1)
Section 37 of the Tax Code, thus:
EN BANC
June 30, 1987
G.R. No. L-53961
NATIONAL DEVELOPMENT COMPANY, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
CRUZ, J.:
We are asked to reverse the decision of the Court of Tax Appeals on the ground that it
is erroneous. We have carefully studied it and find it is not; on the contrary, it is
supported by law and doctrine. So finding, we affirm.
Reduced to simplest terms, the background facts are as follows.
The national Development Company entered into contracts in Tokyo with several
Japanese shipbuilding companies for the construction of twelve ocean-going
vessels. 1 The purchase price was to come from the proceeds of bonds issued by the
Central Bank. 2 Initial payments were made in cash and through irrevocable letters of
credit. 3Fourteen promissory notes were signed for the balance by the NDC and, as
required by the shipbuilders, guaranteed by the Republic of the Philippines. 4 Pursuant
thereto, the remaining payments and the interests thereon were remitted in due time
by the NDC to Tokyo. The vessels were eventually completed and delivered to the NDC
in Tokyo. 5
The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70
as interest on the balance of the purchase price. No tax was withheld. The
Commissioner then held the NDC liable on such tax in the total sum of P5,115,234.74.
Negotiations followed but failed. The BIR thereupon served on the NDC a warrant of
distraint and levy to enforce collection of the claimed amount. 6 The NDC went to the
Court of Tax Appeals.
The BIR was sustained by the CTA except for a slight reduction of the tax deficiency in
the sum of P900.00, representing the compromise penalty. 7 The NDC then came to
this Court in a petition for certiorari.
The petition must fail for the following reasons.
TAXATION 1 Atty. Ortega
Cordero
The Japanese shipbuilders were liable to tax on the interest remitted to them under
SEC. 37. Income from sources within the Philippines. (a) Gross income
from sources within the Philippines. The following items of gross income
shall be treated as gross income from sources within the Philippines:
(1) Interest. Interest derived from sources within the Philippines, and
interest on bonds, notes, or other interest-bearing obligations of residents,
corporate or otherwise;
xxx xxx xxx
The petitioner argues that the Japanese shipbuilders were not subject to tax under the
above provision because all the related activities the signing of the contract, the
construction of the vessels, the payment of the stipulated price, and their delivery to
the NDC were done in Tokyo. 8 The law, however, does not speak of activity but of
"source," which in this case is the NDC. This is a domestic and resident corporation
with principal offices in Manila.
As the Tax Court put it:
It is quite apparent, under the terms of the law, that the Government's right
to levy and collect income tax on interest received by foreign corporations
not engaged in trade or business within the Philippines is not planted upon
the condition that 'the activity or labor and the sale from which the
(interest) income flowed had its situs' in the Philippines. The law specifies:
'Interest derived from sources within the Philippines, and interest on bonds,
notes, or other interest-bearing obligations of residents, corporate or
otherwise.' Nothing there speaks of the 'act or activity' of non-resident
corporations in the Philippines, or place where the contract is signed.
The residence of the obligor who pays the interest rather than the physical
location of the securities, bonds or notes or the place of payment, is the
determining factor of the source of interest income. (Mertens, Law of
Federal Income Taxation, Vol. 8, p. 128, citing A.C. Monk & Co. Inc. 10 T.C.
77; Sumitomo Bank, Ltd., 19 BTA 480; Estate of L.E. Mckinnon, 6 BTA 412;
Standard Marine Ins. Co., Ltd., 4 BTA 853; Marine Ins. Co., Ltd., 4 BTA
867.) Accordingly, if the obligor is a resident of the Philippines the interest
payment paid by him can have no other source than within the Philippines.
The interest is paid not by the bond, note or other interest-bearing
obligations, but by the obligor. (See mertens, Id., Vol. 8, p. 124.)
Here in the case at bar, petitioner National Development Company, a
corporation duly organized and existing under the laws of the Republic of
the Philippines, with address and principal office at Calle Pureza, Sta. Mesa,
Manila, Philippines unconditionally promised to pay the Japanese
shipbuilders, as obligor in fourteen (14) promissory notes for each vessel,
1|Page
 the balance of the contract price of the twelve (12) ocean-going vessels
purchased and acquired by it from the Japanese corporations, including the
interest on the principal sum at the rate of five per cent (5%) per annum.
(See Exhs. "D", D-1" to "D-13", pp. 100-113, CTA Records; par. 11, Partial
Stipulation of Facts.) And pursuant to the terms and conditions of these
promisory notes, which are duly signed by its Vice Chairman and General
Manager, petitioner remitted to the Japanese shipbuilders in Japan during
the years 1960, 1961, and 1962 the sum of $830,613.17, $1,654,936.52 and
$1,541.031.00, respectively, as interest on the unpaid balance of the
purchase price of the aforesaid vessels. (pars. 13, 14, & 15, Partial Stipulation
of Facts.)
The law is clear. Our plain duty is to apply it as written. The residence of the
obligor which paid the interest under consideration, petitioner herein, is
Calle Pureza, Sta. Mesa, Manila, Philippines; and as a corporation duly
organized and existing under the laws of the Philippines, it is a domestic
corporation, resident of the Philippines. (Sec. 84(c), National Internal
Revenue Code.) The interest paid by petitioner, which is admittedly a
resident of the Philippines, is on the promissory notes issued by it. Clearly,
therefore, the interest remitted to the Japanese shipbuilders in Japan in
1960, 1961 and 1962 on the unpaid balance of the purchase price of the
vessels acquired by petitioner is interest derived from sources within the
Philippines subject to income tax under the then Section 24(b)(1) of the
National Internal Revenue Code. 9
There is no basis for saying that the interest payments were obligations of the Republic
of the Philippines and that the promissory notes of the NDC were government
securities exempt from taxation under Section 29(b)[4] of the Tax Code, reading as
follows:
SEC. 29. Gross Income. xxxx xxx xxx xxx
(b) Exclusion from gross income. The following items shall not be
included in gross income and shall be exempt from taxation under this Title:
xxx xxx xxx
(4) Interest on Government Securities. Interest upon the obligations of
the Government of the Republic of the Philippines or any political
subdivision thereof, but in the case of such obligations issued after
approval of this Code, only to the extent provided in the act authorizing the
issue thereof. (As amended by Section 6, R.A. No. 82; emphasis supplied)
The law invoked by the petitioner as authorizing the issuance of securities is R.A. No.
1407, which in fact is silent on this matter. C.A. No. 182 as amended by C.A. No. 311
does carry such authorization but, like R.A. No. 1407, does not exempt from taxes the
interests on such securities.
It is also incorrect to suggest that the Republic of the Philippines could not collect
taxes on the interest remitted because of the undertaking signed by the Secretary of
Finance in each of the promissory notes that:
Upon authority of the President of the Republic of the Philippines, the
undersigned, for value received, hereby absolutely and unconditionally
guarantee (sic), on behalf of the Republic of the Philippines, the due and
punctual payment of both principal and interest of the above note.10
There is nothing in the above undertaking exempting the interests from taxes.
Petitioner has not established a clear waiver therein of the right to tax interests. Tax
exemptions cannot be merely implied but must be categorically and unmistakably
expressed. 11 Any doubt concerning this question must be resolved in favor of the
taxing power. 12
Nowhere in the said undertaking do we find any inhibition against the collection of the
disputed taxes. In fact, such undertaking was made by the government in consonance
with and certainly not against the following provisions of the Tax Code:
Sec. 53(b). Nonresident aliens. All persons, corporations and general co-
partnership (companies colectivas), in whatever capacity acting, including
lessees or mortgagors of real or personal capacity, executors, administrators,
receivers, conservators, fiduciaries, employers, and all officers and
employees of the Government of the Philippines having control, receipt,
custody; disposal or payment of interest, dividends, rents, salaries, wages,
premiums, annuities, compensations, remunerations, emoluments, or other
fixed or determinable annual or categorical gains, profits and income of any
nonresident alien individual, not engaged in trade or business within the
Philippines and not having any office or place of business therein, shall
(except in the cases provided for in subsection (a) of this section) deduct and
withhold from such annual or periodical gains, profits and income a tax to
twenty (now 30%) per centum thereof: ...
Sec. 54. Payment of corporation income tax at source. In the case of
foreign corporations subject to taxation under this Title not engaged in trade
or business within the Philippines and not having any office or place of
business therein, there shall be deducted and withheld at the source in the
same manner and upon the same items as is provided in section fifty-three a
tax equal to thirty (now 35%) per centum thereof, and such tax shall be
returned and paid in the same manner and subject to the same conditions as
provided in that section:....
Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed
the obligations of the NDC but without diminution of its taxing power under existing
laws.

2|Page
TAXATION 1 Atty. Ortega
Cordero
In suggesting that the NDC is merely an administrator of the funds of the Republic of
the Philippines, the petitioner closes its eyes to the nature of this entity as a
corporation. As such, it is governed in its proprietary activities not only by its charter
but also by the Corporation Code and other pertinent laws.
The petitioner also forgets that it is not the NDC that is being taxed. The tax was due
on the interests earned by the Japanese shipbuilders. It was the income of these
companies and not the Republic of the Philippines that was subject to the tax the NDC
did not withhold.
In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for
its failure to withhold the same from the Japanese shipbuilders. Such liability is
imposed by Section 53(c) of the Tax Code, thus:
Section 53(c). Return and Payment. Every person required to deduct and
withhold any tax under this section shall make return thereof, in duplicate,
on or before the fifteenth day of April of each year, and, on or before the
time fixed by law for the payment of the tax, shall pay the amount withheld
to the officer of the Government of the Philippines authorized to receive it.
Every such person is made personally liable for such tax, and is indemnified
against the claims and demands of any person for the amount of any
payments made in accordance with the provisions of this section. (As
amended by Section 9, R.A. No. 2343.)
In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court
of Tax Appeals, 13 the Court quoted with approval the following regulation of the BIR
on the responsibilities of withholding agents:
In case of doubt, a withholding agent may always protect himself by
withholding the tax due, and promptly causing a query to be addressed to
the Commissioner of Internal Revenue for the determination whether or not
the income paid to an individual is not subject to withholding. In case the
Commissioner of Internal Revenue decides that the income paid to an
individual is not subject to withholding, the withholding agent may
thereupon remit the amount of a tax withheld. (2nd par., Sec. 200, Income
Tax Regulations).
"Strict observance of said steps is required of a withholding agent before he could be
released from liability," so said Justice Jose P. Bengson, who wrote the decision.
"Generally, the law frowns upon exemption from taxation; hence, an exempting
provision should be construed strictissimi juris." 14
The petitioner was remiss in the discharge of its obligation as the withholding agent of
the government an so should be held liable for its omission.
WHEREFORE, the appealed decision is AFFIRMED, without any pronouncement as
to costs. It is so ordered.
TAXATION 1 Atty. Ortega
Cordero
2)
G.R. No. L-26284 October 8, 1986
TOMAS CALASANZ, ET AL., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and the COURT OF TAX
APPEALS, respondents.
