G.R. No.

206019

PHILIPPINE NATIONAL BANK, Petitioner, 

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

VELASCO, JR., J.:

Nature of the Case

This is an appeal via a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking
to reverse and set aside the Court of Tax Appeals (CTA) En Banc September 12, 2012 Decision, as
reiterated in a Resolution of February 12, 2013 in CTA EB Case No. 762, affirming the earlier
decision of its First Division denying petitioner's claim for the refund of excess creditable withholding
tax which it allegedly erroneously paid the Bureau of Internal Revenue (BIR) in the amount of Twelve
Million Four Hundred Thousand and Four Pesos and Seventy-One Centavos (Pl2,400,004.71 ).

The Facts

Gotesco Tyan Ming Development, Inc. (Gotesco), a Filipino corporation engaged in the real estate
business, entered on April 7, 1995 into a syndicated loan agreement with petitioner Philippine
1

National Bank (PNB) and three (3) other banks. To secure the loan, Gotesco mortgaged a six-
hectare expanse known as the Ever Ortigas Commercial Complex, under a mortgage trust indenture
agreement in favor of PNB, through its Trust Banking Group, as trustee. 2

Gotesco subsequently defaulted on its loan obligations. Thus, PNB foreclosed the mortgaged
property through a notarial foreclosure sale on July 30, 1999. On August 4, 1999, a certificate of sale
was issued in favor of PNB, subject to Gotesco’s right, as debtor and mortgagor, to redeem the
property within one (1) year from the date of inscription of the certificate of sale with the Register of
Deeds of Pasig City on November 9, 1999. 3

On October 20, 2000, Gotesco filed a civil case against PNB before the Regional Trial Court of
Pasig, Branch 168 (RTC) for the annulment of the foreclosure proceedings, specific performance
and damages with prayer for temporary restraining order (TRO) and/or preliminary injunction. 4

On November 9, 2000, the RTC issued a TRO enjoining PNB from consolidating ownership over the
mortgaged property, then on December 21, 2000, a writ of preliminary injunction. PNB’s motion for
reconsideration was subsequently denied. 5

PNB went to the Court of Appeals (CA) via a Petition for Certiorari. The CA ruled in favor of PNB and
issued an Order reversing and setting aside the writ of preliminary injunction issued by the RTC.
Gotesco’s Motion for Reconsideration was denied on December 22, 2003.  As Gotesco did not
6

challenge the CA ruling, the setting aside of the writ of preliminary injunction became final and
executory.

As it prepared for the consolidation of its ownership over the foreclosed property, PNB paid the BIR
Eighteen Million Six Hundred Fifteen Thousand Pesos ( 18,615,000) as documentary stamp tax
(DST) on October 31, 2003. PNB also withheld and remitted to the BIR withholding taxes equivalent
to six percent (6%) of the bid price of One Billion Two Hundred Forty Million Four Hundred Sixty-
Nine Pesos and Eighty-Two Centavos ( 1,240,000,469.82) or Seventy-Four Million Four Hundred
Thousand and Twenty-Eight Pesos and Forty-Nine Centavos ( 74,400,028.49) on October 31, 2003
and November 11, 2003. 7

Pending the issuance of the Certificate Authorizing Registration (CAR), the BIR informed PNB that it
is imposing interests, penalties and surcharges of Sixty-One Million Six Hundred Seventy-Eight
Thousand Four Hundred Ninety Pesos and Twenty-Eight Centavos (Php 61,678,490.28) on captial
gains tax and Fifteen Million Four Hundred Ninety-Four Thousand and Sixty-Five Pesos (Php
15,494,065) on DST. To facilitate the release of the CAR, petitioner paid all the surcharges, interests
and penalties assessed against it in the total amount of Seventy-Seven Million One Hundred
Seventy-Two Thousand Five Hundred Fifty-Five Pesos and Twenty-Eight Centavos (Php
77,172,555.28) on April 5, 2005. 8

On the claim that what it paid the BIR was not entirely due, PNB lost no time in instituting the
necessary actions. Thus, on October 27, 2005, it filed an administrative claim for the refund of
excess withholding taxes with the BIR. A day after, or on October 28, 2005, it filed its petition for
review before the tax court, docketed thereat as CTA Case No. 7355. 9

In its claim for refund, PNB explained that it inadvertently applied the six percent (6%) creditable
withholding tax rate on the sale of real property classified as ordinary asset, when it should have
applied the five percent (5%) creditable withholding tax rate on the sale of ordinary asset, as
provided in Section 2.57.2(J)(B) of Revenue Regulation (RR) No. 2-98 as amended by RR No. 6-01,
considering that Gotesco is primarily engaged in the real estate business. The applicable creditable
withholding tax rate of five percent (5%) of the bid price is equivalent to the amount of Sixty-Two
Million Twenty-Three Pesos and Forty-Nine Centavos (Php 62,000,023.49). Therefore, PNB claimed
that it erroneously withheld and remitted to the BIR excess taxes of Twelve Million Four Hundred
Thousand and Four Pesos and Seventy-One Centavos (Php12,400,004.71). 10

On March 22, 2007, PNB filed another claim for refund claiming erroneous assessment and payment
of the surcharges, penalties and interests. Petitioner filed its corresponding Petition for Review on
March 30, 2007, docketed as CTA Case No. 7588. 11

Upon motion of petitioner, CTA Case Nos. 7355 and 7588 were consolidated. The consolidated
cases were set for pre-trial conference which CIR failed to attend despite several resetting. On
September 21, 2007, CIR was declared to be in default. 12

CTA Decision

In its July 12, 2010 consolidated Decision,  the CTA Special First Division (First Division), in CTA
13

Case No. 7588, ordered the CIR to refund to PNB 77,172,555.28 representing its claim for refund of
interests, surcharges and penalties on capital gains taxes and documentary stamp taxes for the year
2003.14

In CTA Case No. 7355, however, the First Division denied PNB’s claim for the refund of excess
creditable withholding taxes for insufficiency of evidence. The tax court agreed with PNB that the
applicable withholding rate was indeed five percent (5%) and not six percent (6%).  Nevertheless, it
15

held that PNB, while able to establish the fact of tax withholding and the remittance thereof to the
BIR, failed to present evidence to prove that Gotesco did not utilize the withheld taxes to settle its tax
liabilities. The First Division further stated that PNB should have offered as evidence the 2003
Income Tax Return (2003 ITR) of Gotesco to show that the excess withholding tax payments were
not used by Gotesco to settle its tax liabilities for 2003. The First Division elucidated:
With the above proof of payments, this Court finds that the fact of withholding and payment of the
withholding tax due were properly established by petitioner. x x x

However, it must be noted that although petitioner duly paid the withholding taxes, there was no
evidence presented to this Court showing that GOTESCO utilized the taxes withheld to settle its own
tax liability for the year 2003. Being creditable in nature, petitioner should have likewise offered as
evidence the 2003 Income Tax Return of GOTESCO to convince the court that indeed the excess
withholding tax payments were not used by GOTESCO. The absence of such relevant evidence is
fatal to petitioner’s action preventing this Court from granting its claim. To allow petitioner its claim
may cause jeopardy to the Government if it be required to refund the claim already utilized. 16

On July 30, 2010, PNB filed a Motion for Reconsideration (MR), attaching therewith, among others,
Gotesco’s 2003 ITR and the latter’s Schedule of Prepaid Tax, which the First Division admitted as
part of the records.

On April 5, 2011, the First Division issued a Resolution  denying PNB’s MR mainly because there
17

were no documents or schedules to support the figures reported in Gotesco’s 2003 ITR to show that
no part of the creditable withholding tax sought to be refunded was used, in part, for the settlement
of Gotesco’s tax liabilities for the same year. It stated that PNB should have likewise presented the
Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) issued to Gotesco in relation
to the creditable taxes withheld reported in its 2003 ITR. BIR Form No. 2307, so declared in the
Resolution, will confirm whether or not that the amount being claimed by PNB was indeed not
utilized by Gotesco to offset its taxes. In denying the MR, the First Division explained:

Petitioner attached to its Motion, income tax returns of GOTESCO for the taxable year 2003, to
prove that the latter did not utilize the taxes withheld by petitioner. The returns were submitted
without any attachment regarding its creditable taxes withheld. Except for GOTESCO’s Unadjusted
Schedule of Prepaid Tax for the taxable year 2003, there were no other documents or schedules
presented before this Court to support the figures reported in the tax returns of GOTESCO for the
same year under Lines 27 (C), (D) and (G) of the Creditable Taxes Withheld.

We note that the amounts reported by GOTESCO as creditable taxes withheld for the year 2003
were just P6,014,433.00 in total, which is less than P74,400,028.49, the creditable taxes withheld
from it by the petitioner. In fact, it is less than the P12,400,004.70 creditable taxes withheld being
claimed by petitioner in its present motion. However, this Court deemed that such observation alone,
without any supporting document or schedule, is not enough to convince us that no part of the
creditable withholding tax sought to be refunded is included in the total tax credits reported by
GOTESCO in its tax returns for the taxable year 2003 which was used, in part, for the settlement of
its tax liabilities for the same year.

To sufficiently prove that GOTESCO did not utilize the creditable taxes withheld, petitioner should
have likewise presented BIR Forms No. 2307 issued to GOTESCO in relation to the creditable taxes
withheld reported in its 2003 tax returns. Doing so will dispel any doubt as to the composition of
GOTESCO’s creditable taxes withheld for 2003. This will settle once and for all that the amount
being claimed by petitioner was not utilized by GOTESCO, and thus the claim should be granted.
Until then, this Court will stand by its decision and deny the claim.
18

In due time, PNB filed an appeal before the CTA En Banc by way of a Petition for Review, docketed
as CTA EB Case No. 762.  PNB argued that its evidence confirms that Gotesco’s Six Million
19

Fourteen Thousand and Four Hundred Thirty-Three Pesos ( 6,014,433) worth of tax credits, as
reported and claimed in its 2003 ITR, did not form part of the 74,400,028.49 equivalent to six percent
(6%) creditable tax withheld. To support the foregoing position, PNB highlighted the following:
 1.Gotesco continues to recognize the foreclosed property as its own asset in its 2003
audited financial statements. It did not recognize the foreclosure sale and has not claimed
the corresponding creditable withholding taxes withheld by petitioner on the foreclosure sale.

2.Gotesco testified that the P6,014,4333.00 tax credits claimed in the year 2003 does not
include the P74,400,028.49 withholding taxes withheld and paid by petitioner in the year
2003.

3.PNB presented BIR Form No. 1606, the withholding tax remittance return filed by PNB as
withholding agent, which clearly shows that the amount of P P74,400,028.49 was withheld
and paid upon PNB’s foreclosure of Gotesco’s asset. 20

Finally, in its July 12, 2010 Decision, the First Division expressly provided that Gotesco’s 2003 ITR
was the only evidence it needed to show that the excess withholding taxes paid and remitted to the
BIR were not utilized by Gotesco.

On September 12, 2012, the CTA En Banc, in the first assailed Decision,  denied PNB’s Petition for
21

Review and held:

In this case, petitioner is counting on the Income Tax Returns of GOTESCO for the taxable year
2003 and on a certain Unadjusted Schedule of Prepaid Tax for the same year to support its
argument that GOTESCO did not utilize the taxes withheld by petitioner; however, We are not
persuaded.

To reiterate, since the claim for refund involves creditable taxes withheld from GOTESCO, it is
necessary to prove that these creditable taxes were not utilized by GOTESCO to pay for its
liabilities. The income tax returns alone are not enough to fully support petitioner’s contention that no
part of the creditable withholding tax sought to be refunded by petitioner was utilized by GOTESCO;
first, there were no other relevant supporting documents or schedules presented to delineate the
figures constituting the creditable taxes withheld that was reported in GOTESCO’s 2003 tax returns;
and second, this Court cannot give credence to the Unadjusted Schedule of Prepaid Tax for the
taxable year 2003 being referred to by petitioner as the same pertains merely to a list of
GOTESCO’s creditable tax withheld for taxable year 2003 and was not accompanied by any
attachment to support its contents; also it is manifest from the records that petitioner failed to have
this Schedule of Prepaid Tax offered in evidence, and thus, was not admitted as part of the records
of this case.
22

After the denial of PNB’s Motion for Reconsideration on February 12, 2013,  the bank filed this
23

instant petition.1âwphi1

Issue

Whether or not PNB is entitled to the refund of creditable withholding taxes erroneously paid to the
BIR. Subsumed in this main issue is the evidentiary value under the premises of BIR Form No. 2307.

The Court’s Ruling

The petition is impressed with merit. As PNB insists at every turn, it has presented sufficient
evidence showing its entitlement to the refund of the excess creditable taxes it erroneously withheld
and paid to the BIR.
As earlier stated, the CTA predicated its denial action on the postulate that even if PNB’s withholding
and remittance of taxes were undisputed, it was not able to prove that Gotesco did not utilize the
taxes thus withheld to pay for its tax liabilities for the year 2003.

In its Decision, the First Division categorically stated, "[P]etitioner should have likewise offered as
evidence the 2003 Income Tax Return of GOTESCO to convince this Court that indeed the excess
withholding tax payments were not used by GOTESCO. The absence of such relevant evidence is
fatal to petitioner’s action preventing this Court from granting its claim."
24

Thus, apprised on what to do, and following the First Division’s advice, PNB presented Gotesco’s
2003 ITRs as an attachment to its MR, which was subsequently denied however. In ruling on the
MR, the First Division again virtually required PNB to present additional evidence, specifically,
Gotesco’s Certificates of Creditable Taxes Withheld (BIR Form No. 2307) covering 6,014,433 tax
credits claimed for year 2003, purportedly to show non-utilization by Gotesco of the 74,400,028.49
withholding tax payments.

Although PNB was not able to submit Gotesco’s BIR Form No. 2307, the Court is persuaded and so
declares that PNB submitted evidence sufficiently showing Gotesco’s non-utilization of the taxes
withheld subject of the refund.

First, Gotesco’s Audited Financial Statements for year 2003,  which it subsequently filed with the
25

BIR in 2004, still included the foreclosed Ever Ortigas Commercial Complex, in the Asset account
"Property and Equipment." This was explained on page 8, Note 5 of Gotesco’s 2003 Audited
Financial Statements:

Commercial complex and improvements pertain to the Ever Pasig Mall. As discussed in Notes 1 and
7, the land and the mall, which were used as collaterals for the Company’s bank loans, were
foreclosed by the lender banks in 1999. However, the lender banks have not been able to
consolidate the ownership and take possession of these properties pending decision of the case by
the Court of Appeals. Accordingly, the properties are still carried in the books of the Company. As of
April 21, 2004, the Company continues to operate the said mall. Based on the December 11, 2003
report of an independent appraiser, the fair market value of the land, improvements and machinery
and equipment would amount to about P2.9billion.

Land pertains to the Company’s properties in Pasig City where the Ever Pasig Mall is situated. 26

It is clear that as of year-end 2003, Gotesco had continued to assert ownership over the Ever
Ortigas Commercial Complex as evidenced by the following: (a) it persistently challenged the validity
of the foreclosure sale which was the transaction subject to the 74,400,028.49 creditable withholding
tax; and (b) its 2003 Audited Financial Statements declared said complex as one of its properties.
Thus, it is reasonable to conclude that since Gotesco vehemently refused to recognize the validity of
the foreclosure sale, it stands to reason that it also refused to recognize the payment of the
creditable withholding tax that was due on the sale and most especially, claim the same as a tax
credit.

Certainly, Gotesco’s relentless refusal to transfer registered ownership of the Ever Ortigas
Commercial Complex to PNB constitutes proof enough that Gotesco will not do any act inconsistent
with its claim of ownership over the foreclosed asset, including claiming the creditable tax imposed
on the foreclosure sale as tax credit and utilizing such amount to offset its tax liabilities. To do such
would run roughshod over Gotesco’s firm stance that PNB’s foreclosure on the mortgage was invalid
and that it remained the owner of the subject property.
Several pieces of evidence likewise point to Gotesco’s non-utilization of the claimed creditable
withholding tax. As advised by the First Division, Gotesco presented its 2003 ITR  along with its
27

2003 Schedule of Prepaid Tax  which itemized in detail the withholding taxes claimed by Gotesco
28

for the year 2003 amounting to 6,014,433. The aforesaid schedule shows that the creditable
withholding taxes Gotesco utilized to pay for its 2003 tax liabilities came from the rental payments of
its tenants in the Ever Ortigas Commercial Complex, not from the foreclosure sale.

