Banco de Oro vs.

Republic of the Philippines

GR no. 198756; Leonen. J; August 16, 2016

Facts: The Bureau of Treasury in a notice announced the auction of 10- year Zero-Coupon Bonds
denominated as the Poverty Eradication and Alleviation Certificates or the PEACe Bonds. The BoT said
that it shall not be subject to 20% final withholding tax since the issue is limited to 19 buyers/lenders.

At the auction, RCBC participated on behalf of Caucus of Development NGO Networks (CODE-
NGO) and won the bid. Thus, bonds were issued to RCBC, who, as appointed issue manager and lead
underwriter of CODE-NGO, then sold and distributed said government bonds to BDO and other
petitioner banks.

Before maturity of the said bond, BIR issued a ruling whereas that the PEACe Bonds, being
deposit substitutes, were subject to 20% final withholding tax. DOF then directed BoT to withhold 20%
final tax. In a subsequent ruling, BIR clarified that the final withholding tax should be imposed and
withheld not only on RCBC/CODE NGO but also on all subsequent holders of the Bonds.

Banco de Oro and other petitioner banks thus filed a petition for Certiorari, Prohibition and
Mandamus to the SC against the BIR ruling. SC then issued a TRO enjoining the implementation of the
BIR ruling, subject to the condition that 20% Final Withholding be delivered to the banks to be placed in
escrow.

SC, on ruling the Manifestation with Urgent Reiterative, said that the number of
lenders/investors at every transaction determines 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 public borrowing and bonds are deemed deposit
substitutes. Hence, seller is required to withhold 20% FWT on the imputed interest income from the
bonds.

Issues:

(1) Whether such PEACe bonds are subject to 20% Final Withholding Tax.

(2) Whether the interpretation of the SC be applied prospectively and that the BIR is estopped
from imposing the 20% Final Withholding Tax.

Rulings:

(1) Yes. The definition of deposit substitutes specifically defined "public" to mean "twenty (20)
or more individual or corporate lenders at any one time.” The reckoning of whether there are 20 or
more individuals or corporate lenders is crucial in determining the tax treatment. If there are 20 or more
lenders, the debt instrument is considered a deposit substitute and subject to 20% final withholding tax.

The PEACe Bonds were awarded to RCBC/CODE-NGO as the winning bidder in the primary
auction. The reckoning of the phrase "20 or more lenders" should be at the time when RCBC Capital sold
the PEACe bonds to investors. Should the number of investors to whom 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. Thus, RCBC/CODE-NGO 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.

(2) Yes, as previously ruled by BIR that the said PEACe Bond is not subject to Final Withholding
Tax. This previous interpretation given to ambiguous laws by the CIR are entitled to great weight, and
taxpayers who relied on the same should not be prejudiced in their rights. Thus, SC’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.