San Juan, Africa, Gonzales & San Agustin Law Office for petitioners.
FERNAN, J.:
Appeal taken by Spouses Tomas and Ursula Calasanz from the decision of the Court of
Tax Appeals in CTA No. 1275 dated June 7, 1966, holding them liable for the payment
of P3,561.24 as deficiency income tax and interest for the calendar year 1957 and
P150.00 as real estate dealer's fixed tax.
Petitioner Ursula Calasanz inherited from her father Mariano de Torres an agricultural
land located in Cainta, Rizal, containing a total area of 1,678,000 square meters. In
order to liquidate her inheritance, Ursula Calasanz had the land surveyed and
subdivided into lots. Improvements, such as good roads, concrete gutters, drainage
and lighting system, were introduced to make the lots saleable. Soon after, the lots
were sold to the public at a profit.
In their joint income tax return for the year 1957 filed with the Bureau of Internal
Revenue on March 31, 1958, petitioners disclosed a profit of P31,060.06 realized from
the sale of the subdivided lots, and reported fifty per centum thereof or P15,530.03 as
taxable capital gains.
Upon an audit and review of the return thus filed, the Revenue Examiner adjudged
petitioners engaged in business as real estate dealers, as defined in Section 194 [s] 1 of
the National Internal Revenue Code, required them to pay the real estate dealer's
tax 2and assessed a deficiency income tax on profits derived from the sale of the lots
based on the rates for ordinary income.
On September 29, 1962, petitioners received from respondent Commissioner of
Internal Revenue:
3|Page
 a. Demand No. 90-B-032293-57 in the amount of P160.00
representing real estate dealer's fixed tax of P150.00 and P10.00
compromise penalty for late payment; and
b. Assessment No. 90-5-35699 in the amount of P3,561.24 as
deficiency income tax on ordinary gain of P3,018.00 plus interest
of P 543.24.
On October 17, 1962, petitioners filed with the Court of Tax Appeals a petition for
review contesting the aforementioned assessments.
On June 7, 1966, the Tax Court upheld the respondent Commissioner except for that
portion of the assessment regarding the compromise penalty of P10.00 for the reason
that in this jurisdiction, the same cannot be collected in the absence of a valid and
binding compromise agreement.
Hence, the present appeal.
The issues for consideration are:
a. Whether or not petitioners are real estate dealers liable for real
estate dealer's fixed tax; and
b. Whether the gains realized from the sale of the lots are taxable
in full as ordinary income or capital gains taxable at capital gain
rates.
The issues are closely interrelated and will be taken jointly.
Petitioners assail their liabilities as "real estate dealers" and seek to bring the profits
from the sale of the lots under Section 34 [b] [2] 3 of the Tax Code.
The theory advanced by the petitioners is that inherited land is a capital asset within
the meaning of Section 34[a] [1] of the Tax Code and that an heir who liquidated his
inheritance cannot be said to have engaged in the real estate business and may not be
denied the preferential tax treatment given to gains from sale of capital assets, merely
because he disposed of it in the only possible and advantageous way.
Petitioners averred that the tract of land subject of the controversy was sold because of
their intention to effect a liquidation. They claimed that it was parcelled out into
smaller lots because its size proved difficult, if not impossible, of disposition in one
single transaction. They pointed out that once subdivided, certainly, the lots cannot be
sold in one isolated transaction. Petitioners, however, admitted that roads and other
improvements were introduced to facilitate its sale. 4
TAXATION 1 Atty. Ortega
Cordero
On the other hand, respondent Commissioner maintained that the imposition of the
taxes in question is in accordance with law since petitioners are deemed to be in the
real estate business for having been involved in a series of real estate transactions
pursued for profit. Respondent argued that property acquired by inheritance may be
converted from an investment property to a business property if, as in the present
case, it was subdivided, improved, and subsequently sold and the number, continuity
and frequency of the sales were such as to constitute "doing business." Respondent
likewise contended that inherited property is by itself neutral and the fact that the
ultimate purpose is to liquidate is of no moment for the important inquiry is what the
taxpayer did with the property. Respondent concluded that since the lots are ordinary
assets, the profits realized therefrom are ordinary gains, hence taxable in full.
We agree with the respondent.
The assets of a taxpayer are classified for income tax purposes into ordinary assets and
capital assets. Section 34[a] [1] of the National Internal Revenue Code broadly defines
capital assets as follows:
[1] Capital assets.-The term 'capital assets' means property held
by the taxpayer [whether or not connected with his trade or
business], but does not include, stock in trade of the taxpayer or
other property of a kind which would properly be included, in the
inventory of the taxpayer if on hand at the close of the taxable
year, or property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business, or
property used in the trade or business of a character which is
subject to the allowance for depreciation provided in subsection
[f] of section thirty; or real property used in the trade or business
of the taxpayer.
The statutory definition of capital assets is negative in nature. 5 If the asset is not
among the exceptions, it is a capital asset; conversely, assets falling within the
exceptions are ordinary assets. And necessarily, any gain resulting from the sale or
exchange of an asset is a capital gain or an ordinary gain depending on the kind of
asset involved in the transaction.
However, there is no rigid rule or fixed formula by which it can be determined with
finality whether property sold by a taxpayer was held primarily for sale to customers in
the ordinary course of his trade or business or whether it was sold as a capital
asset. 6 Although several factors or indices 7 have been recognized as helpful guides in
making a determination, none of these is decisive; neither is the presence nor the
absence of these factors conclusive. Each case must in the last analysis rest upon its
own peculiar facts and circumstances. 8
Also a property initially classified as a capital asset may thereafter be treated as an
ordinary asset if a combination of the factors indubitably tend to show that the activity
was in furtherance of or in the course of the taxpayer's trade or business. Thus, a sale
of inherited real property usually gives capital gain or loss even though the property
4|Page
has to be subdivided or improved or both to make it salable. However, if the inherited taxpayer primarily for sale to customers in the ordinary course of
property is substantially improved or very actively sold or both it may be treated as his trade or business.
held primarily for sale to customers in the ordinary course of the heir's business. 9
Additionally, in Home Co., Inc. vs. Commissioner, 15 the court articulated on the
Upon an examination of the facts on record, We are convinced that the activities of matter in this wise:
petitioners are indistinguishable from those invariably employed by one engaged in
the business of selling real estate.
One may, of course, liquidate a capital asset. To do so, it is
necessary to sell. The sale may be conducted in the most
One strong factor against petitioners' contention is the business element of advantageous manner to the seller and he will not lose the
development which is very much in evidence. Petitioners did not sell the land in the benefits of the capital gain provision of the statute unless he
condition in which they acquired it. While the land was originally devoted to rice and enters the real estate business and carries on the sale in the
fruit trees, 10 it was subdivided into small lots and in the process converted into a manner in which such a business is ordinarily conducted. In that
residential subdivision and given the name Don Mariano Subdivision. Extensive event, the liquidation constitutes a business and a sale in the
improvements like the laying out of streets, construction of concrete gutters and ordinary course of such a business and the preferred tax status is
installation of lighting system and drainage facilities, among others, were undertaken lost.
to enhance the value of the lots and make them more attractive to prospective buyers.
The audited financial statements 11 submitted together with the tax return in question
In view of the foregoing, We hold that in the course of selling the subdivided lots,
disclosed that a considerable amount was expended to cover the cost of improvements.
petitioners engaged in the real estate business and accordingly, the gains from the sale
As a matter of fact, the estimated improvements of the lots sold reached P170,028.60
of the lots are ordinary income taxable in full.
whereas the cost of the land is only P 4,742.66. There is authority that a property
ceases to be a capital asset if the amount expended to improve it is double its original
cost, for the extensive improvement indicates that the seller held the property WHEREFORE, the decision of the Court of Tax Appeals is affirmed. No costs.
primarily for sale to customers in the ordinary course of his business. 12
SO ORDERED.
Another distinctive feature of the real estate business discernible from the records is
the existence of contracts receivables, which stood at P395,693.35 as of the year ended
December 31, 1957. The sizable amount of receivables in comparison with the sales 3)
volume of P446,407.00 during the same period signifies that the lots were sold on
installment basis and suggests the number, continuity and frequency of the sales. Also
of significance is the circumstance that the lots were advertised 13 for sale to the public
and that sales and collection commissions were paid out during the period in question.
[G.R. No. 125508. July 19, 2000]

Petitioners, likewise, urge that the lots were sold solely for the purpose of liquidation.

In Ehrman vs. Commissioner, 14 the American court in clear and categorical terms
CHINA BANKING CORPORATION, petitioner, vs. COURT OF APPEALS,
rejected the liquidation test in determining whether or not a taxpayer is carrying on a
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
trade or business The court observed that the fact that property is sold for purposes of
APPEALS, respondents.
liquidation does not foreclose a determination that a "trade or business" is being
conducted by the seller. The court enunciated further:
DECISION
We fail to see that the reasons behind a person's entering into a VITUG, J.:
business-whether it is to make money or whether it is to liquidate-
should be determinative of the question of whether or not the
gains resulting from the sales are ordinary gains or capital gains. The Commissioner of Internal Revenue denied the deduction from gross income
The sole question is-were the taxpayers in the business of of "securities becoming worthless" claimed by China Banking Corporation (CBC). The
subdividing real estate? If they were, then it seems indisputable Commissioners disallowance was sustained by the Court of Tax Appeals ("CTA"). When
that the property sold falls within the exception in the definition the ruling was appealed to the Court of Appeals ("CA"), the appellate court upheld the
of capital assets . . . that is, that it constituted 'property held by the CTA. The case is now before us on a Petition for Review on Certiorari.
5|Page
TAXATION 1 Atty. Ortega
Cordero
 Sometime in 1980, petitioner China Banking Corporation made a 53% equity
investment in the First CBC Capital (Asia) Ltd., a Hongkong subsidiary engaged in
financing and investment with "deposit-taking" function.The investment amounted to
P16,227,851.80, consisting of 106,000 shares with a par Value of P100 per share.
In the course of the regular examination of the financial books and investment
portfolios of petitioner conducted by Bangko Sentral in 1986, it was shown that First
CBC Capital (Asia), Ltd., has become insolvent. With the approval of Bangko Sentral,
petitioner wrote-off as being worthless its investment in First CBC Capital (Asia), Ltd.,
in its 1987 Income Tax Return and treated it as a bad debt or as an ordinary loss
deductible from its gross income.
Respondent Commissioner of internal Revenue disallowed the deduction and
assessed petitioner for income tax deficiency in the amount of P8,533,328.04, inclusive
of surcharge, interest and compromise penalty. The disallowance of the deduction was
made on the ground that the investment should not be classified as being "worthless"
and that, although the Hongkong Banking Commissioner had revoked the license of
First CBC Capital as a "deposit-taping" company, the latter could still exercise, however,
its financing and investment activities. Assuming that the securities had indeed become
worthless, respondent Commissioner of Internal Revenue held the view that they should
then be classified as "capital loss," and not as a bad debt expense there being no
indebtedness to speak of between petitioner and its subsidiary.