Further, Gotesco’s former accountant, Ma. Analene T. Roxas, stated in her Judicial Affidavit  that the
29

tax credits claimed for year 2003 did not include any portion of the amount subject to the claim for
refund. First, she explained that Gotesco could not have possibly utilized the amount claimed for
refund as it was not even aware that PNB paid the six percent (6%) creditable withholding tax since
no documents came to its attention which showed such payment by PNB. As she also explained,
had Gotesco claimed the entire or even any portion of 74,400,028.49, corresponding to the six
percent (6%) tax withheld by PNB, the amount appearing in Items 27D  and 27C  of Gotesco’s 2003
30 31

ITR should have reflected the additional amount of 74,400,028.49. The pertinent portions of Roxas’
Judicial Affidavit read:

Q:In GOTESCO’s 2003 ITRs, both Tentative and amended, the total tax credits/payments amounted
to Php 6,014,433.00. Are you familiar with the composition or breakdown of this Php6,014,433.00?

A: Yes.

Q:May we know, for the record, if any part of this Php 6,014,433.00 of GOTESCO’s tax credits for
year 2003 pertains to the 6% Creditable Tax Withheld by PNB amounting to Php74,400,028.49? To
be more specific, does any part of the Php6,014,433.00 of GOTESCO’s tax credits for year 2003
pertain to the Php12,400,004.70 amount subject to the present claim for refund before the
Honorable Court of Tax Appeals?

A:For the record and based on the ITRs of GOTESCO, the amount of Php 6,014,433.00 tax credits
for year 2003 did not encompass any portion of the Php74,400,028.49 representing 6% Creditable
Tax Withheld, or to be more specific, said Php 6,014,433.00 tax credits of GOTESCO for year 2003
did not include any portion of the Php12,400,004.70 amount subject to the present claim for refund.

Q: Why is this so, Ms. Analene? In theory, the Php74 million creditable withholding tax should have
benefited GOTESCO, right?

A: In theory, it is only proper for GOTESCO to claim and utilize the Php74 million creditable
withholding tax.

However, GOTESCO was not aware that PNB paid 6% creditable withholding tax on behalf of
GOTESCO. There were no documents that came to GOTESCO’s attention which showed such
Php74million creditable tax was paid to the BIR on behalf of GOTESCO.

Q: Considering that you mentioned earlier that you helped prepare GOTESCO’s 2003 ITR, do you
have documents to support your statement?

A: Yes. I have with me a document containing GOTESCO’s Schedule of Prepaid Tax. However, this
Schedule of Prepaid Tax is still unadjusted. The final figure is properly reflected in GOTESCO’S
2003 ITR in the column of Total Tax Credits/Payments.
Q: How can this unadjusted Schedule of Prepaid Tax support your statement that GOTESCO did not
utilize any portion of the Php74,400,028.49 representing 6% creditable tax withheld by herein
Petitioner PNB?

A: As you can see, based on this Schedule of Prepaid Tax, there is a comprehensive list of
GOTESCO tenants and breakdown of their prepaid tax or creditable tax withheld.

Although PNB was listed as a tenant of GOTESCO, the withholding tax of PNB for year 2003 (as
reflected in GOTESCO’s Schedule of Prepaid Tax) only amounted to Php65,985.44 due to the lease
contract between PNB and GOTESCO. This amount is too small if you compare it with the
Php74million creditable tax withheld by PNB based on their foreclosure of GOTESCO’s Ortigas Mall
Complex.

Q: Are you aware of any other document which would likewise confirm your conclusion that
GOTESCO did not utilize any portion of the Php74,400,004.70 subject of the present claim for
refund?

A: Yes. The 2003 Tentative and Amended ITRs of GOTESCO would prove that GOTESCO did not
utilize any portion of the Php74,400,028.49 representing 6% creditable tax withheld by herein
Petitioner PNB.

Had GOTESCO claimed the entire or even any portion of Php74,400,028.49, corresponding to the
6% tax withheld by PNB, the amount appearing in Item 27D-Creditable Tax Withheld per BIR Form
2307 for the Fourth Quarter should not only be Php1,362,965.00, but should have reflected the
additional amount of Php74,400,028.49.

The same observation can be applied in Item 27C Creditable Tax Withheld for the First Three
Quarters, such that the amount reflected should not only be Php4,651,568.00 but Php74,400,028.49
more. 32

All in all, the evidence presented by petitioner sufficiently proved its entitlement to the claimed
refund. There is no need for PNB to present Gotesco’s BIR Form No. 2307, as insisted by the First
Division, because the information contained in the said form may be very well gathered from other
documents already presented by PNB. Thus, the presentation of BIR Form No. 2307 would be in the
final analysis a superfluity, of little or no value.

In claims for excess and unutilized creditable withholding tax, the submission of BIR Forms 2307 is
to prove the fact of withholding of the excess creditable withholding tax being claimed for refund.
This is clear in the provision of Section 58.3, RR 2-98, as amended, and in various rulings of the
Court.  In the words of Section 2.58.3, RR 2-98, "That the fact of withholding is established by a
33

copy of a statement duly issued by the payor (withholding agent) to the payee showing the amount
paid and the amount of tax withheld therefrom."

Hence, the probative value of BIR Form 2307, which is basically a statement showing the amount
paid for the subject transaction and the amount of tax withheld therefrom, is to establish only the fact
of withholding of the claimed creditable withholding tax. There is nothing in BIR Form No. 2307
which would establish either utilization or non-utilization, as the case may be, of the creditable
withholding tax.

It must be noted that PNB had already presented the Withholding Tax Remittance Returns (BIR
Form No. 1606) relevant to the transaction.  The said forms show that the amount of 74,400,028.49
1âwphi1
was withheld and paid by PNB in the year 2003. It contains, among other data, the name of the
payor and the payee, the description of the property subject of the transaction, and the determination
of the taxable base, and the tax rate applied. These are the very same key information that would be
gathered from BIR Form No. 2307.

While perhaps it may be necessary to prove that the taxpayer did not use the claimed creditable
withholding tax to pay for his/its tax liabilities, there is no basis in law or jurisprudence to say that BIR
Form No. 2307 is the only evidence that may be adduced to prove such non-use.

In this case, PNB was able to establish, through the evidence it presented, that Gotesco did not in
fact use the claimed creditable withholding taxes to settle its tax liabilities, to reiterate: (1) Gotesco’s
2003 Audited Financial Statements, which still included the mortgaged property in the asset account
"Properties and Equipment," proving that Gotesco did not recognize the foreclosure sale and
therefore, the payment by PNB of the creditable withholding taxes corresponding to the same; (2)
Gotesco’s 2003 ITRs, which the CTA Special First Division required to show that the excess
creditable withholding tax claimed for refund was not used by Gotesco, along with the 2003
Schedule of Prepaid Tax which itemized in detail the withholding taxes claimed by Gotesco for the
year 2003 amounting to 6,014,433.00; (3) the testimony of Gotesco’s former accountant, proving
that the amount subject of PNB’s claim for refund was not included among the creditable withholding
taxes stated in Gotesco’s 2003 ITR; and (4) the Withholding Tax Remittance Returns (BIR Form
1606) proving that the amount of 74,400,028.49 was withheld and paid by PNB in the year 2003.

Ergo, the evidence on record sufficiently proves that the claimed creditable withholding tax was
withheld and remitted to the BIR, that such withholding and remittance was erroneous, and that the
claimed creditable withholding tax was not used by Gotesco to settle its tax liabilities.

WHEREFORE, the Court resolves to GRANT the petition. The Decision of the Court of Tax Appeals
En Banc dated September 12, 2012 and its Resolution dated February 12, 2013 in CTA EB Case
No. 762 are hereby REVERSEDand SET ASIDE, and a new one entered DIRECTING respondent
Commissioner of Internal Revenue to refund to petitioner Philippine National Bank, within thirty (30)
days from the finality of this Decision, the amount of Twelve Million Four Hundred Thousand and
Four Pesos and Seventy-One Centavos (Php 12,400,004.71), representing excess creditable
withholding taxes withheld and paid for the year 2003.

SO ORDERED.
G.R. No. 198756               January 13, 2015

BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION, METROPOLITAN

BANK & TRUST COMPANY, PHILIPPINE BANK OF COMMUNICATIONS, PHILIPPINE
NATIONAL BANK, PHILIPPINE VETERANS BANK AND PLANTERS DEVELOPMENT
BANK, Petitioners,

RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL

CORPORATION, Petitioners-Intervenors,

CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor, 

vs.
REPUBLIC OF THE PHILIPPINES, THE COMMISSIONER OF INTERNAL REVENUE, BUREAU
OF INTERNAL REVENUE, SECRETARY OF FINANCE, DEPARTMENT OF FINANCE, THE
NATIONAL TREASURER AND BUREAU OF TREASURY, Respondent.

DECISION

LEONEN, J.:

The case involves the proper tax treatment of the discount or interest income arising from the ₱35
billion worth of 10-year zero-coupon treasury bonds issued by the Bureau of Treasury on October
18, 2001 (denominated as the Poverty Eradication and Alleviation Certificates or the PEA Ce Bonds
by the Caucus of Development NGO Networks).

On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling No. 370-2011  (2011 1

BIR Ruling), declaring that the PEACe Bonds being deposit substitutes are subject to the 20% final
withholding tax. Pursuant to this ruling, the Secretary of Finance directed the Bureau of Treasury to
withhold a 20% final tax from the face value of the PEACe Bonds upon their payment at maturity on
October 18, 2011.

This is a petition for certiorari, prohibition and/or mandamus  filed by petitioners under Rule 65 of the
2

Rules of Court seeking to:

a. ANNUL Respondent BIR's Ruling No. 370-2011 dated 7 October 2011 [and] other related
rulings issued by BIR of similar tenor and import, for being unconstitutional and for having
been issued without jurisdiction or with grave abuse of discretion amounting to lack or·
excess of jurisdiction ... ;

b. PROHIBIT Respondents, particularly the BTr; from withholding or collecting the 20% FWT
from the payment of the face value of the Government Bonds upon their maturity;

c. COMMAND Respondents, particularly the BTr, to pay the full amount of the face value of
the Government Bonds upon maturity ... ; and

d. SECURE a temporary restraining order (TRO), and subsequently a writ of preliminary

injunction, enjoining Respondents, particularly the BIR and the BTr, from withholding or
collecting 20% FWT on the Government Bonds and the respondent BIR from enforcing the
assailed 2011 BIR Ruling, as well asother related rulings issued by the BIR of similar tenor
and import, pending the resolution by [the court] of the merits of [the] Petition.
3
 Factual background

By letter  dated March 23, 2001, the Caucus of Development NGO Networks (CODE-NGO) "with the
4

assistance of its financial advisors, Rizal Commercial Banking Corp. ("RCBC"), RCBC Capital Corp.
("RCBC Capital"), CAPEX Finance and Investment Corp. ("CAPEX") and SEED Capital Ventures,
Inc. (SEED),"  requested an approval from the Department of Finance for the issuance by the
5

Bureau of Treasury of 10-year zerocoupon Treasury Certificates (T-notes).  The T-notes would
6

initially be purchased by a special purpose vehicle on behalf of CODE-NGO, repackaged and sold at
a premium to investors as the PEACe Bonds.  The net proceeds from the sale of the Bonds"will be
7

used to endow a permanent fund (Hanapbuhay® Fund) to finance meritorious activities and projects
of accredited non-government organizations (NGOs) throughout the country." 8

Prior to and around the time of the proposal of CODE-NGO, other proposals for the issuance of
zero-coupon bonds were also presented by banks and financial institutions, such as First Metro
Investment Corporation (proposal dated March 1, 2001),  International Exchange Bank (proposal
9

dated July 27, 2000),  Security Bank Corporation and SB Capital Investment Corporation (proposal
10

dated July 25, 2001),  and ATR-Kim Eng Fixed Income, Inc. (proposal dated August 25,
11

1999).  "[B]oth the proposals of First Metro Investment Corp. and ATR-Kim Eng Fixed Income
12

indicate that the interest income or discount earned on the proposed zerocoupon bonds would be
subject to the prevailing withholding tax." 13

A zero-coupon bondis a bond bought at a price substantially lower than its face value (or at a deep
discount), with the face value repaid at the time of maturity.  It does not make periodic interest
14

payments, or have socalled "coupons," hence the term zero-coupon bond.  However, the discount to
15

face value constitutes the return to the bondholder. 16

On May 31, 2001, the Bureau of Internal Revenue, in reply to CODENGO’s letters dated May 10, 15,
and 25, 2001, issued BIR Ruling No. 020-2001  on the tax treatment of the proposed PEACe Bonds.
17

BIR Ruling No. 020-2001, signed by then Commissioner ofInternal Revenue René G. Bañez
confirmed that the PEACe Bonds would not be classified as deposit substitutes and would not be
subject to the corresponding withholding tax:

Thus, to be classified as "deposit substitutes", the borrowing of funds must be obtained from twenty
(20) or more individuals or corporate lenders at any one time. In the light of your representation that
the PEACe Bonds will be issued only to one entity, i.e., Code NGO, the same shall not be
considered as "deposit substitutes" falling within the purview of the above definition. Hence, the
withholding tax on deposit substitutes will not apply.  (Emphasis supplied)
18

The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001 was subsequently
reiterated in BIR Ruling No. 035-2001  dated August 16, 2001 and BIR Ruling No. DA-175-
19

01  dated September 29, 2001 (collectively, the 2001 Rulings). In sum, these rulings pronounced
20

that to be able 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" for purposes of determining the "20 or more lenders" is
to be determined at the time of the original issuance. Such being the case, the PEACe Bonds were
not to be treated as deposit substitutes.

Meanwhile, in the memorandum  dated July 4, 2001, Former Treasurer Eduardo Sergio G. Edeza
21

(Former Treasurer Edeza) questioned the propriety of issuing the bonds directly to a special purpose
vehicle considering that the latter was not a Government Securities Eligible Dealer (GSED).  Former
22

Treasurer Edeza recommended that the issuance of the Bonds "be done through the ADAPS"  and 23

that CODE-NGO "should get a GSED to bid in [sic] its behalf." 24

Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury Bonds  (Public 25

Offering) dated October 9, 2001, the Bureau of Treasury announced that "₱30.0B worth of 10-year
Zero[-] Coupon Bonds [would] be auctioned on October 16, 2001[.]"  The notice stated that the
26

Bonds "shall be issued to not morethan 19 buyers/lenders hence, the necessity of a manual auction
for this maiden issue."  It also required the GSEDs to submit their bids not later than 12 noon on
27

auction date and to disclose in their bid submissions the names of the institutions bidding through
them to ensure strict compliance with the 19 lender limit.  Lastly, it stated that "the issue being
28

limitedto 19 lenders and while taxable shall not be subject to the 20% final withholding [tax]." 29

On October 12, 2001, the Bureau of Treasury released a memo  on the "Formula for the Zero-
30

Coupon Bond." The memo stated inpart 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." 31

A day before the auction date or on October 15, 2001, 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
32

20% withholding tax as the issue will be limited to a maximum of 19 lenders in the primary market
(pursuant to BIR Revenue Regulation No. 020 2001)." The Auction Guidelines, for the first time, also
33

stated that the Bonds are "[e]ligible as liquidity reserves (pursuant to MB Resolution No. 1545 dated
27 September 2001)[.]" 34

On October 16, 2001, the Bureau of Treasury held an auction for the 10-year zero-coupon
bonds.  Also on the same date, the Bureau of Treasury issued another memorandum  quoting
35 36

excerpts of the ruling issued by the Bureau of Internal Revenue concerning the Bonds’ exemption
from 20% final withholding tax and the opinion of the Monetary Board on reserve eligibility. 37

During the auction, there were 45 bids from 15 GSEDs.  The bidding range was very wide, from as
38

low as 12.248% to as high as 18.000%.  Nonetheless, the Bureau of Treasury accepted the auction
39

results.  The cut-off was at 12.75%.

