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 on October
16, 2001, which the BTr states shall not be subject to 20% final withholding tax since the issue is
limited to 19 buyers/lenders.

At the auction, Rizal Commercial Banking Corporation (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 petitioner-banks.

On October 7, 2011, barely 11 days before maturity of the PEACe Bonds, the BIR issued the
following:

BIR Ruling No. 370- 201119 declaring that the PEACe Bonds, being deposit substitutes, were subject
to 20% final withholding tax . Under this, DOF directed BTr to withhold 20% final tax from the face
value of the PEACe Bonds. BIR Ruling No. DA 378-201157 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, et al. thus filed a petition for Certiorari, Prohibition and Mandamus under Rule 65 to
the Supreme Court contending the assailed 2011 BIR Ruling, with urgent application of TRO and/or
writ of Preliminary Injuction.

SC then issued a TRO enjoining the implementation of the BIR ruling, subject to the condition that
20% FWT be delivered to the banks to be placed in escrow. SC Decision promulgated January 13,
2015, SC granted petition and ruled that the number of lenders/ investors at every transaction
determines whether a debt instrument is a deposit substitute subject to 20% FWT. 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.

The two BIR Rulings is void for disregarding the 20-lender rule provided in Section 22 (Y) of the Tax
Code. BTr reprimanded for its continued retention of the amount corresponding to 20% FWT.
Separate Motions for Reconsideration and clarification were filed both by BDO, et al and the
Republic, et al.

ISSUE:

Assuming the PEACe Bonds are considered “deposit substitutes,” whether government or the Bureau
of Internal Revenue is estopped from imposing and/or collecting the 20% final withholding tax from
the face value of these Bonds?

HELD:

YES. The 20-lender rule may apply to PEACe Bonds, depending on the number of lenders “at any
one time”

Under the 1997 National Internal Revenue Code, Congress specifically defined “public” to mean
“twenty (20) or more individual or corporate lenders at any one time.” Hence, the number of lenders is
determinative of whether a debt instrument should be considered a deposit substitute and
consequently subject to the 20% final withholding tax.

20-lender rule

Petitioners contend that “there [is]only one (1) lender (i.e. RCBC) to whom the BTr issued the
Government Bonds.”169 On the other hand, respondents theorize that the word “any” “indicates that
the period contemplated is the entire term of the bond and not merely the point of origination or
issuance[,]”170 such that if the debt instruments “were subsequently sold in secondary markets and
so on, insuch a way that twenty (20) or more buyers eventually own the instruments, then it becomes
indubitable that funds would be obtained from the “public” as defined in Section 22(Y) of the
NIRC.”171 Indeed, in the context of the financial market, the words “at any one time” create an
ambiguity.

Meaning of “at any one time”

Thus, from the point of view of the financial market, the phrase “at any one time” for purposes of
determining the “20 or more lenders” would mean every transaction executed in the primary or
secondary market in connection with the purchase or sale of securities.

For example, where the financial assets involved are government securities like bonds, the reckoning
of “20 or more lenders/investors” is made at any transaction in connection with the purchase or sale
of the Government Bonds, such as:

1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the primary market;

2. Sale and distribution by GSEDs to various lenders/investors in the secondary market;

3. Subsequent sale or trading by a bondholder to another lender/investor in the secondary market

usually through a broker or dealer; or

4. Sale by a financial intermediary-bondholder of its participation interests in the bonds to individual or

corporate lenders in the secondary market.

When, through any of the foregoing transactions, funds are simultaneously obtained from 20 or
morelenders/investors, there is deemed to be a public borrowing and the bonds at that point intime
are deemed deposit substitutes. Consequently, the seller is required to withhold the 20% final
withholding tax on the imputed interest income from the bonds