Petitioner contested the ruling of respondent Commissioner before the CTA. The
tax court sustained the Commissioner, holding that the securities had not indeed
become worthless and ordered petitioner to pay its deficiency income tax for 1987 of
P8,533,328.04 plus 20% interest per annum until fully paid. When the decision was
appealed to the Court of Appeals, the latter upheld the CTA. In its instant petition for
review on certiorari, petitioner bank assails the CA decision.
The petition must fail.
The claim of petitioner that the shares of stock in question have become worthless
is based on a Profit and Loss Account for the Year-End 31 December 1987, and the
recommendation of Bangko Sentral that the equity investment be written-off due to the
insolvency of the subsidiary. While the matter may not be indubitable (considering that
certain classes of intangibles, like franchises and goodwill, are not always given
corresponding values in financial statements[1], there may really be no need, however,
to go of length into this issue since, even to assume the worthlessness of the shares, the
deductibility thereof would still be nil in this particular case.At all events, the Court is
not prepared to hold that both the tax court and the appellate court are utterly devoid
of substantial basis for their own factual findings.
Subject to certain exceptions, such as the compensation income of individuals and
passive income subject to final tax, as well as income of non-resident aliens and foreign
corporations not engaged in trade or business in the Philippines, the tax on income is
imposed on the net income allowing certain specified deductions from gross income to
be claimed by the taxpayer. Among the deductible items allowed by the National
Internal Revenue Code ("NIRC") are bad debts and losses.[2]
An equity investment is a capital, not ordinary, asset of the investor the sale or
exchange of which results in either a capital gain or a capital loss. The gain or the loss
TAXATION 1 Atty. Ortega
Cordero
is ordinary when the property sold or exchanged is not a capital asset.[3] A capital
asset is defined negatively in Section 33(1) of the NIRC; viz:
(1) Capital assets. - The term 'capital assets' means property held by the taxpayer
(whether or not connected with his trade or business), but does not include stock in
trade of the taxpayer or other property of a kind which would properly be included in
the inventory of the taxpayer if on hand at the close of the taxable year, or property
held by the taxpayer primarily for sale to customers in the ordinary course of his trade
or business, or property used in the trade or business, of a character which is subject
to the allowance for depreciation provided in subsection (f) of section twenty-nine; or
real property used in the trade or business of the taxpayer.
Thus, shares of stock; like the other securities defined in Section 20(t)[4] of the
NIRC, would be ordinary assets only to a dealer in securities or a person
engaged in the purchase and sale of, or an active trader (for his own
account) in, securities. Section 20(u) of the NIRC defines a dealer in securities thus:
"(u) The term 'dealer in securities' means a merchant of stocks or securities, whether
an individual, partnership or corporation, with an established place of business,
regularly engaged in the purchase of securities and their resale to customers; that is,
one who as a merchant buys securities and sells them to customers with a view to the
gains and profits that may be derived therefrom."
In the hands, however, of another who holds the shares of stock by way of an investment,
the shares to him would be capital assets. When the shares held by such investor
become worthless, the loss is deemed to be a loss from the sale or exchange
of capital assets. Section 29(d)(4)(B) of the NIRC states:
"(B) Securities becoming worthless. - If securities as defined in Section 20 become
worthless during the tax" year and are capital assets, the loss resulting therefrom shall,
for the purposes of his Title, be considered as a loss from the sale or exchange, on the
last day of such taxable year, of capital assets."
The above provision conveys that the loss sustained by the holder of the securities,
which are capital assets (to him), is to be treated as a capital loss as if incurred from
a sale or exchange transaction. A capital gain or a capital loss normally requires
the concurrence of two conditions for it to result: (1) There is a sale or exchange; and (2)
the thing sold or exchanged is a capital asset. When securities become worthless, there
is strictly no sale or exchange but the law deems the loss anyway to be "a loss from the
sale or exchange of capital assets.[5]A similar kind of treatment is given, by the NIRC on
the retirement of certificates of indebtedness with interest coupons or in registered
form, short sales and options to buy or sell property where no sale or exchange strictly
exists.[6] In these cases, the NIRC dispenses, in effect, with the standard requirement of
a sale or exchange for the application of the capital gain and loss provisions of the code.
Capital losses are allowed to be deducted only to the extent of capital
gains, i.e., gains derived from the sale or exchange of capital assets, and not
from any other income of the taxpayer.
6|Page
 In the case at bar, First CBC Capital (Asia), Ltd., the investee corporation, is a
subsidiary corporation of petitioner bank whose shares in said investee corporation are
not intended for purchase or sale but as an investment. Unquestionably then, any loss
therefrom would be a capital loss, not an ordinary loss, to the investor.
Section 29(d)(4)(A), of the NIRC expresses:
"(A) Limitations. - Losses from sales or exchanges of capital assets shall be allowed
only to the extent provided in Section 33."
The pertinent provisions of Section 33 of the NIRC referred to in the aforesaid Section
29(d)(4)(A), read:
"Section 33. Capital gains and losses. -
x x x x x x x x x.
"(c) Limitation on capital losses. - Losses from sales or exchange of capital
assets shall be allowed only to the extent of the gains from such sales or
exchanges. If a bank or trust company incorporated under the laws of the
Philippines, a substantial part of whose business is the receipt of deposits, sells any
bond, debenture, note, or certificate or other evidence of indebtedness issued by
any corporation (including one issued by a government or political subdivision
thereof), with interest coupons or in registered form, any loss resulting from
such sale shall not be subject to the foregoing limitation an shall not be included in
determining the applicability of such limitation to other losses.
The exclusionary clause found in the foregoing text of the law does not include all
forms of securities but specifically covers only bonds, debentures, notes,
certificates or other evidence of indebtedness, with interest coupons or in
registered form, which are the instruments of credit normally dealt with in the usual
lending operations of a financial institution. Equity holdings cannot come close to
being, within the purview of "evidence of indebtedness" under the second sentence
of the aforequoted paragraph. Verily, it is for a like thesis that the loss of petitioner bank
in its equity in vestment in the Hongkong subsidiary cannot also be deductible
as a bad debt. The shares of stock in question do not constitute a loan extended by it to
its subsidiary (First CBC Capital) or a debt subject to obligatory repayment by the latter,
essential elements to constitute a bad debt, but a long term investment made by CBC.
One other item. Section 34(c)(1) of the NIRC , states that the entire amount of the
gain or loss upon the sale or exchange of property, as the case may be, shall
be recognized. The complete text reads:
SECTION 34. Determination of amount of and recognition of gain or loss.-
"(a) Computation of gain or loss. - The gain from the sale or other disposition of
property shall be the excess of the amount realized therefrom over the basis or
TAXATION 1 Atty. Ortega
Cordero
adjusted basis for determining gain and the loss shall be the excess of the basis or
adjusted basis for determining loss over the amount realized. The amount realized
from the sale or other disposition of property shall be to sum of money received plus
the fair market value of the property (other than money) received. (As amended by
E.O. No. 37)
"(b) Basis for determining gain or loss from sale or disposition of property. - The basis
of property shall be - (1) The cost thereof in cases of property acquired on or before
March 1, 1913, if such property was acquired by purchase; or
"(2) The fair market price or value as of the date of acquisition if the same was
acquired by inheritance; or
"(3) If the property was acquired by gift the basis shall be the same as if it would be in
the hands of the donor or the last preceding owner by whom it was not acquired by
gift, except that if such basis is greater than the fair market value of the property at the
time of the gift, then for the purpose of determining loss the basis shall be such fair
market value; or
"(4) If the property, other than capital asset referred to in Section 21 (e), was acquired
for less than an adequate consideration in money or moneys worth, the basis of such
property is (i) the amount paid by the transferee for the property or (ii) the transferor's
adjusted basis at the time of the transfer whichever is greater.
"(5) The basis as defined in paragraph (c) (5) of this section if the property was
acquired in a transaction where gain or loss is not recognized under paragraph (c) (2)
of this section. (As amended by E.O. No. 37)
(c) Exchange of property.
"(1) General rule.- Except as herein provided, upon the sale or exchange of property,
the entire amount of the gain or loss, as the case may be, shall be recognized.
"(2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger
or consolidation (a) a corporation which is a party to a merger or consolidation
exchanges property solely for stock in a corporation which is, a party to the merger or
consolidation, (b) a shareholder exchanges stock in a corporation which is a party to
the merger or consolidation solely for the stock in another corporation also a party to
the merger or consolidation, or (c) a security holder of a corporation which is a party
to the merger or consolidation exchanges his securities in such corporation solely for
stock or securities in another corporation, a party to the merger or consolidation.
"No gain or loss shall also be recognized if property is transferred to a corporation by a
person in exchange for stock in such corporation of which as a result of such exchange
said person, alone or together with others, not exceeding four persons, gains control of
7|Page
said corporation: Provided, That stocks issued for services shall not be considered as
issued in return of property."
The above law should be taken within context on the general subject of the
determination, and recognition of gain or loss; it is not preclusive of, let alone renders
completely inconsequential, the more specific provisions of the code. Thus, pursuant, to
the same section of the law, no such recognition shall be made if the sale or exchange is
made in pursuance of a plan of corporate merger or consolidation or, if as a result of an
exchange of property for stocks, the exchanger, alone or together with others not
exceeding four, gains control of the corporation.[7] Then, too, how the resulting gain
might be taxed, or whether or not the loss would be deductible and how, are matters
properly dealt with elsewhere in various other sections of the NIRC.[8] At all events, it
may not be amiss to once again stress that the basic rule is still that any capital loss
can be deducted only from capital gains under Section 33(c) of the NIRC.
In sum -
(a) The equity investment in shares of stock held by CBC of approximately 53% in
its Hongkong subsidiary, the First CBC Capital (Asia), Ltd., is not an indebtedness, and
it is a capital, not an ordinary, asset.[9]
(b) Assuming that the equity investment of CBC has indeed become "worthless,"
the loss sustained is a capital, not an ordinary, loss.[10]
(c) The capital loss sustained by CBC can only be deducted from capital gains if
any derived by it during the same taxable year that the securities have become
"worthless."[11]
WHEREFORE, the Petition is DENIED. The decision of the Court of Appeals
disallowing the claimed deduction of P16,227,851.80 is AFFIRMED.
SO ORDERED.
4)
G.R. No. 211666 February 25, 2015
REPUBLIC OF THE PHILIPPINES, represented by the DEPARTMENT OF
PUBLIC WORKS AND HIGHWAYS,Petitioners,
vs.
ARLENE R. SORIANO, Respondent.
CONCURRING OPINION
LEONEN, J.:
TAXATION 1 Atty. Ortega
Cordero
I concur in the result.
Republic Act No. 8974, Section 4 provides in part:
SEC. 4. Guidelines for Expropriation Proceedings. - Whenever it is necessary to
acquire real property for the right-of-way, site or location for any national government
infrastructure project through expropriation, the appropriate implementing agency
shall initiate the expropriation proceedings before the proper court under the
following guidelines:
a. Upon the filing of the complaint, and after due notice to the defendant, the
implementing agency shall immediately pay the owner of the. property the amount
equivalent to the sum of (I) one hundred percent (100%) of the value of the property
based on the current relevant zonal valuation of the Bureau of Internal Revenue (BIR);
and (2) the value of the improvements and/or structures as determined under Section
7 hereof;
....
