification and/or Partial Reconsideration is PARTLY GRANTED.

Respondent Bureau of Treasury is hereby ORDERED to immediately release and pay the bondholders the amount of P4,966,207,796.41, representing the 20% final withholding tax on the PEACe Bonds, with legal interest of 6% per annum from October 19, 2011 until full payment.

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