40 41

After the auction, RCBC which participated on behalf of CODE-NGO was declared as the winning
bidder having tendered the lowest bids.  Accordingly, on October 18, 2001, the Bureau of Treasury
42

issued ₱35 billion worth of Bonds at yield-to-maturity of 12.75% to RCBC for approximately ₱10.17
billion,  resulting in a discount of approximately ₱24.83 billion.
43

Also on October 16, 2001, RCBC Capital entered into an underwriting Agreement  with CODE-NGO,
44

whereby 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
45 46

and sale of the 35 billion Bonds at the price of ₱11,995,513,716.51.  In Section 7(r) of the
47

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 Bureau of Internal Revenue (BIR) letter rulings dated 31 May 2001 and
16 August 2001, respectively." 48

RCBC Capital sold the Government Bonds in the secondary market for an issue price of
₱11,995,513,716.51. Petitioners purchased the PEACe Bonds on different dates. 49

BIR rulings
On October 7, 2011, "the BIR issued the assailed 2011 BIR Ruling imposing a 20% FWT on the
Government Bonds and directing the BTr to withhold said final tax at the maturity thereof, [allegedly
without] consultation with Petitioners as bond holders, and without conducting any hearing." 50

"It appears that the assailed 2011 BIR Ruling was issued in response to a query of the Secretary of
Finance on the proper tax treatment of the discount or interest income derived from the Government
Bonds."  The Bureau of Internal Revenue, citing three (3) of its rulings rendered in 2004 and 2005,
51

namely: BIR Ruling No. 007-04  dated July 16, 2004; BIR Ruling No. DA-491-04  dated September
52 53

13, 2004; and BIR Ruling No. 008-05  dated July 28, 2005, declared the following:
54

The Php 24.3 billion discount on the issuance of the PEACe Bonds should be subject to 20% Final
Tax on interest income from deposit substitutes. It is now settled that all treasury bonds (including
PEACe Bonds), regardless of the number of purchasers/lenders at the time of origination/issuance
are considered deposit substitutes. In the case of zero-coupon bonds, the discount (i.e. difference
between face value and purchase price/discounted value of the bond) is treated as interest income
of the purchaser/holder. Thus, the Php 24.3 interest income should have been properly subject to
the 20% Final Tax as provided in Section 27(D)(1) of the Tax Code of 1997. . . .

....

However, at the time of the issuance of the PEACe Bonds in 2001, the BTr was not able tocollect the
final tax on the discount/interest income realized by RCBC as a result of the 2001 Rulings.
Subsequently, the issuance of BIR Ruling No. 007-04 dated July 16, 2004 effectively modifies and
supersedes the 2001 Rulings by stating that the [1997] Tax Code is clear that the "term public
means borrowing from twenty (20) or more individual or corporate lenders at any one time." The
word "any" plainly indicates that the period contemplated is the entire term of the bond, and not
merely the point of origination or issuance. . . . Thus, by taking the PEACe bonds out of the ambit of
deposits [sic] substitutes and exempting it from the 20% Final Tax, an exemption in favour of the
PEACe Bonds was created when no such exemption is found in the law. 55

On October 11, 2011, a "Memo for Trading Participants No. 58-2011 was issued by the Philippine
Dealing System Holdings Corporation and Subsidiaries ("PDS Group"). The Memo provides that in
view of the pronouncement of the DOF and the BIR on the applicability of the 20% FWT on the
Government Bonds, no transferof the same shall be allowed to be recorded in the Registry of
Scripless Securities ("ROSS") from 12 October 2011 until the redemption payment date on 18
October 2011. Thus, the bondholders of record appearing on the ROSS as of 18 October 2011,
which include the Petitioners, shall be treated by the BTr asthe beneficial owners of such securities
for the relevant [tax] payments to be imposed thereon." 56

On October 17, 2011, replying to anurgent 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
57

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.’" 58

On October 17, 2011, petitioners filed a petition for certiorari, prohibition, and/or mandamus (with
urgent application for a temporary restraining order and/or writ of preliminary injunction)  before this
59

court.

On October 18, 2011, this court issued a temporary restraining order (TRO)  "enjoining the
60

implementation of BIR Ruling No. 370-2011 against the [PEACe Bonds,] . . . subject to the condition
that the 20% final withholding tax on interest income there from shall be withheld by the petitioner
banks and placed in escrow pending resolution of [the] petition." 61
On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of court to intervene and to
admit petition-in-intervention  dated October 27, 2011, which was granted by this court on
62

November 15, 2011. 63

Meanwhile, on November 9, 2011, petitioners filed their "Manifestation with Urgent Ex Parte Motion
to Direct Respondents to Comply with the TRO."  They alleged that on the same day that the
64

temporary restraining order was issued, the Bureau of Treasury paid to petitioners and other
bondholders the amounts representing the face value of the Bonds, net however of the amounts
corresponding to the 20% final withholding tax on interest income, and that the Bureau of Treasury
refused to release the amounts corresponding to the 20% final withholding tax. On November 15,
65

2011, this court directed respondents to: "(1) SHOW CAUSE why they failed to comply with the
October 18, 2011 resolution; and (2) COMPLY with the Court’s resolution in order that petitioners
may place the corresponding funds in escrow pending resolution of the petition." 66

On the same day, CODE-NGO filed a motion for leave to intervene (and to admit attached petition-
in-intervention with comment on the petitionin-intervention of RCBC and RCBC Capital).  The motion
67

was granted by this court on November 22, 2011. 68

On December 1, 2011, public respondents filed their compliance.  They explained that: 1) "the
69

implementation of [BIR Ruling No. 370-2011], which has already been performed on October 18,
2011 with the withholding of the 20% final withholding tax on the face value of the PEACe bonds, is
already fait accompli . . . when the Resolution and TRO were served to and received by respondents
BTr and National Treasurer [on October 19, 2011]";  and 2) the withheld amount has ipso facto
70

become public funds and cannot be disbursed or released to petitioners without congressional
appropriation.  Respondents further aver that"[i]nasmuch as the . . . TRO has already become
71

moot . . . the condition attached to it, i.e., ‘that the 20% final withholding tax on interest income
therefrom shall be withheld by the banks and placed in escrow . . .’has also been rendered moot[.]" 72

On December 6, 2011, this court noted respondents' compliance. 73

On February 22, 2012, respondents filed their consolidated comment  on the petitions-in-
74

intervention filed by RCBC and RCBC Capital and On November 27, 2012, petitioners filed their
"Manifestation with Urgent Reiterative Motion (To Direct Respondents to Comply with the Temporary
Restraining Order)."75

On December 4, 2012, this court: (a) noted petitioners’ manifestation with urgent reiterative motion
(to direct respondents to comply with the temporary restraining order); and (b) required respondents
to comment thereon. 76

Respondents’ comment  was filed on April 15,2013, and petitioners filed their reply  on June 5,
77 78

2013.

Issues

The main issues to be resolved are:

I. Whether the PEACe Bonds are "deposit substitutes" and thus subject to 20% final
withholding tax under the 1997 National Internal Revenue Code. Related to this question is
the interpretation of the phrase "borrowing from twenty (20) or more individual or corporate
lenders at any one time" under Section 22(Y) of the 1997 National Internal Revenue Code,
 particularly on whether the reckoning of the 20 lenders includes trading of the bonds in the
secondary market; and

II. If the PEACe Bonds are considered "deposit substitutes," whether the 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

a. Will the imposition of the 20% final withholding tax violate the non-impairment
clause of the Constitution?

b. Will it constitute a deprivation of property without due process of law?

c. Will it violate Section 245 of the 1997 National Internal Revenue Code on non-
retroactivity of rulings?

Arguments of petitioners, RCBC and RCBC

Capital, and CODE-NGO

Petitioners argue that "[a]s the issuer of the Government Bonds acting through the BTr, the
Government is obligated . . . to pay the face value amount of Ph₱35 Billion upon maturity without
any deduction whatsoever."  They add that "the Government cannot impair the efficacy of the
79

[Bonds] by arbitrarily, oppressively and unreasonably imposing the withholding of 20% FWT upon
the [Bonds] a mere eleven (11) days before maturity and after several, consistent categorical
declarations that such bonds are exempt from the 20% FWT, without violating due process"  and the
80

constitutional principle on non-impairment of contracts.  Petitioners aver that at the time they
81

purchased the Bonds, they had the right to expect that they would receive the full face value of the
Bonds upon maturity, in view of the 2001 BIR Rulings.  "[R]egardless of whether or not the 2001 BIR
82

Rulings are correct, the fact remains that [they] relied [on] good faith thereon."83

At any rate, petitioners insist that the PEACe Bonds are not deposit substitutes as defined under
Section 22(Y) of the 1997 National Internal Revenue Code because there was only one lender
(RCBC) to whom the Bureau of Treasury issued the Bonds.  They allege that the 2004, 2005, and
84

2011 BIR Rulings "erroneously interpreted that the number of investors that participate in the
‘secondary market’ is the determining factor in reckoning the existence or non-existence of twenty
(20) or more individual or corporate lenders."  Furthermore, they contend that the Bureau of Internal
85

Revenue unduly expanded the definition of deposit substitutes under Section 22 of the 1997
National Internal Revenue Code in concluding that "the mere issuance of government debt
instruments and securities is deemed as falling within the coverage of ‘deposit substitutes[.]’"  Thus,
86

"[t]he 2011 BIR Ruling clearly amount[ed] to an unauthorized act of administrative legislation[.]" 87

Petitioners further argue that their income from the Bonds is a "trading gain," which is exempt from
income tax. They insist that "[t]hey are not lenders whose income is considered as ‘interest income
88

or yield’ subject to the 20% FWT under Section 27 (D)(1) of the [1997 National Internal Revenue
Code]"  because they "acquired the Government Bonds in the secondary or tertiary market."
89 90

Even assuming without admitting that the Government Bonds are deposit substitutes, petitioners
argue that the collection of the final tax was barred by prescription.  They point out that under
91

Section 7 of DOF Department Order No. 141-95,  the final withholding tax "should have been
92

withheld at the time of their issuance[.]"  Also, under Section 203 of the 1997 National Internal
93

Revenue Code, "internal revenuetaxes, such as the final tax, [should] be assessed within three (3)
years after the last day prescribed by law for the filing of the return." 94
Moreover, petitioners contend that the retroactive application of the 2011 BIR Ruling without prior
notice to them was in violation of their property rights,  their constitutional right to due process  as
95 96

well as Section 246 of the 1997 National Internal Revenue Code on non-retroactivity of
rulings.  Allegedly, it would also have "an adverse effect of colossal magnitude on the investors,
97

both localand foreign, the Philippine capital market, and most importantly, the country’s standing in
the international commercial community."  Petitioners explained that "unless enjoined, the
98

government’s threatened refusal to pay the full value of the Government Bonds will negatively
impact on the image of the country in terms of protection for property rights (including financial
assets), degree of legal protection for lender’s rights, and strength of investor protection."  They 99

cited the country’s ranking in the World Economic Forum: 75th in the world in its 2011–2012 Global
Competitiveness Index, 111th out of 142 countries worldwide and 2nd to the last among ASEAN
countries in terms of Strength of Investor Protection, and 105th worldwide and last among ASEAN
countries in terms of Property Rights Index and Legal Rights Index.  It would also allegedly "send a
100

reverberating message to the whole world that there is no certainty, predictability, and stability of
financial transactions in the capital markets[.]"  "[T]he integrity of Government-issued bonds and
101

notes will be greatly shattered and the credit of the Philippine Government will suffer"  if the sudden
102

turnaround of the government will be allowed,  and it will reinforce "investors’ perception that the
103

level of regulatory risk for contracts entered into by the Philippine Government is high,"  thus104

resulting in higher interestrate for government-issued debt instruments and lowered credit rating. 105

Petitioners-intervenors RCBC and RCBC Capital contend that respondent Commissioner of Internal
Revenue "gravely and seriously abused her discretion in the exercise of her rule-making
power"  when she issued the assailed 2011 BIR Ruling which ruled that "all treasury bonds are
106

‘deposit substitutes’ regardless of the number of lenders, in clear disregard of the requirement of
twenty (20)or more lenders mandated under the NIRC."  They argue that "[b]y her blanket and
107

arbitrary classification of treasury bonds as deposit substitutes, respondent CIR not only amended
and expanded the NIRC, but effectively imposed a new tax on privately-placed treasury
bonds." Petitioners-intervenors RCBC and RCBC Capital further argue that the 2011 BIR Ruling will
108

cause substantial impairment of their vested rights  under the Bonds since the ruling imposes new
109

conditions by "subjecting the PEACe Bonds to the twenty percent (20%) final withholding tax
notwithstanding the fact that the terms and conditions thereof as previously represented by the
Government, through respondents BTr and BIR, expressly state that it is not subject to final
withholding tax upon their maturity."  They added that "[t]he exemption from the twenty percent
110

(20%) final withholding tax [was] the primary inducement and principal consideration for [their]
participat[ion] in the auction and underwriting of the PEACe Bonds." 111

Like petitioners, petitioners-intervenors RCBC and RCBC Capital also contend that respondent
Commissioner of Internal Revenue violated their rights to due process when she arbitrarily issued
the 2011 BIR Ruling without prior notice and hearing, and the oppressive timing of such ruling
deprived them of the opportunity to challenge the same. 112

Assuming the 20% final withholding tax was due on the PEACe Bonds, petitioners-intervenors
RCBC and RCBC Capital claim that respondents Bureau of Treasury and CODE-NGO should be
held liable "as [these] parties explicitly represented . . . that the said bonds are exempt from the final
withholding tax."113

Finally, petitioners-intervenors RCBC and RCBC Capital argue that "the implementation of the [2011
assailed BIR Ruling and BIR Ruling No. DA 378-2011] will have pernicious effects on the integrity of
existing securities, which is contrary to the State policies of stabilizing the financial system and of
developing capital markets." 114
For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and BIR Ruling No. DA 378-2011 are
"invalid because they contravene Section 22(Y) of the 1997 [NIRC] when the said rulings
disregarded the applicability of the ‘20 or more lender’ rule to government debt instruments"[;]  (b)
115

"when [it] sold the PEACe Bonds in the secondary market instead of holding them until maturity, [it]
derived . . . long-term trading gain[s], not interest income, which [are] exempt . . . under Section
32(B)(7)(g) of the 1997 NIRC"[;]  (c) "the tax exemption privilege relating to the issuance of the
116

PEACe Bonds . . . partakes of a contractual commitment granted by the Government in exchange

for a valid and material consideration [i.e., the issue price paid and savings in borrowing cost derived
by the Government,] thus protected by the non-impairment clause of the 1987 Constitution"[;]  and 117

(d) the 2004, 2005, and 2011 BIR Rulings "did not validly revoke the 2001 BIR Rulings since no
notice of revocation was issued to [it], RCBC and [RCBC Capital] and petitioners[-bondholders], nor
was there any BIR administrative guidance issued and published[.]" CODE-NGO additionally
118

argues that impleading it in a Rule 65 petition was improper because: (a) it involves determination of
a factual question;  and (b) it is premature and states no cause of action as it amounts to an
119

anticipatory third-party claim.