Upon compliance with the guidelines abovementioned, the court shall immediately
issue to the implementing agency an order to take possession of the property and start
the implementation of the project. (Emphasis and underscoring supplied)
Clearly, the state through the agency causing the taking complies with the
requirements for the issuance of a writ of possession only when it pays the owner.
Of course, the owner may contest the proffered value by the agency1 or the power of
the agency to exercise eminent domain, the necessity of the taking, or the public
character of the use for which the property is being condemned. In such cases, the
value required by Section 4(a) will be deposited with the trial court with jurisdiction
over the case.
This case does not present these issues, and I am of the view that the pronouncements
should be limited only to cases where there are no objections to the taking of the
property.
Legal interest, whether in the form of monetary interest (for forbearance) or
compensatory interest (for damages) also does not apply in this case. In Sun Life of
Canada (Philippines), Inc. v. Sandra Tan Kit,2 the two (2) kinds of interest rates were
distinguished.3 Monetary interest rate is determined by parties that enter into a
contract of loan, or any other contract involving the use or forbearance of money.
Thus, monetary interest represents the cost of letting another person use or borrow
money. On the other hand, compensatory interest rates are determined by courts as a
penalty or indemnity for damages in monetary judgments.
8|Page
There is no showing that the owner was denied payment of the amount deposited by
the Department of Public Works and Highways in accordance with Republic Act No.
8974. Furthermore, there is no complaint by the landowner of any delay in
payment.1wphi1 The property was subject to a writ of possession dated March 27,
2011.
Should there be any delay, I am of the view that the value of the property should be at
the time of the taking, but the actual price paid should be computed using the formula
for present value as of the time of payment.4
In other words, we compute for replacement value. Monetary interest or
compensatory interest will not be relevant.
CORONA, J.:
In this original petition for certiorari and mandamus,1 petitioner Chamber of Real
Estate and Builders Associations, Inc. is questioning the constitutionality of Section
27 (E) of Republic Act (RA) 84242 and the revenue regulations (RRs) issued by the
Bureau of Internal Revenue (BIR) to implement said provision and those involving
creditable withholding taxes.3
Petitioner is an association of real estate developers and builders in the Philippines. It
impleaded former Executive Secretary Alberto Romulo, then acting Secretary of
Finance Juanita D. Amatong and then Commissioner of Internal Revenue Guillermo
Parayno, Jr. as respondents.

Finally, I agree that documentary stamp taxes are not necessarily for the account of Petitioner assails the validity of the imposition of minimum corporate income tax
the seller. This is especially so in expropriation cases where the sale is coerced and the (MCIT) on corporations and creditable withholding tax (CWT) on sales of real
owner is unwilling. I, however, doubt whether the "Citizen's Charter" of the properties classified as ordinary assets.
Department of Public Works and Highways, published in its website, should have the
effect of a regulation. At best, it is evidence that can lead to a finding of estoppel if all
Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is
the elements of that equitable defense are alleged and proven by the proper party.
implemented by RR 9-98. Petitioner argues that the MCIT violates the due process
clause because it levies income tax even if there is no realized gain.
ACCORDINGLY, I concur that the Petition be PARTIALLY GRANTED. The Decision
dated November 15, 2013 and Order dated March 10, 2014 of the Regional Trial Court
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and
in Civil Case No. 140-V-10 are hereby MODIFIED, in that the imposition of interest on
2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe
the payment of just compensation and the award of consequential damages are
the rules and procedures for the collection of CWT on the sale of real properties
deleted. In addition, respondent is ORDERED to pay for the capital gains tax due to
categorized as ordinary assets. Petitioner contends that these revenue regulations are
the transfer of the expropriated property, while the documentary stamp tax, transfer
contrary to law for two reasons: first, they ignore the different treatment by RA 8424
tax, and registration fee shall be for the account of petitioner.
of ordinary assets and capital assets andsecond, respondent Secretary of Finance has
no authority to collect CWT, much less, to base the CWT on the gross selling price or
MARVIC M.V.F. LEONEN fair market value of the real properties classified as ordinary assets.
Associate Justice
Petitioner also asserts that the enumerated provisions of the subject revenue
5) regulations violate the due process clause because, like the MCIT, the government
collects income tax even when the net income has not yet been determined. They
contravene the equal protection clause as well because the CWT is being levied upon
EN BANC
real estate enterprises but not on other business enterprises, more particularly those
in the manufacturing sector.
G.R. No. 160756 March 9, 2010
The issues to be resolved are as follows:
CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS,
INC., Petitioner,
(1) whether or not this Court should take cognizance of the present case;
vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON.
ACTING SECRETARY OF FINANCE JUANITA D. AMATONG, and THE (2) whether or not the imposition of the MCIT on domestic corporations is
HON. COMMISSIONER OF INTERNAL REVENUE GUILLERMO unconstitutional and
PARAYNO, JR., Respondents.

DECISION
9|Page
TAXATION 1 Atty. Ortega
Cordero
 (3) whether or not the imposition of CWT on income from sales of real
properties classified as ordinary assets under RRs 2-98, 6-2001 and 7-2003,
is unconstitutional.
Overview of the Assailed Provisions
Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is
assessed an MCIT of 2% of its gross income when such MCIT is greater than the
normal corporate income tax imposed under Section 27(A).4 If the regular income tax
is higher than the MCIT, the corporation does not pay the MCIT. Any excess of the
MCIT over the normal tax shall be carried forward and credited against the normal
income tax for the three immediately succeeding taxable years. Section 27(E) of RA
8424 provides:
Section 27 (E). [MCIT] on Domestic Corporations. -
(1) Imposition of Tax. A [MCIT] of two percent (2%) of the gross income
as of the end of the taxable year, as defined herein, is hereby imposed on a
corporation taxable under this Title, beginning on the fourth taxable year
immediately following the year in which such corporation commenced its
business operations, when the minimum income tax is greater than the tax
computed under Subsection (A) of this Section for the taxable year.
(2) Carry Forward of Excess Minimum Tax. Any excess of the [MCIT] over
the normal income tax as computed under Subsection (A) of this Section
shall be carried forward and credited against the normal income tax for the
three (3) immediately succeeding taxable years.
(3) Relief from the [MCIT] under certain conditions. The Secretary of
Finance is hereby authorized to suspend the imposition of the [MCIT] on
any corporation which suffers losses on account of prolonged labor dispute,
or because of force majeure, or because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon
recommendation of the Commissioner, the necessary rules and regulations
that shall define the terms and conditions under which he may suspend the
imposition of the [MCIT] in a meritorious case.
(4) Gross Income Defined. For purposes of applying the [MCIT] provided
under Subsection (E) hereof, the term gross income shall mean gross sales
less sales returns, discounts and allowances and cost of goods sold. "Cost of
goods sold" shall include all business expenses directly incurred to produce
the merchandise to bring them to their present location and use.
TAXATION 1 Atty. Ortega
Cordero
For trading or merchandising concern, "cost of goods sold" shall include the invoice
cost of the goods sold, plus import duties, freight in transporting the goods to the place
where the goods are actually sold including insurance while the goods are in transit.
For a manufacturing concern, "cost of goods manufactured and sold" shall include all
costs of production of finished goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, "gross income" means gross
receipts less sales returns, allowances, discounts and cost of services. "Cost of services"
shall mean all direct costs and expenses necessarily incurred to provide the services
required by the customers and clients including (A) salaries and employee benefits of
personnel, consultants and specialists directly rendering the service and (B) cost of
facilities directly utilized in providing the service such as depreciation or rental of
equipment used and cost of supplies: Provided, however, that in the case of banks,
"cost of services" shall include interest expense.
On August 25, 1998, respondent Secretary of Finance (Secretary), on the
recommendation of the Commissioner of Internal Revenue (CIR), promulgated RR 9-
98 implementing Section 27(E).5 The pertinent portions thereof read:
Sec. 2.27(E) [MCIT] on Domestic Corporations.
(1) Imposition of the Tax. A [MCIT] of two percent (2%) of the gross income as of the
end of the taxable year (whether calendar or fiscal year, depending on the accounting
period employed) is hereby imposed upon any domestic corporation beginning the
fourth (4th) taxable year immediately following the taxable year in which such
corporation commenced its business operations. The MCIT shall be imposed whenever
such corporation has zero or negative taxable income or whenever the amount of
minimum corporate income tax is greater than the normal income tax due from such
corporation.
For purposes of these Regulations, the term, "normal income tax" means the income
tax rates prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code xxx at 32%
effective January 1, 2000 and thereafter.
xxx xxx xxx
(2) Carry forward of excess [MCIT]. Any excess of the [MCIT] over the normal
income tax as computed under Sec. 27(A) of the Code shall be carried forward on an
annual basis and credited against the normal income tax for the three (3) immediately
succeeding taxable years.
xxx xxx xxx
10 | P a g e
Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of
respondent CIR, promulgated RR 2-98 implementing certain provisions of RA 8424
involving the withholding of taxes.6 Under Section 2.57.2(J) of RR No. 2-98, income
payments from the sale, exchange or transfer of real property, other than capital
assets, by persons residing in the Philippines and habitually engaged in the real estate
business were subjected to CWT:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
xxx xxx xxx
(J) Gross selling price or total amount of consideration or its equivalent paid to the
seller/owner for the sale, exchange or transfer of. Real property, other than capital
assets, sold by an individual, corporation, estate, trust, trust fund or pension fund and
the seller/transferor is habitually engaged in the real estate business in accordance
with the following schedule
Those which are exempt from a withholding tax
at source as prescribed in Sec. 2.57.5 of these
regulations.
With a selling price of five hundred thousand
pesos (P500,000.00) or less.
With a selling price of more than five hundred
thousand pesos (P500,000.00) but not more
than two million pesos (P2,000,000.00).
With selling price of more than two million
pesos (P2,000,000.00)
xxx xxx xxx
Gross selling price shall mean the consideration stated in the sales document or the
fair market value determined in accordance with Section 6 (E) of the Code, as
amended, whichever is higher. In an exchange, the fair market value of the property
received in exchange, as determined in the Income Tax Regulations shall be used.
Where the consideration or part thereof is payable on installment, no withholding tax
is required to be made on the periodic installment payments where the buyer is an
individual not engaged in trade or business. In such a case, the applicable rate of tax
based on the entire consideration shall be withheld on the last installment or
installments to be paid to the seller.
TAXATION 1 Atty. Ortega
Cordero
However, if the buyer is engaged in trade or business, whether a corporation or
otherwise, the tax shall be deducted and withheld by the buyer on every installment.
