SC orders gov’t to return P5-B tax for PEACe bonds

MANILA, Philippines—The Supreme Court ordered the government to pay the P5-billion tax to holders of the Poverty Eradication and Alleviation Certificates (PEACe) bonds after it nullified the Bureau of Internal Revenue (BIR)  rulings imposing a 20% final withholding tax on the government-issued bonds.

In a 45-page decision, the high court en banc said BIR Rulings No. 370-2011 and No. 378-2011 are unconstitutional and contrary to law.

“Respondent Bureau of Treasury (BTr) is hereby ordered to immediately release and pay to the bondholders the amount corresponding to the 20 percent final withholding tax that it withheld on October 18, 2011,” the high court said.

The PEACe bonds were originally issued by the BTr to Rizal Commercial Banking Corporation (RCBC) Capital, in behalf of the Caucus of Development NGO Networks (CODE-NGO), and subsequently sold to the secondary markets, including the eight petitioner banks–Banco de Oro, Bank of Commerce, China Banking Corp., Metropolitan Bank and Trust Co., Philippine Bank of Communications, Philippine National Bank, Philippine Veterans Bank and Planters Development Bank. Net proceeds from the sale will be used to endow a permanent fund to finance accredited non-government organizations throughout the country.

A few months before the bonds matured, the BIR issued the assailed rulings imposing said tax “not only on RCBC/CODE NGO but also on all subsequent holders of the bonds.”

The petitioners and petitioner-intervenors sought recourse from the Supreme Court, which then issued a temporary restraining order (TRO) against implementation by the BTr of the BIR rulings. However, the government agency failed to comply with said order.

The high court said the BIR erroneously ruled that “all treasury bonds, regardless of the number of purchasers/lenders at the time of issuance are considered deposit substitutes.” This interpretation, according to the high court, “completely disregarded the 20 or more lender rule added by Congress in the 1997 Tax Code. It also created a distinction for government debt instruments as against those issued by private corporations when there was none in the tax law.”

Under the National Internal Revenue Code (NIRC), monetary benefits from deposit substitutes are subject to a 20% final withholding tax. The Code also defines “deposit substitutes as 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 accounts…”

“Congress specifically defined ‘public’ to mean twenty (20) or more individual or corporate leaders 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 20% final withholding tax,” the decision said.

The high court said “at the time of original issuance, the PEACe bonds are not deemed deposit substitutes within the meaning of Section 22 (Y) of the 1997 Tax Code, since there is only one lender – RCBC on behalf of CODE – NGO – to whom the bonds were issued.”

“It may be granted that the interpretation of the Commissioner of Internal Revenue in charge of executing the Tax Code is an authoritative construction of great weight, but the principle is not absolute and may be overcome by strong reasons to the contrary,” he said. “[T]he error must be corrected when the true construction is ascertained.”

However, the decision also clarified that a subsequent sale and distribution of the PEACe bonds to 20 or more lenders/investors, would oblige RCBC Capital and Code NGO to withhold the 20% final on the interest/discount from the bond.

The high court said should PEACe Bonds be found to be within the coverage of the deposit substitutes, the proper procedure was for the BTr to pay the face value of the PEACe bonds to the bondholders and for the BIR to collect  the unpaid final withholding tax directly from RCBC  Capital/ CODE-NGO, or any lender or investor.

“Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe bonds to 20 or more lenders/investors, the BIR may still collect the unpaid tax from RCBC Capital/CODE-NGO within 10 years after the discovery of the omission,” the high court said.