120

Arguments of respondents

Respondents argue that petitioners’ direct resort to this court to challenge the 2011 BIR Ruling
violates the doctrines of exhaustion of administrative remedies and hierarchy ofcourts, resulting in a
lack of cause of action that justifies the dismissal of the petition.  According to them, "the jurisdiction
121

to review the rulings of the [Commissioner of Internal Revenue], after the aggrieved party exhausted
the administrative remedies, pertains to the Court of Tax Appeals."  They point out that "a case
122

similar to the present Petition was [in fact] filed with the CTA on October 13, 2011[,] [docketed as]
CTA Case No. 8351 [and] entitled, ‘Rizal Commercial Banking Corporation and RCBC Capital
Corporation vs. Commissioner of Internal Revenue, et al.’" 123

Respondents further take issue on the timeliness of the filing of the petition and petitions-in-
intervention.  They argue that under the guise of mainly assailing the 2011 BIR Ruling, petitioners
124

are indirectly attacking the 2004 and 2005 BIR Rulings, of which the attack is legally prohibited, and
the petition insofar as it seeks to nullify the 2004 and 2005 BIR Rulings was filed way out of time
pursuant to Rule 65, Section 4. 125

Respondents contend that the discount/interest income derived from the PEACe Bonds is not a
trading gain but interest income subject to income tax.  They explain that "[w]ith the payment of the
126

Ph₱35 Billion proceeds on maturity of the PEACe Bonds, Petitioners receive an amount of money
equivalent to about Ph₱24.8 Billion as payment for interest. Such interest is clearly an income of the
Petitioners considering that the same is a flow of wealth and not merely a return of capital – the
capital initially invested in the Bonds being approximately Ph₱10.2 Billion[.]" 127

Maintaining that the imposition of the 20% final withholding tax on the PEACe Bonds does not
constitute an impairment of the obligations of contract, respondents aver that: "The BTr has no
power to contractually grant a tax exemption in favour of Petitioners thus the 2001 BIR Rulings
cannot be considered a material term of the Bonds"[;]  "[t]here has been no change in the laws
128

governing the taxability of interest income from deposit substitutes and said laws are read into every
contract"[;]  "[t]he assailed BIR Rulings merely interpret the term "deposit substitute" in accordance
129

with the letter and spirit of the Tax Code"[;]  "[t]he withholding of the 20% FWT does not result in a
130

default by the Government as the latter performed its obligations to the bondholders in full"[;]  and
131

"[i]f there was a breach of contract or a misrepresentation it was between RCBC/CODE-NGO/RCBC

Cap and the succeeding purchasers of the PEACe Bonds." 132
Similarly, respondents counter that the withholding of "[t]he 20% final withholding tax on the PEACe
Bonds does not amount to a deprivation of property without due process of law."  Their imposition of
133

the 20% final withholding tax is not arbitrary because they were only performing a duty imposed by
law;  "[t]he 2011 BIR Ruling is aninterpretative rule which merely interprets the meaning of deposit
134

substitutes [and upheld] the earlier construction given to the termby the 2004 and 2005 BIR
Rulings."  Hence, respondents argue that "there was no need to observe the requirements of notice,
135

hearing, and publication[.]" 136

Nonetheless, respondents add that "there is every reason to believe that Petitioners — all major
financial institutions equipped with both internal and external accounting and compliance
departments as wellas access to both internal and external legal counsel; actively involved in
industry organizations such as the Bankers Association of the Philippines and the Capital Market
Development Council; all actively taking part in the regular and special debt issuances of the BTr
and indeed regularly proposing products for issue by BTr — had actual notice of the 2004 and 2005
BIR Rulings."  Allegedly, "the sudden and drastic drop — including virtually zero trading for
137

extended periods of six months to almost a year — in the trading volume of the PEACe Bonds after
the release of BIR Ruling No. 007-04 on July 16, 2004 tend to indicate that market participants,
including the Petitioners herein, were aware of the ruling and its consequences for the PEACe
Bonds." 138

Moreover, they contend that the assailed 2011 BIR Ruling is a valid exercise of the Commissioner of
Internal Revenue’s rule-making power;  that it and the 2004 and 2005 BIR Rulings did not unduly
139

expand the definition of deposit substitutes by creating an unwarranted exception to the requirement
of having 20 or more lenders/purchasers;  and the word "any" in Section 22(Y) of the National
140

Internal Revenue Code plainly indicates that the period contemplated is the entire term of the bond
and not merely the point of origination or issuance. 141

Respondents further argue that a retroactive application of the 2011 BIR Ruling will not unjustifiably
prejudice petitioners.  "[W]ith or without the 2011 BIR Ruling, Petitioners would be liable topay a
142

20% final withholding tax just the same because the PEACe Bonds in their possession are legally in
the nature of deposit substitutes subject to a 20% final withholding tax under the NIRC."  Section 7
143

of DOF Department Order No. 141-95 also provides that incomederived from Treasury bonds is
subject to the 20% final withholding tax.  "[W]hile revenue regulations as a general rule have no
144

retroactive effect, if the revocation is due to the fact that the regulation is erroneous or contrary to
law, such revocation shall have retroactive operation as to affect past transactions, because a wrong
construction of the law cannot give rise to a vested right that can be invoked by a taxpayer." 145

Finally, respondents submit that "there are a number of variables and factors affecting a capital
market."  "[C]apital market itself is inherently unstable."  Thus, "[p]etitioners’ argument that the 20%
146 147

final withholding tax . . . will wreak havoc on the financial stability of the country is a mere
supposition that is not a justiciable issue." 148

On the prayer for the temporary restraining order, respondents argue that this order "could no longer
be implemented [because] the acts sought to be enjoined are already fait accompli."  They add that
149

"to disburse the funds withheld to the Petitioners at this time would violate Section 29[,] Article VI of
the Constitution prohibiting ‘money being paid out of the Treasury except in pursuance of an
appropriation made by law[.]’"  "The remedy of petitioners is to claim a tax refund under Section
150

204(c) of the Tax Code should their position be upheld by the Honorable Court." 151

Respondents also argue that "the implementation of the TRO would violate Section 218 of the Tax
Code in relation to Section 11 of Republic Act No. 1125 (as amended by Section 9 of Republic Act
No. 9282) which prohibits courts, except the Court of Tax Appeals, from issuing injunctions to
restrain the collection of any national internal revenue tax imposed by the Tax Code." 152

Summary of arguments

In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC Capital, and CODE-NGO
argue that:

1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997 National Internal
Revenue Code when it declared that all government debt instruments are deposit substitutes
regardless of the 20-lender rule; and

2. The 2011 BIR Ruling cannot be applied retroactively because:

a) It will violate the contract clause;

● It constitutes a unilateral amendment of a material term (tax exempt status) in the

Bonds, represented by the government as an inducement and important
consideration for the purchase of the Bonds;

b) It constitutes deprivation ofproperty without due process because there was no

prior notice to bondholders and hearing and publication;

c) It violates the rule on non-retroactivity under the 1997 National Internal Revenue
Code;

d) It violates the constitutional provision on supporting activities of non-government

organizations and development of the capital market; and

e) The assessment had already prescribed.

Respondents counter that:

1) Respondent Commissioner of Internal Revenue did not act with grave abuse of discretion in
issuing the challenged 2011 BIR Ruling:

a. The 2011 BIR Ruling, being an interpretative rule, was issued by virtue of the
Commissioner of Internal Revenue’s power to interpret the provisions of the 1997 National
Internal Revenue Code and other tax laws;

b. Commissioner of Internal Revenue merely restates and confirms the interpretations

contained in previously issued BIR Ruling Nos. 007-2004, DA-491-04,and 008-05, which
have already effectively abandoned or revoked the 2001 BIR Rulings;

c. Commissioner of Internal Revenue is not bound by his or her predecessor’s rulings

especially when the latter’s rulings are not in harmony with the law; and

d. The wrong construction of the law that the 2001 BIR Rulings have perpetrated cannot give
rise to a vested right. Therefore, the 2011 BIR Ruling can be given retroactive effect.
2) Rule 65 can be resorted to only if there is no appeal or any plain, speedy, and adequate remedy
in the ordinary course of law:

a. Petitioners had the basic remedy offiling a claim for refund of the 20% final withholding tax they
allege to have been wrongfully collected; and

b. Non-observance of the doctrine of exhaustion of administrative remedies and of hierarchy of

courts.

Court’s ruling

Procedural Issues
Non-exhaustion of
administrative remedies proper

Under Section 4 of the 1997 National Internal Revenue Code, interpretative rulings are reviewable
by the Secretary of Finance.

SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. -The power to
interpret the provisions of this Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the Secretary of Finance. (Emphasis supplied)

Thus, it was held that "[i]f superior administrative officers [can] grant the relief prayed for, [then]
special civil actions are generally not entertained."  The remedy within the administrative machinery
153

must be resorted to first and pursued to its appropriate conclusion before the court’s judicial power
can be sought. 154

Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of administrative

remedies:

[The doctrine of exhaustion of administrative remedies] is a relative one and its flexibility is called
upon by the peculiarity and uniqueness of the factual and circumstantial settings of a case. Hence, it
is disregarded (1) when there is a violation of due process, (2) when the issue involved is purely a
legal question,  (3) when the administrative action is patently illegal amounting to lack or excess of
155

jurisdiction,(4) when there is estoppel on the part of the administrative agency concerned,(5) when
there is irreparable injury, (6) when the respondent is a department secretary whose acts as an alter
ego of the President bears the implied and assumed approval of the latter, (7) when to require
exhaustion of administrative remedies would be unreasonable, (8) when it would amount to a
nullification of a claim, (9) when the subject matter is a private land in land case proceedings, (10)
when the rule does not provide a plain, speedy and adequate remedy, (11) when there are
circumstances indicating the urgency of judicial intervention.  (Emphasis supplied, citations omitted)
156

The exceptions under (2) and (11)are present in this case. The question involved is purely legal,
namely: (a) the interpretation of the 20-lender rule in the definition of the terms public and deposit
substitutes under the 1997 National Internal Revenue Code; and (b) whether the imposition of the
20% final withholding tax on the PEACe Bonds upon maturity violates the constitutional provisions
on non-impairment of contracts and due process. Judicial intervention is likewise urgent with the
impending maturity of the PEACe Bonds on October 18, 2011.

The rule on exhaustion of administrative remedies also finds no application when the exhaustion will
result in an exercise in futility.
157
In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR Ruling would be a
futile exercise because it was upon the request of the Secretary of Finance that the 2011 BIR Ruling
was issued by the Bureau of Internal Revenue. It appears that the Secretary of Finance adopted the
Commissioner of Internal Revenue’s opinions as his own.  This position was in fact confirmed in the
158

letter  dated October 10, 2011 where he ordered the Bureau of Treasury to withhold the amount
159

corresponding to the 20% final withholding tax on the interest or discounts allegedly due from the
bondholders on the strength of the 2011 BIR Ruling. Doctrine on hierarchy of courts

We agree with respondents that the jurisdiction to review the rulings of the Commissioner of Internal
Revenue pertains to the Court of Tax Appeals. The questioned BIR Ruling Nos. 370-2011 and DA
378-2011 were issued in connection with the implementation of the 1997 National Internal Revenue
Code on the taxability of the interest income from zero-coupon bonds issued by the government.

Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as amended by Republic
Act No. 9282, such rulings of the Commissioner of Internal Revenue are appealable to that court,
160

thus:

SEC. 7.Jurisdiction.- The CTA shall exercise:

a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,

refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue or other laws administered by the Bureau of
Internal Revenue;

....

SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely affected by a
decision, ruling or inaction of the Commissioner of Internal Revenue, the Commissioner of Customs,
the Secretary of Finance, the Secretary of Trade and Industry or the Secretary of Agriculture or the
Central Board of Assessment Appeals or the Regional Trial Courts may file an appeal with the CTA
within thirty (30) days after the receipt of such decision or rulingor after the expiration of the period
fixed by law for action as referred toin Section 7(a)(2) herein.

....

SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving matters arising
under the National Internal Revenue Code, the Tariff and Customs Code or the Local Government
Code shall be maintained, except as herein provided, until and unless an appeal has been
previously filed with the CTA and disposed of in accordance with the provisions of this Act.

In Commissioner of Internal Revenue v. Leal,  citing Rodriguez v. Blaquera,  this court emphasized
161 162

the jurisdiction of the Court of Tax Appeals over rulings of the Bureau of Internal Revenue, thus:

While the Court of Appeals correctly took cognizance of the petition for certiorari, however, let it be
stressed that the jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains
to the Court of Tax Appeals, not to the RTC.

The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the
Commissioner implementing the Tax Code on the taxability of pawnshops.. . .
 ....

Such revenue orders were issued pursuant to petitioner's powers under Section 245 of the Tax
Code, which states:

"SEC. 245. Authority of the Secretary of Finance to promulgate rules and regulations. — The
Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all needful rules
and regulations for the effective enforcement of the provisions of this Code.

The authority of the Secretary of Finance to determine articles similar or analogous to those subject
to a rate of sales tax under certain category enumerated in Section 163 and 165 of this Code shall
be without prejudice to the power of the Commissioner of Internal Revenue to make rulings or
opinions in connection with the implementation of the provisionsof internal revenue laws, including
ruling on the classification of articles of sales and similar purposes." (Emphasis in the original)

....

The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:

"Plaintiff maintains that this is not an appeal from a ruling of the Collector of Internal Revenue, but
merely an attempt to nullify General Circular No. V-148, which does not adjudicate or settle any
controversy, and that, accordingly, this case is not within the jurisdiction of the Court of Tax Appeals.

We find no merit in this pretense. General Circular No. V-148 directs the officers charged with the
collection of taxes and license fees to adhere strictly to the interpretation given by the defendant
tothe statutory provisions abovementioned, as set forth in the Circular. The same incorporates,
therefore, a decision of the Collector of Internal Revenue (now Commissioner of Internal Revenue)
on the manner of enforcement of the said statute, the administration of which is entrusted by law to
the Bureau of Internal Revenue. As such, it comes within the purview of Republic Act No. 1125,
Section 7 of which provides that the Court of Tax Appeals ‘shall exercise exclusive appellate
jurisdiction to review by appeal . . . decisions of the Collector of Internal Revenue in . . . matters
arising under the National Internal Revenue Code or other law or part of the law administered by the
Bureau of Internal Revenue.’" 163

In exceptional cases, however, this court entertained direct recourse to it when "dictated by public
welfare and the advancement of public policy, or demanded by the broader interest of justice, or the
orders complained of were found to be patent nullities, or the appeal was considered as clearly an
inappropriate remedy." 164

In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary,

Department of Interior and Local Government,  this court noted that the petition for prohibition was
165

filed directly before it "in disregard of the rule on hierarchy of courts. However, [this court] opt[ed] to
take primary jurisdiction over the . . . petition and decide the same on its merits in viewof the
significant constitutional issues raised by the parties dealing with the tax treatment of cooperatives
under existing laws and in the interest of speedy justice and prompt disposition of the matter." 166

Here, the nature and importance of the issues raised  to the investment and banking industry with
167

regard to a definitive declaration of whether government debt instruments are deposit substitutes
under existing laws, and the novelty thereof, constitute exceptional and compelling circumstances to
justify resort to this court in the first instance.
The tax provision on deposit substitutes affects not only the PEACe Bonds but also any other
financial instrument or product that may be issued and traded in the market. Due to the changing
positions of the Bureau of Internal Revenue on this issue, there isa need for a final ruling from this
court to stabilize the expectations in the financial market.

Finally, non-compliance with the rules on exhaustion of administrative remedies and hierarchy of
courts had been rendered moot by this court’s issuance of the temporary restraining order enjoining
the implementation of the 2011 BIR Ruling. The temporary restraining order effectively recognized
the urgency and necessity of direct resort to this court.

Substantive issues

Tax treatment of deposit

substitutes

Under Sections 24(B)(1), 27(D)(1),and 28(A)(7) of the 1997 National Internal Revenue Code, a final
withholdingtax at the rate of 20% is imposed on interest on any currency bank deposit and yield or
any other monetary benefit from deposit substitutes and from trust funds and similar arrangements.
These provisions read:

SEC. 24. Income Tax Rates.

....

(B) Rate of Tax on Certain Passive Income.

(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%)
is hereby imposed upon the amount of interest fromany currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar arrangements; . . .
Provided, further, That interest income from long-term deposit or investment in the form of savings,
common or individual trust funds, deposit substitutes, investment management accounts and other
investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas
(BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the
holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax
shall be imposed on the entire income and shall be deducted and withheld by the depository bank
from the proceeds of the long-term deposit or investment certificate based on the remaining maturity
thereof:

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than four (4) years - 12%; and

Less than three (3) years - 20%. (Emphasis supplied)

SEC. 27. Rates of Income Tax on Domestic Corporations. -

....