This provision was amended by RR 6-2001 on July 31, 2001:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
xxx xxx xxx
(J) Gross selling price or total amount of consideration or its equivalent paid to the
seller/owner for the sale, exchange or transfer of real property classified as ordinary
asset. - A [CWT] based on the gross selling price/total amount of consideration or the
fair market value determined in accordance with Section 6(E) of the Code, whichever
is higher, paid to the seller/owner for the sale, transfer or exchange of real property,
other than capital asset, shall be imposed upon the withholding agent,/buyer, in
accordance with the following schedule:
Exempt Where the seller/transferor is exempt from [CWT] in accordance with Sec. Exempt
2.57.5 of these regulations.
Upon the following values of real property, where the seller/transferor is
habitually engaged in the real estate business.
With a selling price of Five Hundred Thousand Pesos (P500,000.00) or less. 1.5%
1.5%
With a selling price of more than Five Hundred Thousand Pesos 3.0%
(P500,000.00) but not more than Two Million Pesos (P2,000,000.00).
With a selling price of more than two Million Pesos (P2,000,000.00). 5.0%
3.0%
xxx xxx xxx
5.0% Gross selling price shall remain the consideration stated in the sales document or the
fair market value determined in accordance with Section 6 (E) of the Code, as
amended, whichever is higher. In an exchange, the fair market value of the property
received in exchange shall be considered as the consideration.
xxx xxx xxx
However, if the buyer is engaged in trade or business, whether a corporation or
otherwise, these rules shall apply:
(i) If the sale is a sale of property on the installment plan (that is, payments in the year
of sale do not exceed 25% of the selling price), the tax shall be deducted and withheld
by the buyer on every installment.
(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale
not on the installment plan" (that is, payments in the year of sale exceed 25% of the
11 | P a g e
selling price), the buyer shall withhold the tax based on the gross selling price or fair
market value of the property, whichever is higher, on the first installment.
In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer
unless the [CWT] due on the sale, transfer or exchange of real property other than
capital asset has been fully paid. (Underlined amendments in the original)
Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any
sale, barter or exchange subject to the CWT will not be recorded by the Registry of
Deeds until the CIR has certified that such transfers and conveyances have been
reported and the taxes thereof have been duly paid:7
Sec. 2.58.2. Registration with the Register of Deeds. Deeds of conveyances of land or
land and building/improvement thereon arising from sales, barters, or exchanges
subject to the creditable expanded withholding tax shall not be recorded by the
Register of Deeds unless the [CIR] or his duly authorized representative has certified
that such transfers and conveyances have been reported and the expanded
withholding tax, inclusive of the documentary stamp tax, due thereon have been fully
paid xxxx.
On February 11, 2003, RR No. 7-20038 was promulgated, providing for the guidelines
in determining whether a particular real property is a capital or an ordinary asset for
purposes of imposing the MCIT, among others. The pertinent portions thereof state:
Section 4. Applicable taxes on sale, exchange or other disposition of real
property. - Gains/Income derived from sale, exchange, or other disposition of real
properties shall, unless otherwise exempt, be subject to applicable taxes imposed
under the Code, depending on whether the subject properties are classified as capital
assets or ordinary assets;
a. In the case of individual citizen (including estates and trusts), resident aliens, and
non-resident aliens engaged in trade or business in the Philippines;
xxx xxx xxx
(ii) The sale of real property located in the Philippines, classified as ordinary assets,
shall be subject to the [CWT] (expanded) under Sec. 2.57..2(J) of [RR 2-98], as
amended, based on the gross selling price or current fair market value as determined
in accordance with Section 6(E) of the Code, whichever is higher, and consequently, to
the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the
case may be, based on net taxable income.
xxx xxx xxx
c. In the case of domestic corporations.
TAXATION 1 Atty. Ortega
Cordero
xxx xxx xxx
(ii) The sale of land and/or building classified as ordinary asset and other real property
(other than land and/or building treated as capital asset), regardless of the
classification thereof, all of which are located in the Philippines, shall be subject to the
[CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently,
to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the ordinary income
tax, however, domestic corporations may become subject to the [MCIT] under Sec.
27(E) of the Code, whichever is applicable.
xxx xxx xxx
We shall now tackle the issues raised.
Existence of a Justiciable Controversy
Courts will not assume jurisdiction over a constitutional question unless the following
requisites are satisfied: (1) there must be an actual case calling for the exercise of
judicial review; (2) the question before the court must be ripe for adjudication; (3) the
person challenging the validity of the act must have standing to do so; (4) the question
of constitutionality must have been raised at the earliest opportunity and (5) the issue
of constitutionality must be the very lis mota of the case.9
Respondents aver that the first three requisites are absent in this case. According to
them, there is no actual case calling for the exercise of judicial power and it is not yet
ripe for adjudication because
[petitioner] did not allege that CREBA, as a corporate entity, or any of its members,
has been assessed by the BIR for the payment of [MCIT] or [CWT] on sales of real
property. Neither did petitioner allege that its members have shut down their
businesses as a result of the payment of the MCIT or CWT. Petitioner has raised
concerns in mere abstract and hypothetical form without any actual, specific and
concrete instances cited that the assailed law and revenue regulations have actually
and adversely affected it. Lacking empirical data on which to base any conclusion, any
discussion on the constitutionality of the MCIT or CWT on sales of real property is
essentially an academic exercise.
Perceived or alleged hardship to taxpayers alone is not an adequate justification for
adjudicating abstract issues. Otherwise, adjudication would be no different from the
giving of advisory opinion that does not really settle legal issues.10
An actual case or controversy involves a conflict of legal rights or an assertion of
opposite legal claims which is susceptible of judicial resolution as distinguished from a
hypothetical or abstract difference or dispute.11 On the other hand, a question is
considered ripe for adjudication when the act being challenged has a direct adverse
effect on the individual challenging it.12
12 | P a g e
Contrary to respondents assertion, we do not have to wait until petitioners members
have shut down their operations as a result of the MCIT or CWT. The assailed
provisions are already being implemented. As we stated inDidipio Earth-Savers
Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:13
By the mere enactment of the questioned law or the approval of the challenged act, the
dispute is said to have ripened into a judicial controversy even without any other overt
act. Indeed, even a singular violation of the Constitution and/or the law is enough to
awaken judicial duty.14
If the assailed provisions are indeed unconstitutional, there is no better time than the
present to settle such question once and for all.
Respondents next argue that petitioner has no legal standing to sue:
Petitioner is an association of some of the real estate developers and builders in the
Philippines. Petitioners did not allege that [it] itself is in the real estate business. It did
not allege any material interest or any wrong that it may suffer from the enforcement
of [the assailed provisions].15
Legal standing or locus standi is a partys personal and substantial interest in a case
such that it has sustained or will sustain direct injury as a result of the governmental
act being challenged.16 In Holy Spirit Homeowners Association, Inc. v. Defensor,17 we
held that the association had legal standing because its members stood to be injured
by the enforcement of the assailed provisions:
Petitioner association has the legal standing to institute the instant petition xxx. There
is no dispute that the individual members of petitioner association are residents of the
NGC. As such they are covered and stand to be either benefited or injured by the
enforcement of the IRR, particularly as regards the selection process of beneficiaries
and lot allocation to qualified beneficiaries. Thus, petitioner association may assail
those provisions in the IRR which it believes to be unfavorable to the rights of its
members. xxx Certainly, petitioner and its members have sustained direct injury
arising from the enforcement of the IRR in that they have been disqualified and
eliminated from the selection process.18
In any event, this Court has the discretion to take cognizance of a suit which does not
satisfy the requirements of an actual case, ripeness or legal standing when paramount
public interest is involved.19 The questioned MCIT and CWT affect not only petitioners
but practically all domestic corporate taxpayers in our country. The transcendental
importance of the issues raised and their overreaching significance to society make it
proper for us to take cognizance of this petition.20
Concept and Rationale of the MCIT
TAXATION 1 Atty. Ortega
Cordero
The MCIT on domestic corporations is a new concept introduced by RA 8424 to the
Philippine taxation system. It came about as a result of the perceived inadequacy of
the self-assessment system in capturing the true income of corporations.21 It was
devised as a relatively simple and effective revenue-raising instrument compared to
the normal income tax which is more difficult to control and enforce. It is a means to
ensure that everyone will make some minimum contribution to the support of the
public sector. The congressional deliberations on this are illuminating:
Senator Enrile. Mr. President, we are not unmindful of the practice of certain
corporations of reporting constantly a loss in their operations to avoid the payment of
taxes, and thus avoid sharing in the cost of government. In this regard, the Tax Reform
Act introduces for the first time a new concept called the [MCIT] so as to minimize tax
evasion, tax avoidance, tax manipulation in the country and for administrative
convenience. This will go a long way in ensuring that corporations will pay their just
share in supporting our public life and our economic advancement.22
Domestic corporations owe their corporate existence and their privilege to do business
to the government. They also benefit from the efforts of the government to improve
the financial market and to ensure a favorable business climate. It is therefore fair for
the government to require them to make a reasonable contribution to the public
expenses.
Congress intended to put a stop to the practice of corporations which, while having
large turn-overs, report minimal or negative net income resulting in minimal or zero
income taxes year in and year out, through under-declaration of income or over-
deduction of expenses otherwise called tax shelters.23
Mr. Javier (E.) [This] is what the Finance Dept. is trying to remedy, that is why they
have proposed the [MCIT]. Because from experience too, you have corporations which
have been losing year in and year out and paid no tax. So, if the corporation has been
losing for the past five years to ten years, then that corporation has no business to be
in business. It is dead. Why continue if you are losing year in and year out? So, we
have this provision to avoid this type of tax shelters, Your Honor.24
The primary purpose of any legitimate business is to earn a profit. Continued and
repeated losses after operations of a corporation or consistent reports of minimal net
income render its financial statements and its tax payments suspect. For sure, certain
tax avoidance schemes resorted to by corporations are allowed in our jurisdiction. The
MCIT serves to put a cap on such tax shelters. As a tax on gross income, it prevents tax
evasion and minimizes tax avoidance schemes achieved through sophisticated and
artful manipulations of deductions and other stratagems. Since the tax base was
broader, the tax rate was lowered.
To further emphasize the corrective nature of the MCIT, the following safeguards were
incorporated into the law:
13 | P a g e
First, recognizing the birth pangs of businesses and the reality of the need to recoup
initial major capital expenditures, the imposition of the MCIT commences only on the
fourth taxable year immediately following the year in which the corporation
commenced its operations.25 This grace period allows a new business to stabilize first
and make its ventures viable before it is subjected to the MCIT.26
Second, the law allows the carrying forward of any excess of the MCIT paid over the
normal income tax which shall be credited against the normal income tax for the three
immediately succeeding years.27
Third, since certain businesses may be incurring genuine repeated losses, the law
authorizes the Secretary of Finance to suspend the imposition of MCIT if a corporation
suffers losses due to prolonged labor dispute, force majeure and legitimate business
reverses.28
Even before the legislature introduced the MCIT to the Philippine taxation system,
several other countries already had their own system of minimum corporate income
taxation. Our lawmakers noted that most developing countries, particularly Latin
American and Asian countries, have the same form of safeguards as we do. As pointed
out during the committee hearings:
[Mr. Medalla:] Note that most developing countries where you have of course quite a
bit of room for underdeclaration of gross receipts have this same form of safeguards.