(D) Rates of Tax on Certain Passive Incomes. -

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and
from Trust Funds and Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent
(20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any
other monetary benefit from deposit substitutes and from trust funds and similar arrangements
received by domestic corporations, and royalties, derived from sources within the Philippines:
Provided, however, That interest income derived by a domestic corporation from a depository bank
under the expanded foreign currency deposit system shall be subject to a final income tax at the rate
of seven and one-half percent (7 1/2%) of such interest income. (Emphasis supplied)

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

....

(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -

(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust
Funds and Similar Arrangements and Royalties. - Interest from any currency bank deposit and yield
or any other monetary benefit from deposit substitutes and from trust funds and similar
arrangements and royalties derived from sources within the Philippines shall be subject to a final
income tax at the rate of twenty percent (20%) of such interest: Provided, however, That interest
income derived by a resident foreign corporation from a depository bank under the expanded foreign
currency deposit system shall be subject to a final income tax at the rate of seven and one-half
percent (7 1/2%) of such interest income. (Emphasis supplied)

This tax treatment of interest from bank deposits and yield from deposit substitutes was first
introduced in the 1977 National Internal Revenue Code through Presidential Decree No.
1739  issued in 1980. Later, Presidential Decree No. 1959, effective on October 15, 1984, formally
168

added the definition of deposit substitutes, viz:

(y) ‘Deposit substitutes’ shall mean an alternative form of obtaining funds from the public, 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.These promissory notes, repurchase
agreements, certificates of assignment or participation and similar instrument with recourse as may
be authorized by the Central Bank of the Philippines, for banks and non-bank financial
intermediaries or by the Securities and Exchange Commission of the Philippines for commercial,
industrial, finance companies and either non-financial companies: Provided, however, that only debt
instruments issued for inter-bank call loans to cover deficiency in reserves against deposit liabilities
including those between or among banks and quasi-banks shall not be considered as deposit
substitute debt instruments. (Emphasis supplied)

Revenue Regulations No. 17-84, issued to implement Presidential Decree No. 1959, adopted
verbatim the same definition and specifically identified the following borrowings as "deposit
substitutes":

SECTION 2. Definitions of Terms. . . .

(h) "Deposit substitutes" shall mean –

 ....

(a) All interbank borrowings by or among banks and non-bank financial institutions
authorized to engage in quasi-banking functions evidenced by deposit substitutes
instruments, except interbank call loans to cover deficiency in reserves against deposit
liabilities as evidenced by interbank loan advice or repayment transfer tickets.

(b) All borrowings of the national and local government and its instrumentalities including the
Central Bank of the Philippines, evidenced by debt instruments denoted as treasury bonds,
bills, notes, certificates of indebtedness and similar instruments.

(c) All borrowings of banks, non-bank financial intermediaries, finance companies,

investment companies, trust companies, including the trust department of banks and
investment houses, evidenced by deposit substitutes instruments. (Emphasis supplied)

The definition of deposit substitutes was amended under the 1997 National Internal Revenue Code
with the addition of the qualifying phrase for public – borrowing from 20 or more individual or
corporate lenders at any one time. Under Section 22(Y), deposit substitute is defined thus: SEC. 22.
Definitions- When used in this Title:

....

(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.
These instruments may include, but need not be limited to, bankers’ acceptances, promissory notes,
repurchase agreements, including reverse repurchase agreements entered into by and between the
Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or
participation and similar instruments with recourse: Provided, however, That debt instruments issued
for interbank call loans with maturity of not more than five (5) days to cover deficiency in reserves
against deposit liabilities, including those between or among banks and quasi-banks, shall not be
considered as deposit substitute debt instruments. (Emphasis supplied)

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."  On the other hand, respondents theorize that the word "any" "indicates that
169

the period contemplated is the entire term of the bond and not merely the point of origination or
issuance[,]"  such that if the debt instruments "were subsequently sold in secondary markets and so
170

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."  Indeed, in the context of the financial market, the words "at any one time" create an
171

ambiguity.
Financial markets

Financial markets provide the channel through which funds from the surplus units (households and
business firms that have savings or excess funds) flow to the deficit units (mainly business firms and
government that need funds to finance their operations or growth). They bring suppliers and users of
funds together and provide the means by which the lenders transform their funds into financial
assets, and the borrowers receive these funds now considered as their financial liabilities. The
transfer of funds is represented by a security, such as stocks and bonds. Fund suppliers earn a
return on their investment; the return is necessary to ensure that funds are supplied to the financial
markets. 172

"The financial markets that facilitate the transfer of debt securities are commonly classified by the
maturity of the securities[,]"  namely: (1) the money market, which facilitates the flow of short-term
173

funds (with maturities of one year or less); and (2) the capital market, which facilitates the flow of
long-term funds (with maturities of more than one year). 174

Whether referring to money marketsecurities or capital market securities, transactions occur either in
the primary market or in the secondary market.  "Primary markets facilitate the issuance of new
175

securities. Secondary markets facilitate the trading of existing securities, which allows for a change
in the ownership of the securities."  The transactions in primary markets exist between issuers and
176

investors, while secondary market transactions exist among investors. 177

"Over time, the system of financial markets has evolved from simple to more complex ways of
carrying out financial transactions."  Still, all systems perform one basic function: the quick
178

mobilization of money from the lenders/investors to the borrowers. 179

Fund transfers are accomplished in three ways: (1) direct finance; (2) semidirect finance; and (3)
indirect finance. 180

With direct financing, the "borrower and lender meet each other and exchange funds in returnfor
financial assets" (e.g., purchasing bonds directly from the company issuing them). This method
181

provides certain limitations such as: (a) "both borrower and lender must desire to exchange the
same amount of funds at the same time"[;]  and (b) "both lender and borrower must frequently incur
182

substantial information costs simply to find each other." 183

In semidirect financing, a securities broker or dealer brings surplus and deficit units together, thereby
reducing information costs.  A Broker  is "an individual or financial institution who provides
184 185

information concerning possible purchases and sales of securities. Either a buyer or a seller of
securities may contact a broker, whose job is simply to bring buyers and sellers together."  A 186

dealer  "also serves as a middleman between buyers and sellers, but the dealer actually acquires
187

the seller’s securities in the hope of selling them at a later time at a more favorable
price."  Frequently, "a dealer will split up a large issue of primary securities into smaller units
188

affordable by . . . buyers . . . and thereby expand the flow of savings into investment."  In semi direct
189

financing, "[t]he ultimate lender still winds up holding the borrower’s securities, and therefore the
lender must be willing to accept the risk, liquidity, and maturity characteristics of the borrower’s [debt
security]. There still must be a fundamental coincidence of wants and needs between [lenders and
borrowers] for semidirect financial transactions to take place." 190

"The limitations of both direct and semidirect finance stimulated the development of indirect financial
transactions, carried out with the help of financial intermediaries"  or financial institutions, like
191

banks, investment banks, finance companies, insurance companies, and mutual funds.  Financial 192

intermediaries accept funds from surplus units and channel the funds to deficit units.  "Depository
193
institutions [such as banks] accept deposits from surplus units and provide credit to deficit units
through loans and purchase of [debt] securities."  Nondepository institutions, like mutual funds,
194

issue securities of their own (usually in smaller and affordable denominations) to surplus units and at
the same time purchase debt securities of deficit units.  "By pooling the resources of[small savers, a
195

financial intermediary] can service the credit needs of large firms simultaneously." 196

The financial market, therefore, is an agglomeration of financial transactions in securities performed

by market participants that works to transfer the funds from the surplus units (or investors/lenders) to
those who need them (deficit units or borrowers).

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.

For debt instruments that are

not deposit substitutes, regular
income tax applies

It must be emphasized, however, that debt instruments that do not qualify as deposit substitutes
under the 1997 National Internal Revenue Code are subject to the regular income tax.

The phrase "all income derived from whatever source" in Chapter VI, Computation of Gross Income,
Section 32(A) of the 1997 National Internal Revenue Code discloses a legislative policy to include all
income not expressly exempted as within the class of taxable income under our laws.

"The definition of gross income isbroad enough to include all passive incomes subject to specific tax
rates or final taxes."  Hence, interest income from deposit substitutes are necessarily part of taxable
197

income. "However, since these passive incomes are already subject to different rates and taxed
finally at source, they are no longer included in the computation of gross income, which determines
taxable income."  "Stated otherwise . . . if there were no withholding tax system in place in this
198
country, this 20 percent portion of the ‘passive’ income of [creditors/lenders] would actually be paid
to the [creditors/lenders] and then remitted by them to the government in payment of their income
tax."
199

This court, in Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo,  explained the
200

rationale behind the withholding tax system:

The withholding [of tax at source] was devised for three primary reasons: first, to provide the
taxpayer a convenient manner to meet his probable income tax liability; second, to ensure the
collection of income tax which can otherwise be lost or substantially reduced through failure to file
the corresponding returns[;] and third, to improve the government’s cash flow. This results in
administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and
reduction of governmental effort to collect taxes through more complicated means and
remedies.  (Citations omitted)
201

"The application of the withholdings system to interest on bank deposits or yield from deposit
substitutes is essentially to maximize and expedite the collection of income taxes by requiring its
payment at the source." 202

Hence, when there are 20 or more lenders/investors in a transaction for a specific bond issue, the
seller isrequired to withhold the 20% final income tax on the imputed interest income from the bonds.

Interest income v. gains from sale or redemption

The interest income earned from bonds is not synonymous with the "gains" contemplated under
Section 32(B)(7)(g)  of the 1997 National Internal Revenue Code, which exempts gains derived
203

from trading, redemption, or retirement of long-term securities from ordinary income tax.

The term "gain" as used in Section 32(B)(7)(g) does not include interest, which represents
forbearance for the use of money. Gains from sale or exchange or retirement of bonds orother
certificate of indebtedness fall within the general category of "gainsderived from dealings in property"
under Section 32(A)(3), while interest from bonds or other certificate of indebtedness falls within the
category of "interests" under Section 32(A)(4).  The use of the term "gains from sale" in Section
204

32(B)(7)(g) shows the intent of Congress not toinclude interest as referred under Sections 24, 25,
27, and 28 in the exemption. 205

Hence, the "gains" contemplated in Section 32(B)(7)(g) refers to: (1) gain realized from the trading of
the bonds before their maturity date, which is the difference between the selling price of the bonds in
the secondary market and the price at which the bonds were purchased by the seller; and (2) gain
realized by the last holder of the bonds when the bonds are redeemed at maturity, which is the
difference between the proceeds from the retirement of the bonds and the price atwhich such last
holder acquired the bonds. For discounted instruments,like the zero-coupon bonds, the trading gain
shall be the excess of the selling price over the book value or accreted value (original issue price
plus accumulated discount from the time of purchase up to the time of sale) of the instruments. 206

The Bureau of Internal

Revenue rulings

The Bureau of Internal Revenue’s interpretation as expressed in the three 2001 BIR Rulings is not
consistent with law.  Its interpretation of "at any one time" to mean at the point of origination alone is
207

unduly restrictive.
BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying on the 2004 and 2005
BIR Rulings) that "all treasury bonds . . . regardlessof the number of purchasers/lenders at the time
of origination/issuance are considered deposit substitutes."  Being the subject of this petition, it is,
208

thus, declared void because it completely disregarded the 20 or more lender rule added by
Congress in the 1997 National Internal Revenue Code. It also created a distinction for government
debt instruments as against those issued by private corporations when there was none in the law.

Tax statutes must be reasonably construed as to give effect to the whole act. Their constituent
provisions must be read together, endeavoring to make every part effective, harmonious, and
sensible.  That construction which will leave every word operative will be favored over one that
209

leaves some word, clause, or sentence meaningless and insignificant. 210

It may be granted that the interpretation of the Commissioner of Internal Revenue in charge of
executing the 1997 National Internal Revenue Code is an authoritative construction ofgreat weight,
but the principle is not absolute and may be overcome by strong reasons to the contrary. If through a
misapprehension of law an officer has issued an erroneous interpretation, the error must be
corrected when the true construction is ascertained.

In Philippine Bank of Communications v. Commissioner of Internal Revenue,  this court upheld the
211

nullification of Revenue Memorandum Circular (RMC) No. 7-85 issued by the Acting Commissioner
of Internal Revenue because it was contrary to the express provision of Section 230 of the 1977
National Internal Revenue Codeand, hence, "[cannot] be given weight for to do so would, in effect,
amend the statute."  Thus:
212

When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive
period of two years to ten years on claims of excess quarterly income tax payments, such circular
created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did
not simply interpret the law; rather it legislated guidelines contrary to the statute passed by
Congress.

It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the
sense of more specific and less general interpretations of tax laws) which are issued from time to
time by the Commissioner of Internal Revenue. It is widely accepted that the interpretation placed
upon a statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the
courts. Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to be
erroneous. Thus, courts will not countenance administrative issuances that override, instead of
remaining consistent and in harmony with, the law they seek to apply and implement. (Citations
213

omitted)

This court further held that "[a] memorandum-circular of a bureau head could not operate to vest a
taxpayer with a shield against judicial action [because] there are no vested rights to speak of
respecting a wrong construction of the law by the administrative officials and such wrong
interpretation could not place the Government in estoppel to correct or overrule the same."  In 214

Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,  this court nullified
215

Revenue Memorandum Order (RMO) No. 15-91 and RMC No. 43-91, which imposed a 5% lending
investor's tax on pawnshops.  It was held that "the [Commissioner] cannot, in the exercise of [its
216

interpretative] power, issue administrative rulings or circulars not consistent with the law sought to be
applied. Indeed, administrative issuances must not override, supplant or modify the law, but must
remain consistent with the law they intend to carry out. Only Congress can repeal or amend the
law."217
In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary,  this 218

court stated that the Commissioner of Internal Revenue is not bound by the ruling of his
predecessors,  but, to the contrary, the overruling of decisions is inherent in the interpretation of
219

laws:

[I]n considering a legislative rule a court is free to make three inquiries: (i) whether the rule is within
the delegated authority of the administrative agency; (ii) whether itis reasonable; and (iii) whether it
was issued pursuant to proper procedure. But the court is not free to substitute its judgment as to the
desirability or wisdom of the rule for the legislative body, by its delegation of administrative judgment,
has committed those questions to administrative judgments and not to judicial judgments. In the
case of an interpretative rule, the inquiry is not into the validity but into the correctness or propriety of
the rule. As a matter of power a court, when confronted with an interpretative rule, is free to (i) give
the force of law to the rule; (ii) go to the opposite extreme and substitute its judgment; or (iii) give
some intermediate degree of authoritative weight to the interpretative rule.

In the case at bar, we find no reason for holding that respondent Commissioner erred in not
considering copra as an "agricultural food product" within the meaning of § 103(b) of the NIRC. As
the Solicitor General contends, "copra per se is not food, that is, it is not intended for human
consumption. Simply stated, nobody eats copra for food." That previous Commissioners considered
it so, is not reason for holding that the present interpretation is wrong. The Commissioner of Internal
Revenue is not bound by the ruling of his predecessors. To the contrary, the overruling of decisions
is inherent in the interpretation of laws.  (Emphasis supplied, citations omitted)
220

Tax treatment of income

derived from the PEACe Bonds

The transactions executed for the sale of the PEACe Bonds are:

1. The issuance of the 35 billion Bonds by the Bureau of Treasury to RCBC/CODE-NGO at

10.2 billion; and

2. The sale and distribution by RCBC Capital (underwriter) on behalf of CODE-NGO of the
PEACe Bonds to undisclosed investors at ₱11.996 billion.

It may seem that there was only one lender — RCBC on behalf of CODE-NGO — to whom the
PEACe Bonds were issued at the time of origination. However, a reading of the underwriting
agreement  and RCBC term sheet reveals that the settlement dates for the sale and distribution by
221 222

RCBC Capital (as underwriter for CODE-NGO) of the PEACe Bonds to various undisclosed
investors at a purchase price of approximately ₱11.996 would fall on the same day, October 18,
2001, when the PEACe Bonds were supposedly issued to CODE-NGO/RCBC. In reality, therefore,
the entire ₱10.2 billion borrowing received by the Bureau of Treasury in exchange for the ₱35 billion
worth of PEACe Bonds was sourced directly from the undisclosed number of investors to whom
RCBC Capital/CODE-NGO distributed the PEACe Bonds — all at the time of origination or issuance.
At this point, however, we do not know as to how many investors the PEACe Bonds were sold to by
RCBC Capital.

Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACe Bonds are
deemed deposit substitutes within the meaning of Section 22(Y) of the 1997 National Internal
Revenue Code and RCBC Capital/CODE-NGO would have been obliged to pay the 20% final
withholding tax on the interest or discount from the PEACe Bonds. Further, the obligation to withhold
the 20% final tax on the corresponding interest from the PEACe Bonds would likewise be required of
any lender/investor had the latter turnedaround and sold said PEACe Bonds, whether in whole or
part, simultaneously to 20 or more lenders or investors.

We note, however, that under Section 24  of the 1997 National Internal Revenue Code, interest
223

income received by individuals from longterm deposits or investments with a holding period of not
less than five (5) years is exempt from the final tax.

Thus, should the PEACe Bonds be found to be within the coverage of deposit substitutes, the proper
procedure was for the Bureau of Treasury to pay the face value of the PEACe Bonds to the
bondholders and for the Bureau of Internal Revenue to collect the unpaid final withholding tax
directly from RCBC Capital/CODE-NGO, orany lender or investor if such be the case, as the
withholding agents.

The collection of tax is not

barred by prescription

The three (3)-year prescriptive period under Section 203 of the 1997 National Internal Revenue
Code to assess and collect internal revenue taxes is extended to 10 years in cases of (1) fraudulent
returns; (2) false returns with intent to evade tax; and (3) failureto file a return, to be computed from
the time of discovery of the falsity, fraud, or omission. Section 203 states:

SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section
222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by
law for the filing of the return, and no proceeding in court without assessment for the collection of
such taxes shall be begun after the expiration of such period: Provided, That in a case where a
return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from
the day the return was filed. For purposes of this Section, a return filed before the last day
prescribed by law for the filing thereof shall be considered as filed on such last day. (Emphasis
supplied)

....

SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.

(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the
tax may be assessed, or a proceeding in court for the collection of such tax may be filed without
assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission:
Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall
be judicially taken cognizance of in the civil or criminal action for the collection thereof.

Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe Bonds to 20 or more
lenders/investors, the Bureau of Internal Revenue may still collect the unpaid tax from RCBC
Capital/CODE-NGO within 10 years after the discovery of the omission.

In view of the foregoing, there is no need to pass upon the other issues raised by petitioners and
petitioners-intervenors.

Reiterative motion on the temporary restraining order

Respondents’ withholding of the
20% final withholding tax on
October 18, 2011 was justified

Under the Rules of Court, court orders are required to be "served upon the parties
affected."  Moreover, service may be made personally or by mail.  And, "[p]ersonal service is
224 225

complete upon actual delivery [of the order.]" This court’s temporary restraining order was received
226

only on October 19, 2011, or a day after the PEACe Bonds had matured and the 20% final
withholding tax on the interest income from the same was withheld.

Publication of news reports in the print and broadcast media, as well as on the internet, is not a
recognized mode of service of pleadings, court orders, or processes. Moreover, the news
reports  cited by petitioners were posted minutes before the close of office hours or late in the
227

evening of October 18, 2011, and they did not givethe exact contents of the temporary restraining
order.

"[O]ne cannot be punished for violating an injunction or an order for an injunction unless it is shown
that suchinjunction or order was served on him personally or that he had notice of the issuance or
making of such injunction or order."228

At any rate, "[i]n case of doubt, a withholding agent may always protect himself or herself by
withholding the tax due"  and return the amount of the tax withheld should it be finally determined
229

that the income paid is not subject to withholding.  Hence, respondent Bureau of Treasury was
230

justified in withholding the amount corresponding to the 20% final withholding tax from the proceeds
of the PEACe Bonds, as it received this court’s temporary restraining order only on October 19,
2011, or the day after this tax had been withheld.

Respondents’ retention of the

amounts withheld is a defiance
of the temporary restraining
order

Nonetheless, respondents’ continued failure to release to petitioners the amount corresponding to

the 20% final withholding tax in order that it may be placed in escrow as directed by this court
constitutes a defiance of this court’s temporary restraining order.
231

The temporary restraining order is not moot. The acts sought to be enjoined are not fait accompli.
For an act to be considered fait accompli, the act must have already been fully accomplished and
consummated.  It must be irreversible, e.g., demolition of properties,  service of the penalty of
232 233

imprisonment,  and hearings on cases. When the act sought to be enjoined has not yet been fully
234 235

satisfied, and/or is still continuing in nature,  the defense of fait accomplicannot prosper.
236

The temporary restraining order enjoins the entire implementation of the 2011 BIR Ruling that
constitutes both the withholding and remittance of the 20% final withholding tax to the Bureau of
Internal Revenue. Even though the Bureau of Treasury had already withheld the 20% final
withholding tax  when it received the temporary restraining order, it had yet to remit the monies it
237

withheld to the Bureau of Internal Revenue, a remittance which was due only on November 10,
2011.  The act enjoined by the temporary restraining order had not yet been fully satisfied and was
238

still continuing.

Under DOF-DBM Joint Circular No. 1-2000A  dated July 31, 2001 which prescribes to national
239

government agencies such as the Bureau of Treasury the procedure for the remittance of all taxes it
withheld to the Bureau of Internal Revenue, a national agency shall file before the Bureau of Internal
Revenue a Tax Remittance Advice (TRA) supported by withholding tax returns on or before the 10th
day of the following month after the said taxes had been withheld.  The Bureau of Internal Revenue
240

shall transmit an original copy of the TRA to the Bureau of Treasury, which shall be the basis for
241

recording the remittance of the tax collection.  The Bureau of Internal Revenue will then record the
242

amount of taxes reflected in the TRA as tax collection in the Journal ofTax Remittance by
government agencies based on its copies of the TRA.  Respondents did not submit any withholding
243

tax return or TRA to provethat the 20% final withholding tax was indeed remitted by the Bureau of
Treasury to the Bureau of Internal Revenue on October 18, 2011.

Respondent Bureau of Treasury’s Journal Entry Voucher No. 11-10-10395  dated October 18, 2011
244

submitted to this court shows:

Account Code Debit Amount Credit Amount

Bonds Payable-L/T, Dom-Zero 442-360 35,000,000,000.00
Coupon T/Bonds
(Peace Bonds) – 10 yr
Sinking Fund-Cash (BSF) 198-001 30,033,792,203.59
Due to BIR 412-002 4,966,207,796.41
To record redemption of 10yr Zero
coupon (Peace Bond) net of the 20% final
withholding tax pursuant to BIR Ruling No.
378-2011, value date, October 18, 2011 per
BTr letter authority and BSP Bank
Statements.

The foregoing journal entry, however, does not prove that the amount of ₱4,966,207,796.41,
representing the 20% final withholding tax on the PEACe Bonds, was disbursed by it and remitted to
the Bureau of Internal Revenue on October 18, 2011. The entries merely show that the monies
corresponding to 20% final withholding tax was set aside for remittance to the Bureau of Internal
Revenue.

We recall the November 15, 2011 resolution issued by this court directing respondents to "show
cause why they failed to comply with the [TRO]; and [to] comply with the [TRO] in order that
petitioners may place the corresponding funds in escrow pending resolution of the petition."  The
245

20% final withholding tax was effectively placed in custodia legiswhen this court ordered the deposit
of the amount in escrow. The Bureau of Treasury could still release the money withheld to
petitioners for the latter to place in escrow pursuant to this court’s directive. There was no legal
obstacle to the release of the 20% final withholding tax to petitioners. Congressional appropriation is
not required for the servicing of public debts in view of the automatic appropriations clause
embodied in Presidential Decree Nos. 1177 and 1967.

Section 31 of Presidential Decree No. 1177 provides:

Section 31. Automatic Appropriations. All expenditures for (a) personnel retirement premiums,
government service insurance, and other similar fixed expenditures, (b) principal and interest on
public debt, (c) national government guarantees of obligations which are drawn upon, are
automatically appropriated: provided, that no obligations shall be incurred or payments made from
funds thus automatically appropriated except as issued in the form of regular budgetary allotments.

Section 1 of Presidential Decree No. 1967 states:

Section 1. There is hereby appropriated, out of any funds in the National Treasury not otherwise
appropriated, such amounts as may be necessary to effect payments on foreign or domestic loans,
or foreign or domestic loans whereon creditors make a call on the direct and indirect guarantee of
the Republic of the Philippines, obtained by:

a. the Republic of the Philippines the proceeds of which were relent to government-owned or
controlled corporations and/or government financial institutions;

b. government-owned or controlled corporations and/or government financial institutions the

proceeds of which were relent to public or private institutions;

c. government-owned or controlled corporations and/or financial institutions and guaranteed

by the Republic of the Philippines;

d. other public or private institutions and guaranteed by government owned or controlled

corporations and/or government financial institutions.

The amount of ₱35 billion that includes the monies corresponding to 20% final withholding tax is a
lawfuland valid obligation of the Republic under the Government Bonds. Since said obligation
represents a public debt, the release of the monies requires no legislative appropriation.

Section 2 of Republic Act No. 245 likewise provides that the money to be used for the payment of
Government Bonds may be lawfully taken from the continuing appropriation out of any monies in the
National Treasury and is not required to be the subject of another appropriation legislation: SEC. 2.
The Secretary of Finance shall cause to be paid out of any moneys in the National Treasury not
otherwise appropriated, or from any sinking funds provided for the purpose by law, any interest
falling due, or accruing, on any portion of the public debt authorized by law. He shall also cause to
be paid out of any such money, or from any such sinking funds the principal amount of any
obligations which have matured, or which have been called for redemption or for which redemption
has been demanded in accordance with terms prescribed by him prior to date of issue. . . In the case
of interest-bearing obligations, he shall pay not less than their face value; in the case of obligations
issued at a discount he shall pay the face value at maturity; or if redeemed prior to maturity, such
portion of the face value as is prescribed by the terms and conditions under which such obligations
were originally issued. There are hereby appropriated as a continuing appropriation out of any
moneys in the National Treasury not otherwise appropriated, such sums as may be necessary from
time to time to carry out the provisions of this section. The Secretary of Finance shall transmit to
Congress during the first month of each regular session a detailed statement of all expenditures
made under this section during the calendar year immediately preceding.

Thus, DOF Department Order No. 141-95, as amended, states that payment for Treasury bills and
bonds shall be made through the National Treasury’s account with the Bangko Sentral ng Pilipinas,
to wit:

Section 38. Demand Deposit Account.– The Treasurer of the Philippines maintains a Demand
Deposit Account with the Bangko Sentral ng Pilipinas to which all proceeds from the sale of Treasury
Bills and Bonds under R.A. No. 245, as amended, shall be credited and all payments for redemption
of Treasury Bills and Bonds shall be charged. 1âwphi1

Regarding these legislative enactments ordaining an automatic appropriations provision for debt
servicing, this court has held:

Congress . . . deliberates or acts on the budget proposals of the President, and Congress in the
exercise of its own judgment and wisdom formulates an appropriation act precisely following the
process established by the Constitution, which specifies that no money may be paid from the
Treasury except in accordance with an appropriation made by law.

Debt service is not included inthe General Appropriation Act, since authorization therefor already
exists under RA Nos. 4860 and 245, as amended, and PD 1967. Precisely in the light of this
subsisting authorization as embodied in said Republic Acts and PD for debt service, Congress does
not concern itself with details for implementation by the Executive, butlargely with annual levels and
approval thereof upon due deliberations as part of the whole obligation program for the year. Upon
such approval, Congress has spoken and cannot be said to havedelegated its wisdom to the
Executive, on whose part lies the implementation or execution of the legislative wisdom.  (Citation
246

omitted)

Respondent Bureau of Treasury had the duty to obey the temporary restraining order issued by this
court, which remained in full force and effect, until set aside, vacated, or modified. Its conduct finds
no justification and is reprehensible.
247

WHEREFORE, the petition for review and petitions-in-intervention are GRANTED. BIR Ruling Nos.
370-2011 and DA 378-2011 are NULLIFIED.

Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued retention of the
amount corresponding to the 20% final withholding tax despite this court's directive in the temporary
restraining order and in the resolution dated November 15, 2011 to deliver the amounts to the banks
to be placed in escrow pending resolution of this case.

Respondent Bureau of Treasury is hereby ORDERED to immediately ·release and pay to the
bondholders the amount corresponding-to the 20% final withholding tax that it withheld on October
18, 2011.
G.R. No. 188550               August 19, 2013

DEUTSCHE BANK AG MANILA BRANCH, PETITIONER, 

vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

DECISION

SERENO, CJ.:

This is a Petition for Review1 filed by Deutsche Bank AG Manila Branch (petitioner) under Rule 45 of
the 1997 Rules of Civil Procedure assailing the Court of Tax Appeals En Banc (CTA En Banc)
Decision2 dated 29 May 2009 and Resolution3 dated 1 July 2009 in C.T.A. EB No. 456.

THE FACTS

In accordance with Section 28(A)(5)4 of the National Internal Revenue Code (NIRC) of 1997,
petitioner withheld and remitted to respondent on 21 October 2003 the amount of PHP
67,688,553.51, which represented the fifteen percent (15%) branch profit remittance tax (BPRT) on
its regular banking unit (RBU) net income remitted to Deutsche Bank Germany (DB Germany) for
2002 and prior taxable years.5

Believing that it made an overpayment of the BPRT, petitioner filed with the BIR Large Taxpayers
Assessment and Investigation Division on 4 October 2005 an administrative claim for refund or
issuance of its tax credit certificate in the total amount of PHP 22,562,851.17. On the same date,
petitioner requested from the International Tax Affairs Division (ITAD) a confirmation of its
entitlement to the preferential tax rate of 10% under the RP-Germany Tax Treaty.6

Alleging the inaction of the BIR on its administrative claim, petitioner filed a Petition for Review7 with
the CTA on 18 October 2005. Petitioner reiterated its claim for the refund or issuance of its tax credit
certificate for the amount of PHP 22,562,851.17 representing the alleged excess BPRT paid on
branch profits remittance to DB Germany.

THE CTA SECOND DIVISION RULING8

After trial on the merits, the CTA Second Division found that petitioner indeed paid the total amount
of PHP 67,688,553.51 representing the 15% BPRT on its RBU profits amounting to PHP
451,257,023.29 for 2002 and prior taxable years. Records also disclose that for the year 2003,
petitioner remitted to DB Germany the amount of EURO 5,174,847.38 (or PHP 330,175,961.88 at
the exchange rate of PHP 63.804:1 EURO), which is net of the 15% BPRT.

However, the claim of petitioner for a refund was denied on the ground that the application for a tax
treaty relief was not filed with ITAD prior to the payment by the former of its BPRT and actual
remittance of its branch profits to DB Germany, or prior to its availment of the preferential rate of ten
percent (10%) under the RP-Germany Tax Treaty provision. The court a quo held that petitioner
violated the fifteen (15) day period mandated under Section III paragraph (2) of Revenue
Memorandum Order (RMO) No. 1-2000.

Further, the CTA Second Division relied on Mirant (Philippines) Operations Corporation (formerly
Southern Energy Asia-Pacific Operations [Phils.], Inc.) v. Commissioner of Internal
Revenue9 (Mirant) where the CTA En Banc ruled that before the benefits of the tax treaty may be
extended to a foreign corporation wishing to avail itself thereof, the latter should first invoke the
provisions of the tax treaty and prove that they indeed apply to the corporation.