In the case of Thailand, half a percent (0.5%), theres a minimum of income tax of half
a percent (0.5%) of gross assessable income. In Korea a 25% of taxable income before
deductions and exemptions. Of course the different countries have different basis for
that minimum income tax.
The other thing youll notice is the preponderance of Latin American countries that
employed this method. Okay, those are additional Latin American countries.29
At present, the United States of America, Mexico, Argentina, Tunisia, Panama and
Hungary have their own versions of the MCIT.30
MCIT Is Not Violative of Due Process
Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional
because it is highly oppressive, arbitrary and confiscatory which amounts to
deprivation of property without due process of law. It explains that gross income as
defined under said provision only considers the cost of goods sold and other direct
expenses; other major expenditures, such as administrative and interest expenses
which are equally necessary to produce gross income, were not taken into
account.31 Thus, pegging the tax base of the MCIT to a corporations gross income is
tantamount to a confiscation of capital because gross income, unlike net income, is not
"realized gain."32
TAXATION 1 Atty. Ortega
Cordero
We disagree.
Taxes are the lifeblood of the government. Without taxes, the government can neither
exist nor endure. The exercise of taxing power derives its source from the very
existence of the State whose social contract with its citizens obliges it to promote
public interest and the common good.33
Taxation is an inherent attribute of sovereignty.34 It is a power that is purely
legislative.35 Essentially, this means that in the legislature primarily lies the discretion
to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and
situs (place) of taxation.36 It has the authority to prescribe a certain tax at a specific
rate for a particular public purpose on persons or things within its jurisdiction. In
other words, the legislature wields the power to define what tax shall be imposed, why
it should be imposed, how much tax shall be imposed, against whom (or what) it shall
be imposed and where it shall be imposed.
As a general rule, the power to tax is plenary and unlimited in its range,
acknowledging in its very nature no limits, so that the principal check against its abuse
is to be found only in the responsibility of the legislature (which imposes the tax) to its
constituency who are to pay it.37 Nevertheless, it is circumscribed by constitutional
limitations. At the same time, like any other statute, tax legislation carries a
presumption of constitutionality.
The constitutional safeguard of due process is embodied in the fiat "[no] person shall
be deprived of life, liberty or property without due process of law." In Sison, Jr. v.
Ancheta, et al.,38 we held that the due process clause may properly be invoked to
invalidate, in appropriate cases, a revenue measure39 when it amounts to a
confiscation of property.40 But in the same case, we also explained that we will not
strike down a revenue measure as unconstitutional (for being violative of the due
process clause) on the mere allegation of arbitrariness by the taxpayer.41 There must
be a factual foundation to such an unconstitutional taint.42 This merely adheres to the
authoritative doctrine that, where the due process clause is invoked, considering that it
is not a fixed rule but rather a broad standard, there is a need for proof of such
persuasive character.43
Petitioner is correct in saying that income is distinct from capital.44 Income means all
the wealth which flows into the taxpayer other than a mere return on capital. Capital is
a fund or property existing at one distinct point in time while income denotes a flow of
wealth during a definite period of time.45 Income is gain derived and severed from
capital.46 For income to be taxable, the following requisites must exist:
(1) there must be gain;
(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from taxation.47
14 | P a g e
Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital
is not income. In other words, it is income, not capital, which is subject to income tax.
However, the MCIT is not a tax on capital.
The MCIT is imposed on gross income which is arrived at by deducting the capital
spent by a corporation in the sale of its goods, i.e., the cost of goods48 and other direct
expenses from gross sales. Clearly, the capital is not being taxed.
Furthermore, the MCIT is not an additional tax imposition. It is imposed in
lieu of the normal net income tax, and only if the normal income tax is suspiciously
low. The MCIT merely approximates the amount of net income tax due from a
corporation, pegging the rate at a very much reduced 2% and uses as the base the
corporations gross income.
Besides, there is no legal objection to a broader tax base or taxable income by
eliminating all deductible items and at the same time reducing the applicable tax
rate.49
Statutes taxing the gross "receipts," "earnings," or "income" of particular
corporations are found in many jurisdictions. Tax thereon is generally held to be
within the power of a state to impose; or constitutional, unless it interferes with
interstate commerce or violates the requirement as to uniformity of taxation.50
The United States has a similar alternative minimum tax (AMT) system which is
generally characterized by a lower tax rate but a broader tax base.51 Since our income
tax laws are of American origin, interpretations by American courts of our parallel tax
laws have persuasive effect on the interpretation of these laws.52 Although our MCIT is
not exactly the same as the AMT, the policy behind them and the procedure of their
implementation are comparable. On the question of the AMTs constitutionality, the
United States Court of Appeals for the Ninth Circuit stated in Okin v. Commissioner:53
In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust
of the system growing from large numbers of taxpayers with large incomes who were
yet paying no taxes.
xxx xxx xxx
We thus join a number of other courts in upholding the constitutionality of the [AMT].
xxx [It] is a rational means of obtaining a broad-based tax, and therefore is
constitutional.54
The U.S. Court declared that the congressional intent to ensure that corporate
taxpayers would contribute a minimum amount of taxes was a legitimate
governmental end to which the AMT bore a reasonable relation.55
TAXATION 1 Atty. Ortega
Cordero
American courts have also emphasized that Congress has the power to condition, limit
or deny deductions from gross income in order to arrive at the net that it chooses to
tax.56 This is because deductions are a matter of legislative grace.57
Absent any other valid objection, the assignment of gross income, instead of net
income, as the tax base of the MCIT, taken with the reduction of the tax rate from 32%
to 2%, is not constitutionally objectionable.
Moreover, petitioner does not cite any actual, specific and concrete negative
experiences of its members nor does it present empirical data to show that the
implementation of the MCIT resulted in the confiscation of their property.
In sum, petitioner failed to support, by any factual or legal basis, its allegation that the
MCIT is arbitrary and confiscatory. The Court cannot strike down a law as
unconstitutional simply because of its yokes.58 Taxation is necessarily burdensome
because, by its nature, it adversely affects property rights.59 The party alleging the
laws unconstitutionality has the burden to demonstrate the supposed violations in
understandable terms.60
RR 9-98 Merely Clarifies Section 27(E) of RA 8424
Petitioner alleges that RR 9-98 is a deprivation of property without due process of law
because the MCIT is being imposed and collected even when there is actually a loss, or
a zero or negative taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations.
(1) Imposition of the Tax. xxx The MCIT shall be imposed whenever such
corporation has zero or negative taxable income or whenever the amount of
[MCIT] is greater than the normal income tax due from such corporation. (Emphasis
supplied)
RR 9-98, in declaring that MCIT should be imposed whenever such corporation has
zero or negative taxable income, merely defines the coverage of Section 27(E). This
means that even if a corporation incurs a net loss in its business operations or reports
zero income after deducting its expenses, it is still subject to an MCIT of 2% of its gross
income. This is consistent with the law which imposes the MCIT on gross income
notwithstanding the amount of the net income. But the law also states that the MCIT is
to be paid only if it is greater than the normal net income. Obviously, it may well be
the case that the MCIT would be less than the net income of the corporation which
posts a zero or negative taxable income.
We now proceed to the issues involving the CWT.
The withholding tax system is a procedure through which taxes (including income
taxes) are collected.61 Under Section 57 of RA 8424, the types of income subject to
15 | P a g e
withholding tax are divided into three categories: (a) withholding of final tax on
certain incomes; (b) withholding of creditable tax at source and (c) tax-free covenant
bonds. Petitioner is concerned with the second category (CWT) and maintains that the
revenue regulations on the collection of CWT on sale of real estate categorized as
ordinary assets are unconstitutional.
Petitioner, after enumerating the distinctions between capital and ordinary assets
under RA 8424, contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections
4(a)(ii) and (c)(ii) of RR 7-2003 were promulgated "with grave abuse of discretion
amounting to lack of jurisdiction" and "patently in contravention of law"62 because
they ignore such distinctions. Petitioners conclusion is based on the following
premises: (a) the revenue regulations use gross selling price (GSP) or fair market value
(FMV) of the real estate as basis for determining the income tax for the sale of real
estate classified as ordinary assets and (b) they mandate the collection of income tax
on a per transaction basis, i.e., upon consummation of the sale via the CWT, contrary
to RA 8424 which calls for the payment of the net income at the end of the taxable
period.63
Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets
differently, respondents cannot disregard the distinctions set by the legislators as
regards the tax base, modes of collection and payment of taxes on income from the
sale of capital and ordinary assets.
Petitioners arguments have no merit.
Authority of the Secretary of Finance to Order the Collection of CWT on
Sales of Real Property Considered as Ordinary Assets
The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to
promulgate the necessary rules and regulations for the effective enforcement of the
provisions of the law. Such authority is subject to the limitation that the rules and
regulations must not override, but must remain consistent and in harmony with, the
law they seek to apply and implement.64 It is well-settled that an administrative agency
cannot amend an act of Congress.65
We have long recognized that the method of withholding tax at source is a procedure
of collecting income tax which is sanctioned by our tax laws.66 The withholding tax
system 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 governments cash
flow.67 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.68
TAXATION 1 Atty. Ortega
Cordero
Respondent Secretary has the authority to require the withholding of a tax on items of
income payable to any person, national or juridical, residing in the Philippines. Such
authority is derived from Section 57(B) of RA 8424 which provides:
SEC. 57. Withholding of Tax at Source.
xxx xxx xxx
(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the
recommendation of the [CIR], require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate of not less than one percent
(1%) but not more than thirty-two percent (32%) thereof, which shall be credited
against the income tax liability of the taxpayer for the taxable year.
The questioned provisions of RR 2-98, as amended, are well within the authority given
by Section 57(B) to the Secretary, i.e., the graduated rate of 1.5%-5% is between the
1%-32% range; the withholding tax is imposed on the income payable and the tax is
creditable against the income tax liability of the taxpayer for the taxable year.
Effect of RRs on the Tax Base for the Income Tax of Individuals or
Corporations Engaged in the Real Estate Business
Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a
real estate business income tax from net income to GSP or FMV of the property sold.
Petitioner is wrong.