THE CTA EN BANC RULING10

The CTA En Banc affirmed the CTA Second Division’s Decision dated 29 August 2008 and
Resolution dated 14 January 2009. Citing Mirant, the CTA En Banc held that a ruling from the ITAD
of the BIR must be secured prior to the availment of a preferential tax rate under a tax treaty.
Applying the principle of stare decisis et non quieta movere, the CTA En Banc took into
consideration that this Court had denied the Petition in G.R. No. 168531 filed by Mirant for failure to
sufficiently show any reversible error in the assailed judgment.11 The CTA En Banc ruled that once a
case has been decided in one way, any other case involving exactly the same point at issue should
be decided in the same manner.

The court likewise ruled that the 15-day rule for tax treaty relief application under RMO No. 1-2000
cannot be relaxed for petitioner, unlike in CBK Power Company Limited v. Commissioner of Internal
Revenue.12 In that case, the rule was relaxed and the claim for refund of excess final withholding
taxes was partially granted. While it issued a ruling to CBK Power Company Limited after the
payment of withholding taxes, the ITAD did not issue any ruling to petitioner even if it filed a request
for confirmation on 4 October 2005 that the remittance of branch profits to DB Germany is subject to
a preferential tax rate of 10% pursuant to Article 10 of the RP-Germany Tax Treaty.

ISSUE

This Court is now confronted with the issue of whether the failure to strictly comply with RMO No. 1-
2000 will deprive persons or corporations of the benefit of a tax treaty.

THE COURT’S RULING

The Petition is meritorious.

Under Section 28(A)(5) of the NIRC, any profit remitted to its head office shall be subject to a tax of
15% based on the total profits applied for or earmarked for remittance without any deduction of the
tax component. However, petitioner invokes paragraph 6, Article 10 of the RP-Germany Tax Treaty,
which provides that where a resident of the Federal Republic of Germany has a branch in the
Republic of the Philippines, this branch may be subjected to the branch profits remittance tax
withheld at source in accordance with Philippine law but shall not exceed 10% of the gross amount
of the profits remitted by that branch to the head office.

By virtue of the RP-Germany Tax Treaty, we are bound to extend to a branch in the Philippines,
remitting to its head office in Germany, the benefit of a preferential rate equivalent to 10% BPRT.

On the other hand, the BIR issued RMO No. 1-2000, which requires that any availment of the tax
treaty relief must be preceded by an application with ITAD at least 15 days before the transaction.
The Order was issued to streamline the processing of the application of tax treaty relief in order to
improve efficiency and service to the taxpayers. Further, it also aims to prevent the consequences of
an erroneous interpretation and/or application of the treaty provisions (i.e., filing a claim for a tax
refund/credit for the overpayment of taxes or for deficiency tax liabilities for underpayment).13

The crux of the controversy lies in the implementation of RMO No. 1-2000.
Petitioner argues that, considering that it has met all the conditions under Article 10 of the RP-
Germany Tax Treaty, the CTA erred in denying its claim solely on the basis of RMO No. 1-2000. The
filing of a tax treaty relief application is not a condition precedent to the availment of a preferential
tax rate. Further, petitioner posits that, contrary to the ruling of the CTA, Mirant is not a binding
judicial precedent to deny a claim for refund solely on the basis of noncompliance with RMO No. 1-
2000.

Respondent counters that the requirement of prior application under RMO No. 1-2000 is mandatory
in character. RMO No. 1-2000 was issued pursuant to the unquestioned authority of the Secretary of
Finance to promulgate rules and regulations for the effective implementation of the NIRC. Thus,
courts cannot ignore administrative issuances which partakes the nature of a statute and have in
their favor a presumption of legality.

The CTA ruled that prior application for a tax treaty relief is mandatory, and noncompliance with this
prerequisite is fatal to the taxpayer’s availment of the preferential tax rate.

We disagree.

A minute resolution is not a binding precedent

At the outset, this Court’s minute resolution on Mirant is not a binding precedent. The Court has
clarified this matter in Philippine Health Care Providers, Inc. v. Commissioner of Internal
Revenue14 as follows:

It is true that, although contained in a minute resolution, our dismissal of the petition was a
disposition of the merits of the case. When we dismissed the petition, we effectively affirmed the CA
ruling being questioned. As a result, our ruling in that case has already become final. When a minute
resolution denies or dismisses a petition for failure to comply with formal and substantive
requirements, the challenged decision, together with its findings of fact and legal conclusions, are
deemed sustained. But what is its effect on other cases?

With respect to the same subject matter and the same issues concerning the same parties, it
constitutes res judicata. However, if other parties or another subject matter (even with the same
parties and issues) is involved, the minute resolution is not binding precedent. Thus, in CIR v. Baier-
Nickel, the Court noted that a previous case, CIR v. Baier-Nickel involving the same parties and the
same issues, was previously disposed of by the Court thru a minute resolution dated February 17,
2003 sustaining the ruling of the CA. Nonetheless, the Court ruled that the previous case "ha(d) no
bearing" on the latter case because the two cases involved different subject matters as they were
concerned with the taxable income of different taxable years.

Besides, there are substantial, not simply formal, distinctions between a minute resolution and a
decision. The constitutional requirement under the first paragraph of Section 14, Article VIII of the
Constitution that the facts and the law on which the judgment is based must be expressed clearly
and distinctly applies only to decisions, not to minute resolutions. A minute resolution is signed only
by the clerk of court by authority of the justices, unlike a decision. It does not require the certification
of the Chief Justice. Moreover, unlike decisions, minute resolutions are not published in the
Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of a decision. Indeed, as
a rule, this Court lays down doctrines or principles of law which constitute binding precedent in a
decision duly signed by the members of the Court and certified by the Chief Justice. (Emphasis
supplied)
Even if we had affirmed the CTA in Mirant, the doctrine laid down in that Decision cannot bind this
Court in cases of a similar nature. There are differences in parties, taxes, taxable periods, and
treaties involved; more importantly, the disposition of that case was made only through a minute
resolution.

Tax Treaty vs. RMO No. 1-2000

Our Constitution provides for adherence to the general principles of international law as part of the
law of the land.15The time-honored international principle of pacta sunt servanda demands the
performance in good faith of treaty obligations on the part of the states that enter into the agreement.
Every treaty in force is binding upon the parties, and obligations under the treaty must be performed
by them in good faith.16 More importantly, treaties have the force and effect of law in this
jurisdiction.17

Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties
and, in turn, help the taxpayer avoid simultaneous taxations in two different jurisdictions."18 CIR v.
S.C. Johnson and Son, Inc. further clarifies that "tax conventions are drafted with a view towards the
elimination of international juridical double taxation, which is defined as the imposition of comparable
taxes in two or more states on the same taxpayer in respect of the same subject matter and for
identical periods. The apparent rationale for doing away with double taxation is to encourage the free
flow of goods and services and the movement of capital, technology and persons between countries,
conditions deemed vital in creating robust and dynamic economies. Foreign investments will only
thrive in a fairly predictable and reasonable international investment climate and the protection
against double taxation is crucial in creating such a climate."19

Simply put, tax treaties are entered into to minimize, if not eliminate the harshness of international
juridical double taxation, which is why they are also known as double tax treaty or double tax
agreements.

"A state that has contracted valid international obligations is bound to make in its legislations those
modifications that may be necessary to ensure the fulfillment of the obligations undertaken."20 Thus,
laws and issuances must ensure that the reliefs granted under tax treaties are accorded to the
parties entitled thereto. The BIR must not impose additional requirements that would negate the
availment of the reliefs provided for under international agreements. More so, when the RP-
Germany Tax Treaty does not provide for any pre-requisite for the availment of the benefits under
said agreement.

Likewise, it must be stressed that there is nothing in RMO No. 1-2000 which would indicate a
deprivation of entitlement to a tax treaty relief for failure to comply with the 15-day period. We
recognize the clear intention of the BIR in implementing RMO No. 1-2000, but the CTA’s outright
denial of a tax treaty relief for failure to strictly comply with the prescribed period is not in harmony
with the objectives of the contracting state to ensure that the benefits granted under tax treaties are
enjoyed by duly entitled persons or corporations.

Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty
relief as required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it
would constitute a violation of the duty required by good faith in complying with a tax treaty. The
denial of the availment of tax relief for the failure of a taxpayer to apply within the prescribed period
under the administrative issuance would impair the value of the tax treaty. At most, the application
for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to
the relief.
The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-
2000.  Logically, noncompliance with tax treaties has negative implications on international relations,
1âwphi1

and unduly discourages foreign investors. While the consequences sought to be prevented by RMO
No. 1-2000 involve an administrative procedure, these may be remedied through other system
management processes, e.g., the imposition of a fine or penalty. But we cannot totally deprive those
who are entitled to the benefit of a treaty for failure to strictly comply with an administrative issuance
requiring prior application for tax treaty relief.

Prior Application vs. Claim for Refund

Again, RMO No. 1-2000 was implemented to obviate any erroneous interpretation and/or application
of the treaty provisions. The objective of the BIR is to forestall assessments against corporations
who erroneously availed themselves of the benefits of the tax treaty but are not legally entitled
thereto, as well as to save such investors from the tedious process of claims for a refund due to an
inaccurate application of the tax treaty provisions. However, as earlier discussed, noncompliance
with the 15-day period for prior application should not operate to automatically divest entitlement to
the tax treaty relief especially in claims for refund.

The underlying principle of prior application with the BIR becomes moot in refund cases, such as the
present case, where the very basis of the claim is erroneous or there is excessive payment arising
from non-availment of a tax treaty relief at the first instance. In this case, petitioner should not be
faulted for not complying with RMO No. 1-2000 prior to the transaction. It could not have applied for
a tax treaty relief within the period prescribed, or 15 days prior to the payment of its BPRT, precisely
because it erroneously paid the BPRT not on the basis of the preferential tax rate under

the RP-Germany Tax Treaty, but on the regular rate as prescribed by the NIRC. Hence, the prior
application requirement becomes illogical. Therefore, the fact that petitioner invoked the provisions
of the RP-Germany Tax Treaty when it requested for a confirmation from the ITAD before filing an
administrative claim for a refund should be deemed substantial compliance with RMO No. 1-2000.

Corollary thereto, Section 22921 of the NIRC provides the taxpayer a remedy for tax recovery when
there has been an erroneous payment of tax.  The outright denial of petitioner’s claim for a refund,
1âwphi1

on the sole ground of failure to apply for a tax treaty relief prior to the payment of the BPRT, would
defeat the purpose of Section 229.

Petitioner is entitled to a refund

It is significant to emphasize that petitioner applied – though belatedly – for a tax treaty relief, in
substantial compliance with RMO No. 1-2000. A ruling by the BIR would have confirmed whether
petitioner was entitled to the lower rate of 10% BPRT pursuant to the RP-Germany Tax Treaty.

Nevertheless, even without the BIR ruling, the CTA Second Division found as follows:

Based on the evidence presented, both documentary and testimonial, petitioner was able to
establish the following facts:

a. That petitioner is a branch office in the Philippines of Deutsche Bank AG, a corporation
organized and existing under the laws of the Federal Republic of Germany;
 b. That on October 21, 2003, it filed its Monthly Remittance Return of Final Income Taxes
Withheld under BIR Form No. 1601-F and remitted the amount of ₱67,688,553.51 as branch
profits remittance tax with the BIR; and

c. That on October 29, 2003, the Bangko Sentral ng Pilipinas having issued a clearance,
petitioner remitted to Frankfurt Head Office the amount of EUR5,174,847.38 (or
₱330,175,961.88 at 63.804 Peso/Euro) representing its 2002 profits remittance.22

The amount of PHP 67,688,553.51 paid by petitioner represented the 15% BPRT on its RBU net
income, due for remittance to DB Germany amounting to PHP 451,257,023.29 for 2002 and prior
taxable years.23

Likewise, both the administrative and the judicial actions were filed within the two-year prescriptive
period pursuant to Section 229 of the NIRC.24

Clearly, there is no reason to deprive petitioner of the benefit of a preferential tax rate of 10% BPRT
in accordance with the RP-Germany Tax Treaty.

Petitioner is liable to pay only the amount of PHP 45,125,702.34 on its RBU net income amounting
to PHP 451,257,023.29 for 2002 and prior taxable years, applying the 10% BPRT. Thus, it is proper
to grant petitioner a refund ofthe difference between the PHP 67,688,553.51 (15% BPRT) and PHP
45,125,702.34 (10% BPRT) or a total of PHP 22,562,851.17.

WHEREFORE, premises considered, the instant Petition is GRANTED. Accordingly, the Court of
Tax Appeals En Banc Decision dated 29 May 2009 and Resolution dated 1 July 2009 are
REVERSED and SET ASIDE. A new one is hereby entered ordering respondent Commissioner of
Internal Revenue to refund or issue a tax credit certificate in favor of petitioner Deutsche Bank AG
Manila Branch the amount of TWENTY TWO MILLION FIVE HUNDRED SIXTY TWO THOUSAND
EIGHT HUNDRED FIFTY ONE PESOS AND SEVENTEEN CENTAVOS (PHP 22,562,851.17),
Philippine currency, representing the erroneously paid BPRT for 2002 and prior taxable years.

SO ORDERED.
G.R. No. 183137               April 10, 2013

PELIZLOY REALTY CORPORATION, represented herein by its President, GREGORY K.

LOY, Petitioner, 
vs.
THE PROVINCE OF BENGUET, Respondent.

DECISION

LEONEN, J.:

The principal issue in this case is the scope of authority of a province to impose an amusement tax.

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court praying that the
December 10, 2007 decision of the Regional Trial Court,- Branch 62, La Trinidad, Benguet in Civil
Case No. 06-CV-2232 be reversed and set aside and a new one issued in which: ( 1) respondent
Province of Benguet is declared as having no authority to levy amusement taxes on admission fees
for resorts, swimming pools, bath houses, hot springs, tourist spots, and other places for recreation;
(2) Section 59, Article X of the Benguet Provincial Revenue Code of 2005 is declared null and void;
and (3) the respondent Province of Benguet is permanently enjoined from enforcing Section 59,
Article X of the Benguet Provincial Revenue Code of 2005.

Petitioner Pelizloy Realty Corporation ("Pelizloy") owns Palm Grove Resort, which is designed for
recreation and which has facilities like swimming pools, a spa and function halls. It is located at Asin,
Angalisan, Municipality of Tuba, Province of Benguet.

On December 8, 2005, the Provincial Board of the Province of Benguet approved Provincial Tax
Ordinance No. 05-107, otherwise known as the Benguet Revenue Code of 2005 ("Tax Ordinance").
Section 59, Article X of the Tax Ordinance levied a ten percent (10%) amusement tax on gross
receipts from admissions to "resorts, swimming pools, bath houses, hot springs and tourist spots."
Specifically, it provides the following:

Article Ten: Amusement Tax on Admission

Section 59. Imposition of Tax. There is hereby levied a tax to be collected from the proprietors,
lessees, or operators of theaters, cinemas, concert halls, circuses, cockpits, dancing halls, dancing
schools, night or day clubs, and other places of amusement at the rate of thirty percent (30%) of the
gross receipts from admission fees; and

A tax of ten percent (10%) of gross receipts from admission fees for boxing, resorts, swimming
pools, bath houses, hot springs, and tourist spots is likewise levied. [Emphasis and underscoring
supplied]

Section 162 of the Tax Ordinance provided that the Tax Ordinance shall take effect on January 1,
2006.

It was Pelizloy's position that the Tax Ordinance's imposition of a 10% amusement tax on gross
receipts from admission fees for resorts, swimming pools, bath houses, hot springs, and tourist spots
is an ultra vires act on the part of the Province of Benguet. Thus, it filed an appeal/petition before the
Secretary of Justice on January 27, 2006.
The appeal/petition was filed within the thirty (30)-day period from the effectivity of a tax ordinance
allowed by Section 187 of Republic Act No. 7160, otherwise known as the Local Government Code
(LGC).1 The appeal/petition was docketed as MSO-OSJ Case No. 03-2006.

Under Section 187 of the LGC, the Secretary of Justice has sixty (60) days from receipt of the
appeal to render a decision. After the lapse of which, the aggrieved party may file appropriate
proceedings with a court of competent jurisdiction.