The taxes withheld are in the nature of advance tax payments by a taxpayer in order to
extinguish its possible tax obligation. 69 They are installments on the annual tax which
may be due at the end of the taxable year.70
Under RR 2-98, the tax base of the income tax from the sale of real property classified
as ordinary assets remains to be the entitys net income imposed under Section 24
(resident individuals) or Section 27 (domestic corporations) in relation to Section 31 of
RA 8424, i.e. gross income less allowable deductions. The CWT is to be deducted from
the net income tax payable by the taxpayer at the end of the taxable year.71 Precisely,
Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax base for the sale of real
property classified as ordinary assets remains to be the net taxable income:
Section 4. Applicable taxes on sale, exchange or other disposition of real property. -
Gains/Income derived from sale, exchange, or other disposition of real properties shall
unless otherwise exempt, be subject to applicable taxes imposed under the Code,
depending on whether the subject properties are classified as capital assets or ordinary
assets;
16 | P a g e
 xxx xxx xxx 8424 imposes a final tax and flat rate of 6% on the gain presumed to be realized from
the sale of a capital asset based on its GSP or FMV. This final tax is also withheld at
source.72
a. In the case of individual citizens (including estates and trusts), resident aliens, and
non-resident aliens engaged in trade or business in the Philippines;
The differences between the two forms of withholding tax, i.e., creditable and final,
show that ordinary assets are not treated in the same manner as capital assets. Final
xxx xxx xxx
withholding tax (FWT) and CWT are distinguished as follows:

(ii) The sale of real property located in the Philippines, classified as ordinary assets,
shall be subject to the [CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as
amended, based on the [GSP] or current [FMV] as determined in accordance with FWT CWT
Section 6(E) of the Code, whichever is higher, and consequently, to the ordinary
income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the
case may be, based on net taxable income.
a) The amount of income tax withheld by the a) Taxes withheld on certain income pa
xxx xxx xxx withholding agent is constituted as a full and final intended to equal or at least approxima
payment of the income tax due from the payee on the the payee on said income.
said income.
c. In the case of domestic corporations.

The sale of land and/or building classified as ordinary asset and other real property
(other than land and/or building treated as capital asset), regardless of the b)The liability for payment of the tax rests primarily on b) Payee of income is required to report
classification thereof, all of which are located in the Philippines, shall besubject the payor as a withholding agent. and/or pay the difference between the t
to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and and the tax due on the income. The pay
consequently, to theordinary income tax under Sec. 27(A) of the Code. In lieu of right to ask for a refund if the tax withh
the ordinary income tax, however, domestic corporations may become subject to the than the tax due.
[MCIT] under Sec. 27(E) of the same Code, whichever is applicable. (Emphasis
supplied)

Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return c) The payee is not required to file an income tax c) The income recipient is still required
and credit the taxes withheld (by the withholding agent/buyer) against its tax due. If return for the particular income.73 income tax return, as prescribed in Sec.
the tax due is greater than the tax withheld, then the taxpayer shall pay the difference. of the NIRC, as amended.74
If, on the other hand, the tax due is less than the tax withheld, the taxpayer will be
entitled to a refund or tax credit. Undoubtedly, the taxpayer is taxed on its net income.

As previously stated, FWT is imposed on the sale of capital assets. On the other hand,
The use of the GSP/FMV as basis to determine the withholding taxes is evidently for
CWT is imposed on the sale of ordinary assets. The inherent and substantial
purposes of practicality and convenience. Obviously, the withholding agent/buyer who
differences between FWT and CWT disprove petitioners contention that ordinary
is obligated to withhold the tax does not know, nor is he privy to, how much the
assets are being lumped together with, and treated similarly as, capital assets in
taxpayer/seller will have as its net income at the end of the taxable year. Instead, said
contravention of the pertinent provisions of RA 8424.
withholding agents knowledge and privity are limited only to the particular
transaction in which he is a party. In such a case, his basis can only be the GSP or FMV
as these are the only factors reasonably known or knowable by him in connection with Petitioner insists that the levy, collection and payment of CWT at the time of
the performance of his duties as a withholding agent. transaction are contrary to the provisions of RA 8424 on the manner and time of filing
of the return, payment and assessment of income tax involving ordinary assets.75
No Blurring of Distinctions Between Ordinary Assets and Capital Assets
The fact that the tax is withheld at source does not automatically mean that it is
treated exactly the same way as capital gains. As aforementioned, the mechanics of the
RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real
FWT are distinct from those of the CWT. The withholding agent/buyers act of
property categorized as ordinary assets. On the other hand, Section 27(D)(5) of RA
17 | P a g e
TAXATION 1 Atty. Ortega
Cordero
collecting the tax at the time of the transaction by withholding the tax due from the
income payable is the essence of the withholding tax method of tax collection.
No Rule that Only Passive
Incomes Can Be Subject to CWT
Petitioner submits that only passive income can be subjected to withholding tax,
whether final or creditable. According to petitioner, the whole of Section 57 governs
the withholding of income tax on passive income. The enumeration in Section 57(A)
refers to passive income being subjected to FWT. It follows that Section 57(B) on CWT
should also be limited to passive income:
SEC. 57. Withholding of Tax at Source.
(A) Withholding of Final Tax on Certain Incomes. Subject to rules and
regulations, the [Secretary] may promulgate, upon the recommendation of
the [CIR], requiring the filing of income tax return by certain income
payees, the tax imposed or prescribed by Sections 24(B)(1),
24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D),
25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5),
28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2),
28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and
282 of this Code on specified items of income shall be withheld by
payor-corporation and/or person and paid in the same manner and subject
to the same conditions as provided in Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon
the recommendation of the [CIR], require the withholding of a tax on the
items of income payable to natural or juridical persons, residing
in the Philippines, by payor-corporation/persons as provided for by law,
at the rate of not less than one percent (1%) but not more than thirty-two
percent (32%) thereof, which shall be credited against the income tax
liability of the taxpayer for the taxable year. (Emphasis supplied)
This line of reasoning is non sequitur.
Section 57(A) expressly states that final tax can be imposed on certain kinds of income
and enumerates these as passive income. The BIR defines passive income by stating
what it is not:
if the income is generated in the active pursuit and performance of the corporations
primary purposes, the same is not passive income76
TAXATION 1 Atty. Ortega
Cordero
It is income generated by the taxpayers assets. These assets can be in the form of real
properties that return rental income, shares of stock in a corporation that earn
dividends or interest income received from savings.
On the other hand, Section 57(B) provides that the Secretary can require a CWT on
"income payable to natural or juridical persons, residing in the Philippines." There is
no requirement that this income be passive income. If that were the intent of
Congress, it could have easily said so.
Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section
57(B) pertains to CWT. The former covers the kinds of passive income enumerated
therein and the latter encompasses any income other than those listed in 57(A). Since
the law itself makes distinctions, it is wrong to regard 57(A) and 57(B) in the same
way.
To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate
from the text of Section 57(B). RR 2-98 merely implements the law by specifying what
income is subject to CWT. It has been held that, where a statute does not require any
particular procedure to be followed by an administrative agency, the agency may adopt
any reasonable method to carry out its functions.77 Similarly, considering that the law
uses the general term "income," the Secretary and CIR may specify the kinds of
income the rules will apply to based on what is feasible. In addition, administrative
rules and regulations ordinarily deserve to be given weight and respect by the
courts78 in view of the rule-making authority given to those who formulate them and
their specific expertise in their respective fields.
No Deprivation of Property Without Due Process
Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as
ordinary assets deprives its members of their property without due process of law
because, in their line of business, gain is never assured by mere receipt of the selling
price. As a result, the government is collecting tax from net income not yet gained or
earned.
Again, it is stressed that the CWT is creditable against the tax due from the seller of the
property at the end of the taxable year. The seller will be able to claim a tax refund if
its net income is less than the taxes withheld. Nothing is taken that is not due so there
is no confiscation of property repugnant to the constitutional guarantee of due
process. More importantly, the due process requirement applies to the power to
tax.79 The CWT does not impose new taxes nor does it increase taxes.80 It relates
entirely to the method and time of payment.
Petitioner protests that the refund remedy does not make the CWT less burdensome
because taxpayers have to wait years and may even resort to litigation before they are
granted a refund.81 This argument is misleading. The practical problems encountered
in claiming a tax refund do not affect the constitutionality and validity of the CWT as a
method of collecting the tax.1avvphi1
18 | P a g e
Petitioner complains that the amount withheld would have otherwise been used by the
enterprise to pay labor wages, materials, cost of money and other expenses which can
then save the entity from having to obtain loans entailing considerable interest
expense. Petitioner also lists the expenses and pitfalls of the trade which add to the
burden of the realty industry: huge investments and borrowings; long gestation
period; sudden and unpredictable interest rate surges; continually spiraling
development/construction costs; heavy taxes and prohibitive "up-front" regulatory
fees from at least 20 government agencies.82
Petitioners lamentations will not support its attack on the constitutionality of the
CWT. Petitioners complaints are essentially matters of policy best addressed to the
executive and legislative branches of the government. Besides, the CWT is applied only
on the amounts actually received or receivable by the real estate entity. Sales on
installment are taxed on a per-installment basis.83 Petitioners desire to utilize for its
operational and capital expenses money earmarked for the payment of taxes may be a
practical business option but it is not a fundamental right which can be demanded
from the court or from the government.
No Violation of Equal Protection
Petitioner claims that the revenue regulations are violative of the equal protection
clause because the CWT is being levied only on real estate enterprises. Specifically,
petitioner points out that manufacturing enterprises are not similarly imposed a CWT
on their sales, even if their manner of doing business is not much different from that of
a real estate enterprise. Like a manufacturing concern, a real estate business is
involved in a continuous process of production and it incurs costs and expenditures on
a regular basis. The only difference is that "goods" produced by the real estate business
are house and lot units.84
Again, we disagree.
The equal protection clause under the Constitution means that "no person or class of
persons shall be deprived of the same protection of laws which is enjoyed by other
persons or other classes in the same place and in like circumstances."85 Stated
differently, all persons belonging to the same class shall be taxed alike. It follows that
the guaranty of the equal protection of the laws is not violated by legislation based on a
reasonable classification. Classification, to be valid, must (1) rest on substantial
distinctions; (2) be germane to the purpose of the law; (3) not be limited to existing
conditions only and (4) apply equally to all members of the same class.86
The taxing power has the authority to make reasonable classifications for purposes of
taxation.87 Inequalities which result from a singling out of one particular class for
taxation, or exemption, infringe no constitutional limitation.88 The real estate industry
is, by itself, a class and can be validly treated differently from other business
enterprises.
TAXATION 1 Atty. Ortega
Cordero
Petitioner, in insisting that its industry should be treated similarly as manufacturing
enterprises, fails to realize that what distinguishes the real estate business from other
manufacturing enterprises, for purposes of the imposition of the CWT, is not their
production processes but the prices of their goods sold and the number of transactions
involved. The income from the sale of a real property is bigger and its frequency of
transaction limited, making it less cumbersome for the parties to comply with the
withholding tax scheme.
On the other hand, each manufacturing enterprise may have tens of thousands of
transactions with several thousand customers every month involving both minimal
and substantial amounts. To require the customers of manufacturing enterprises, at
present, to withhold the taxes on each of their transactions with their tens or hundreds
of suppliers may result in an inefficient and unmanageable system of taxation and may
well defeat the purpose of the withholding tax system.
Petitioner counters that there are other businesses wherein expensive items are also
sold infrequently, e.g. heavy equipment, jewelry, furniture, appliance and other capital
goods yet these are not similarly subjected to the CWT.89As already discussed, the
Secretary may adopt any reasonable method to carry out its functions.90 Under Section
57(B), it may choose what to subject to CWT.
A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioners argument is
not accurate. The sales of manufacturers who have clients within the top 5,000
corporations, as specified by the BIR, are also subject to CWT for their transactions
with said 5,000 corporations.91
Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424
Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of
Deeds should not effect the regisration of any document transferring real property
unless a certification is issued by the CIR that the withholding tax has been paid.