Treating the Secretary of Justice's failure to decide on its appeal/petition within the sixty (60) days
provided by Section 187 of the LGC as an implied denial of such appeal/petition, Pelizloy filed a
Petition for Declaratory Relief and Injunction before the Regional Trial Court, Branch 62, La Trinidad,
Benguet. The petition was docketed as Civil Case No. 06-CV-2232.

Pelizloy argued that Section 59, Article X of the Tax Ordinance imposed a percentage tax in violation
of the limitation on the taxing powers of local government units (LGUs) under Section 133 (i) of the
LGC. Thus, it was null and void ab initio. Section 133 (i) of the LGC provides:

Section 133. Common Limitations on the Taxing Powers of Local Government Units. - Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of the following:

xxx

(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions on
goods or services except as otherwise provided herein

The Province of Benguet assailed the Petition for Declaratory Relief and Injunction as an improper
remedy. It alleged that once a tax liability has attached, the only remedy of a taxpayer is to pay the
tax and to sue for recovery after exhausting administrative remedies.2

On substantive grounds, the Province of Benguet argued that the phrase ‘other places of
amusement’ in Section 140 (a) of the LGC3 encompasses resorts, swimming pools, bath houses, hot
springs, and tourist spots since "Article 220 (b) (sic)" of the LGC defines "amusement" as
"pleasurable diversion and entertainment x x x synonymous to relaxation, avocation, pastime, or
fun."4 However, the Province of Benguet erroneously cited Section 220 (b) of the LGC. Section 220
of the LGC refers to valuation of real property for real estate tax purposes. Section 131 (b) of the
LGC, the provision which actually defines "amusement", states:

Section 131. Definition of Terms. - When used in this Title, the term:

xxx

(b) "Amusement" is a pleasurable diversion and entertainment. It is synonymous to relaxation,

avocation, pastime, or fun On December 10, 2007, the RTC rendered the assailed Decision
dismissing the Petition for Declaratory Relief and Injunction for lack of merit.

Procedurally, the RTC ruled that Declaratory Relief was a proper remedy. On the validity of Section
59, Article X of the Tax Ordinance, the RTC noted that, while Section 59, Article X imposes a
percentage tax, Section 133 (i) of the LGC itself allowed for exceptions. It noted that what the LGC
prohibits is not the imposition by LGUs of percentage taxes in general but the "imposition and levy of
percentage tax on sales, barters, etc., on goods and services only."5It further gave credence to the
Province of Benguet's assertion that resorts, swimming pools, bath houses, hot springs, and tourist
spots are encompassed by the phrase ‘other places of amusement’ in Section 140 of the LGC.

On May 21, 2008, the RTC denied Pelizloy’s Motion for Reconsideration.

Aggrieved, Pelizloy filed the present petition on June 10, 2008 on pure questions of law. It assailed
the legality of Section 59, Article X of the Tax Ordinance as being a (supposedly) prohibited
percentage tax per Section 133 (i) of the LGC.

In its Comment, the Province of Benguet, erroneously citing Section 40 of the LGC, argued that
Section 59, Article X of the Tax Ordinance does not levy a percentage tax "because the imposition is
not based on the total gross receipts of services of the petitioner but solely and actually limited on
the gross receipts of the admission fees collected."6 In addition, it argued that provinces can validly
impose amusement taxes on resorts, swimming pools, bath houses, hot springs, and tourist spots,
these being ‘amusement places’.

For resolution in this petition are the following issues:

1. Whether or not Section 59, Article X of Provincial Tax Ordinance No. 05-107, otherwise
known as the Benguet Revenue Code of 2005, levies a percentage tax.

2. Whether or not provinces are authorized to impose amusement taxes on admission fees
to resorts, swimming pools, bath houses, hot springs, and tourist spots for being
"amusement places" under the Local Government Code.

The power to tax "is an attribute of sovereignty,"7 and as such, inheres in the State. Such, however,
is not true for provinces, cities, municipalities and barangays as they are not the sovereign;8 rather,
they are mere "territorial and political subdivisions of the Republic of the Philippines".9

The rule governing the taxing power of provinces, cities, muncipalities and barangays is summarized
in Icard v. City Council of Baguio:10

It is settled that a municipal corporation unlike a sovereign state is clothed with no inherent power of
taxation. The charter or statute must plainly show an intent to confer that power or the municipality,
cannot assume it. And the power when granted is to be construed in strictissimi juris. Any doubt or
ambiguity arising out of the term used in granting that power must be resolved against the
municipality. Inferences, implications, deductions – all these – have no place in the interpretation of
the taxing power of a municipal corporation.11 [Underscoring supplied]

Therefore, the power of a province to tax is limited to the extent that such power is delegated to it
either by the Constitution or by statute. Section 5, Article X of the 1987 Constitution is clear on this
point:

Section 5. Each local government unit shall have the power to create its own sources of revenues
and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall
accrue exclusively to the local governments. [Underscoring supplied]

Per Section 5, Article X of the 1987 Constitution, "the power to tax is no longer vested exclusively on
Congress; local legislative bodies are now given direct authority to levy taxes, fees and other
charges."12 Nevertheless, such authority is "subject to such guidelines and limitations as the
Congress may provide".13

In conformity with Section 3, Article X of the 1987 Constitution,14 Congress enacted Republic Act No.
7160, otherwise known as the Local Government Code of 1991. Book II of the LGC governs local
taxation and fiscal matters.

Relevant provisions of Book II of the LGC establish the parameters of the taxing powers of LGUS
found below.

First, Section 130 provides for the following fundamental principles governing the taxing powers of
LGUs:

1. Taxation shall be uniform in each LGU.

2. Taxes, fees, charges and other impositions shall:

a. be equitable and based as far as practicable on the taxpayer's ability to pay;

b. be levied and collected only for public purposes;

c. not be unjust, excessive, oppressive, or confiscatory;

d. not be contrary to law, public policy, national economic policy, or in the restraint of
trade.

3. The collection of local taxes, fees, charges and other impositions shall in no case be let to
any private person.

4. The revenue collected pursuant to the provisions of the LGC shall inure solely to the
benefit of, and be subject to the disposition by, the LGU levying the tax, fee, charge or other
imposition unless otherwise specifically provided by the LGC.

5. Each LGU shall, as far as practicable, evolve a progressive system of taxation.

Second, Section 133 provides for the common limitations on the taxing powers of LGUs. Specifically,
Section 133 (i) prohibits the levy by LGUs of percentage or value-added tax (VAT) on sales, barters
or exchanges or similar transactions on goods or services except as otherwise provided by the LGC.

As it is Pelizloy’s contention that Section 59, Article X of the Tax Ordinance levies a prohibited
percentage tax, it is crucial to understand first the concept of a percentage tax.

In Commissioner of Internal Revenue v. Citytrust Investment Phils. Inc.,15 the Supreme Court defined
percentage tax as a "tax measured by a certain percentage of the gross selling price or gross value
in money of goods sold, bartered or imported; or of the gross receipts or earnings derived by any
person engaged in the sale of services." Also, Republic Act No. 8424, otherwise known as the
National Internal Revenue Code (NIRC), in Section 125, Title V,16 lists amusement taxes as among
the (other) percentage taxes which are levied regardless of whether or not a taxpayer is already
liable to pay value-added tax (VAT).
Amusement taxes are fixed at a certain percentage of the gross receipts incurred by certain
specified establishments.

Thus, applying the definition in CIR v. Citytrust and drawing from the treatment of amusement taxes
by the NIRC, amusement taxes are percentage taxes as correctly argued by Pelizloy.

However, provinces are not barred from levying amusement taxes even if amusement taxes are a
form of percentage taxes. Section 133 (i) of the LGC prohibits the levy of percentage taxes "except
as otherwise provided" by the LGC.

Section 140 of the LGC provides:

SECTION 140. Amusement Tax - (a) The province may levy an amusement tax to be collected from
the proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia,
and other places of amusement at a rate of not more than thirty percent (30%) of the gross receipts
from admission fees.

(b) In the case of theaters of cinemas, the tax shall first be deducted and withheld by their
proprietors, lessees, or operators and paid to the provincial treasurer before the gross
receipts are divided between said proprietors, lessees, or operators and the distributors of
the cinematographic films.

(c) The holding of operas, concerts, dramas, recitals, painting and art exhibitions, flower
shows, musical programs, literary and oratorical presentations, except pop, rock, or similar
concerts shall be exempt from the payment of the tax herein imposed.

(d) The Sangguniang Panlalawigan may prescribe the time, manner, terms and conditions
for the payment of tax. In case of fraud or failure to pay the tax, the Sangguniang
Panlalawigan may impose such surcharges, interests and penalties.

(e) The proceeds from the amusement tax shall be shared equally by the province and the
municipality where such amusement places are located. [Underscoring supplied]

Evidently, Section 140 of the LGC carves a clear exception to the general rule in Section 133 (i).
Section 140 expressly allows for the imposition by provinces of amusement taxes on "the
proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia, and
other places of amusement."

However, resorts, swimming pools, bath houses, hot springs, and tourist spots are not among those
places expressly mentioned by Section 140 of the LGC as being subject to amusement taxes. Thus,
the determination of whether amusement taxes may be levied on admissions to resorts, swimming
pools, bath houses, hot springs, and tourist spots hinges on whether the phrase ‘other places of
amusement’ encompasses resorts, swimming pools, bath houses, hot springs, and tourist spots.

Under the principle of ejusdem generis, "where a general word or phrase follows an enumeration of
particular and specific words of the same class or where the latter follow the former, the general
word or phrase is to be construed to include, or to be restricted to persons, things or cases akin to,
resembling, or of the same kind or class as those specifically mentioned."17

The purpose and rationale of the principle was explained by the Court in National Power Corporation
v. Angas18 as follows:
The purpose of the rule on ejusdem generis is to give effect to both the particular and general words,
by treating the particular words as indicating the class and the general words as including all that is
embraced in said class, although not specifically named by the particular words. This is justified on
the ground that if the lawmaking body intended the general terms to be used in their unrestricted
sense, it would have not made an enumeration of particular subjects but would have used only
general terms. [2 Sutherland, Statutory Construction, 3rd ed., pp. 395-400].19

In Philippine Basketball Association v. Court of Appeals,20 the Supreme Court had an opportunity to

interpret a starkly similar provision or the counterpart provision of Section 140 of the LGC in the
Local Tax Code then in effect. Petitioner Philippine Basketball Association (PBA) contended that it
was subject to the imposition by LGUs of amusement taxes (as opposed to amusement taxes
imposed by the national government).  In support of its contentions, it cited Section 13 of
1âwphi1

Presidential Decree No. 231, otherwise known as the Local Tax Code of 1973, (which is analogous
to Section 140 of the LGC) providing the following:

Section 13. Amusement tax on admission. - The province shall impose a tax on admission to be
collected from the proprietors, lessees, or operators of theaters, cinematographs, concert halls,
circuses and other places of amusement xxx.

Applying the principle of ejusdem generis, the Supreme Court rejected PBA's assertions and noted
that:

In determining the meaning of the phrase 'other places of amusement', one must refer to the prior
enumeration of theaters, cinematographs, concert halls and circuses with artistic expression as their
common characteristic. Professional basketball games do not fall under the same category as
theaters, cinematographs, concert halls and circuses as the latter basically belong to artistic forms of
entertainment while the former caters to sports and gaming.21 [Underscoring supplied]

However, even as the phrase ‘other places of amusement’ was already clarified in Philippine
Basketball Association, Section 140 of the LGC adds to the enumeration of 'places of amusement'
which may properly be subject to amusement tax. Section 140 specifically mentions 'boxing stadia'
in addition to "theaters, cinematographs, concert halls and circuses" which were already mentioned
in PD No. 231. Also, 'artistic expression' as a characteristic does not pertain to 'boxing stadia'.

In the present case, the Court need not embark on a laborious effort at statutory construction.
Section 131 (c) of the LGC already provides a clear definition of ‘amusement places’:

Section 131. Definition of Terms. - When used in this Title, the term:

xxx

(c) "Amusement Places" include theaters, cinemas, concert halls, circuses and other places of
amusement where one seeks admission to entertain oneself by seeing or viewing the show or
performances [Underscoring supplied]

Indeed, theaters, cinemas, concert halls, circuses, and boxing stadia are bound by a common
typifying characteristic in that they are all venues primarily for the staging of spectacles or the
holding of public shows, exhibitions, performances, and other events meant to be viewed by an
audience. Accordingly, ‘other places of amusement’ must be interpreted in light of the typifying
characteristic of being venues "where one seeks admission to entertain oneself by seeing or viewing
the show or performances" or being venues primarily used to stage spectacles or hold public shows,
exhibitions, performances, and other events meant to be viewed by an audience.

As defined in The New Oxford American Dictionary,22 ‘show’ means "a spectacle or display of
something, typically an impressive one";23 while ‘performance’ means "an act of staging or
presenting a play, a concert, or other form of entertainment."24 As such, the ordinary definitions of the
words ‘show’ and ‘performance’ denote not only visual engagement (i.e., the seeing or viewing of
things) but also active doing (e.g., displaying, staging or presenting) such that actions are
manifested to, and (correspondingly) perceived by an audience.

Considering these, it is clear that resorts, swimming pools, bath houses, hot springs and tourist
spots cannot be considered venues primarily "where one seeks admission to entertain oneself by
seeing or viewing the show or performances". While it is true that they may be venues where people
are visually engaged, they are not primarily venues for their proprietors or operators to actively
display, stage or present shows and/or performances.

Thus, resorts, swimming pools, bath houses, hot springs and tourist spots do not belong to the same
category or class as theaters, cinemas, concert halls, circuses, and boxing stadia. It follows that they
cannot be considered as among the ‘other places of amusement’ contemplated by Section 140 of
the LGC and which may properly be subject to amusement taxes.

At this juncture, it is helpful to recall this Court’s pronouncements in Icard:

The power to tax when granted to a province is to be construed in strictissimi juris. Any doubt or
ambiguity arising out of the term used in granting that power must be resolved against the province.
Inferences, implications, deductions – all these – have no place in the interpretation of the taxing
power of a province.25

In this case, the definition of' amusement places' in Section 131 (c) of the LGC is a clear basis for
determining what constitutes the 'other places of amusement' which may properly be subject to
amusement tax impositions by provinces. There is no reason for going beyond such basis. To do
otherwise would be to countenance an arbitrary interpretation/application of a tax law and to inflict an
injustice on unassuming taxpayers.

The previous pronouncements notwithstanding, it will be noted that it is only the second paragraph
of Section 59, Article X of the Tax Ordinance which imposes amusement taxes on "resorts,
swimming pools, bath houses, hot springs, and tourist spots". The first paragraph of Section 59,
Article X of the Tax Ordinance refers to "theaters, cinemas, concert halls, circuses, cockpits, dancing
halls, dancing schools, night or day clubs, and other places of amusement".  In any case, the issues
1âwphi1

raised by Pelizloy are pertinent only with respect to the second paragraph of Section 59, Article X of
the Tax Ordinance. Thus, there is no reason to invalidate the first paragraph of Section 59, Article X
of the Tax Ordinance. Any declaration as to the Province of Benguet's lack of authority to levy
amusement taxes must be limited to admission fees to resorts, swimming pools, bath houses, hot
springs and tourist spots.

Moreover, the second paragraph of Section 59, Article X of the Tax Ordinance is not limited to
resorts, swimming pools, bath houses, hot springs, and tourist spots but also covers admission fees
for boxing. As Section 140 of the LGC allows for the imposition of amusement taxes on gross
receipts from admission fees to boxing stadia, Section 59, Article X of the Tax Ordinance must be
sustained with respect to admission fees from boxing stadia.
WHEREFORE, the petition for review on certiorari is GRANTED. The second paragraph of Section
59, Article X of the Benguet Provincial Revenue Code of 2005, in so far as it imposes amusement
taxes on admission fees to resorts, swimming pools, bath houses, hot springs and tourist spots, is
declared null and void. Respondent Province of Benguet is permanently enjoined from enforcing the
second paragraph of Section 59, Article X of the Benguet Provincial Revenue Code of 2005 with
respect to resorts, swimming pools, bath houses, hot springs and tourist spots.

SO ORDERED.