Petitioner proffers hardly any reason to strike down this rule except to rely on its
contention that the CWT is unconstitutional. We have ruled that it is not.
Furthermore, this provision uses almost exactly the same wording as Section 58(E) of
RA 8424 and is unquestionably in accordance with it:
Sec. 58. Returns and Payment of Taxes Withheld at Source.
(E) Registration with Register of Deeds. - No registration of any document
transferring real property shall be effected by the Register of Deeds unless
the [CIR] or his duly authorized representative has certified that such
transfer has been reported, and the capital gains or [CWT], if any, has
been paid: xxxx any violation of this provision by the Register of Deeds shall be
subject to the penalties imposed under Section 269 of this Code. (Emphasis supplied)
Conclusion
19 | P a g e
The renowned genius Albert Einstein was once quoted as saying "[the] hardest thing in
the world to understand is the income tax."92 When a party questions the
constitutionality of an income tax measure, it has to contend not only with Einsteins
observation but also with the vast and well-established jurisprudence in support of the
plenary powers of Congress to impose taxes. Petitioner has miserably failed to
discharge its burden of convincing the Court that the imposition of MCIT and CWT is
unconstitutional.
WHEREFORE, the petition is hereby DISMISSED.
Costs against petitioner.
SO ORDERED.
6)
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,
CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor,
v. 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, Respondents.
DECISION
LEONEN, J.:
The case involves the proper tax treatment of the discount or interest income arising
from the P35 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 PEACe Bonds by the Caucus of Development NGO
Networks).
On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling No.
370-20111 (2011 BIR Ruling), declaring that the PEACe Bonds being deposit
substitutes are subject to the 20% final withholding tax. Pursuant to this ruling, the
TAXATION 1 Atty. Ortega
Cordero
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 mandamus2 filed by petitioners
under Rule 65 of the Rules of Court seeking to:chanroblesvirtuallawlibrary
a. ANNUL Respondent BIRs 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 as other 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 letter4 dated March 23, 2001, the Caucus of Development NGO Networks (CODE-
NGO) with the 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),5 requested an approval
from the Department of Finance for the issuance by the Bureau of Treasury of 10-year
zero-coupon Treasury Certificates (T-notes).6 The T-notes would 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.7 The net proceeds from the sale of the
Bonds will be used to endow a permanent fund (Hanapbuhay Fund) to finance
meritorious activities and projects of accredited non-government organizations
(NGOs) throughout the country.8chanRoblesvirtualLawlibrary
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),9 International Exchange Bank (proposal dated July 27, 2000),10 Security Bank
Corporation and SB Capital Investment Corporation (proposal dated July 25,
2001),11 and ATR-Kim Eng Fixed Income, Inc. (proposal dated August 25,
1999).12 [B]oth the proposals of First Metro Investment Corp. and ATR-Kim Eng
Fixed Income indicate that the interest income or discount earned on the proposed
zero-coupon bonds would be subject to the prevailing withholding
tax.13chanRoblesvirtualLawlibrary
20 | P a g e

A zero-coupon bond is 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.14 It
does not make periodic interest payments, or have so-called coupons, hence the term
zero-coupon bond.15 However, the discount to face value constitutes the return to the
bondholder.16chanRoblesvirtualLawlibrary
On May 31, 2001, the Bureau of Internal Revenue, in reply to CODE-NGOs letters
dated May 10, 15, and 25, 2001, issued BIR Ruling No. 020-200117 on the tax
treatment of the proposed PEACe Bonds. BIR Ruling No. 020-2001, signed by then
Commissioner of Internal Revenue Ren G. Baez confirmed that the PEACe Bonds
would not be classified as deposit substitutes and would not be subject to the
corresponding withholding tax:chanroblesvirtuallawlibrary
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.18 (Emphasis supplied)
The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001 was
subsequently reiterated in BIR Ruling No. 035-200119 dated August 16, 2001 and BIR
Ruling No. DA-175-0120 dated September 29, 2001 (collectively, the 2001 Rulings). In
sum, these rulings pronounced 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 memorandum21 dated July 4, 2001, Former Treasurer Eduardo
Sergio G. Edeza (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).22 Former Treasurer Edeza
recommended that the issuance of the Bonds be done through the ADAPS23 and that
CODE-NGO should get a GSED to bid in [sic] its
behalf.24chanRoblesvirtualLawlibrary
Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury
Bonds25 (Public Offering) dated October 9, 2001, the Bureau of Treasury announced
that P30.0B worth of 10-year Zero[-] Coupon Bonds [would] be auctioned on October
16, 2001[.]26 The notice stated that the Bonds shall be issued to not more than 19
buyers/lenders hence, the necessity of a manual auction for this maiden issue.27 It
also required the GSEDs to submit their bids not later than 12 noon on 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.28 Lastly, it stated that the
issue being limited to 19 lenders and while taxable shall not be subject to the 20% final
withholding [tax].29chanRoblesvirtualLawlibrary
TAXATION 1 Atty. Ortega
Cordero
On October 12, 2001, the Bureau of Treasury released a memo30 on the Formula for
the Zero-Coupon Bond. The memo stated in part that the formula (in determining
the purchase price and settlement amount) is only applicable to the zeroes that are
not subject to the 20% final withholding due to the 19 buyer/lender
limit.31chanRoblesvirtualLawlibrary
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).32 The Auction Guidelines reiterated that the
Bonds to be auctioned are [n]ot subject to 20% withholding tax as the issue will be
limited to a maximum of 19 lenders in the primary market (pursuant to BIR Revenue
Regulation No. 020 2001).33 The Auction Guidelines, for the first time, also stated
that the Bonds are [e]ligible as liquidity reserves (pursuant to MB Resolution No.
1545 dated 27 September 2001)[.]34chanRoblesvirtualLawlibrary
On October 16, 2001, the Bureau of Treasury held an auction for the 10-year zero-
coupon bonds.35 Also on the same date, the Bureau of Treasury issued another
memorandum36 quoting 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.37chanRoblesvirtualLawlibrary
During the auction, there were 45 bids from 15 GSEDs.38 The bidding range was very
wide, from as low as 12.248% to as high as 18.000%.39 Nonetheless, the Bureau of
Treasury accepted the auction results.40 The cut-off was at
12.75%.41chanRoblesvirtualLawlibrary
After the auction, RCBC which participated on behalf of CODE-NGO was declared as
the winning bidder having tendered the lowest bids.42 Accordingly, on October 18,
2001, the Bureau of Treasury issued P35 billion worth of Bonds at yield-to-maturity of
12.75% to RCBC for approximately P10.17 billion,43resulting in a discount of
approximately P24.83 billion.
Also on October 16, 2001, RCBC Capital entered into an underwriting
agreement44 with CODE-NGO, whereby RCBC Capital was appointed as the Issue
Manager and Lead Underwriter for the offering of the PEACe Bonds.45 RCBC Capital
agreed to underwrite46 on a firm basis the offering, distribution and sale of the P35
billion Bonds at the price of P11,995,513,716.51.47 In Section 7(r) of the underwriting
agreement, CODE-NGO represented that [a]ll income derived from the Bonds,
inclusive of premium on redemption and gains on the trading of the same, are exempt
from all forms of taxation as confirmed by Bureau of Internal Revenue (BIR) letter
rulings dated 31 May 2001 and 16 August 2001,
respectively.48chanRoblesvirtualLawlibrary
RCBC Capital sold the Government Bonds in the secondary market for an issue price
of P11,995,513,716.51. Petitioners purchased the PEACe Bonds on different
dates.49chanRoblesvirtualLawlibrary
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 BIR to withhold said final tax at the
21 | P a g e
maturity thereof, [allegedly without] consultation with Petitioners as bondholders, and
without conducting any hearing.50chanRoblesvirtualLawlibrary
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.51 The Bureau of Internal Revenue, citing three
(3) of its rulings rendered in 2004 and 2005, namely: BIR Ruling No. 007-0452 dated
July 16, 2004; BIR Ruling No. DA-491-0453 dated September 13, 2004; and BIR
Ruling No. 008-0554 dated July 28, 2005, declared the
following:chanroblesvirtuallawlibrary
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
to collect 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 On the same day, CODE-NGO filed a motion for leave to intervene (and to admit
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 transfer of 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 as the beneficial owners of such securities
for the relevant [tax] payments to be imposed thereon.56chanRoblesvirtualLawlibrary
On October 17, 2011, replying to an urgent query from the Bureau of Treasury, the
Bureau of Internal Revenue issued BIR Ruling No. DA 378-201157 clarifying that
the final withholding tax due on the discount or interest earned on the PEACe Bonds
should be imposed and withheld not only on RCBC/CODE NGO but also [on] all
subsequent holders of the Bonds.58chanRoblesvirtualLawlibrary
TAXATION 1 Atty. Ortega
Cordero
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)59 before this court.
On October 18, 2011, this court issued a temporary restraining order
(TRO)60 enjoining the implementation of BIR Ruling No. 370-2011 against the
[PEACe Bonds,] . . . subject to the condition that the 20% final withholding tax on
interest income therefrom shall be withheld by the petitioner banks and placed in
escrow pending resolution of [the] petition.61chanRoblesvirtualLawlibrary
On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of court to
intervene and to admit petition-in-intervention62 dated October 27, 2011, which was
granted by this court on November 15, 2011.63chanRoblesvirtualLawlibrary
Meanwhile, on November 9, 2011, petitioners filed their Manifestation with Urgent
Ex Parte Motion to Direct Respondents to Comply with the TRO.64 They alleged that
on the same day that the 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.65chanRoblesvirtualLawlibrary
On November 15, 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
Courts resolution in order that petitioners may place the corresponding funds in
escrow pending resolution of the petition.66chanRoblesvirtualLawlibrary
attached petition-in-intervention with comment on the petition-in-intervention of
RCBC and RCBC Capital).67 The motion was granted by this court on November 22,
2011.68chanRoblesvirtualLawlibrary
On December 1, 2011, public respondents filed their compliance.69 They explained
that: 1) the 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 alreadyfait accompli . . . when the Resolution
and TRO were served to and received by respondents BTr and National Treasurer [on
October 19, 2011];70 and 2) the withheld amount has ipso facto become public funds
and cannot be disbursed or released to petitioners without congressional
appropriation.71 Respondents further aver that [i]nasmuch as the . . . TRO has
already become 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[.]72chanRoblesvirtualLawlibrary
On December 6, 2011, this court noted respondents'
compliance.73chanRoblesvirtualLawlibrary
On February 22, 2012, respondents filed their consolidated comment74 on the
petitions-in-intervention filed by RCBC and RCBC Capital and CODE-NGO.
22 | P a g e
On November 27, 2012, petitioners filed their Manifestation with Urgent Reiterative
Motion (To Direct Respondents to Comply with the Temporary Restraining
Order).75chanRoblesvirtualLawlibrary
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.76chanRoblesvirtualLawlibrary
Respondents comment77 was filed on April 15, 2013, and petitioners filed their
reply78 on June 5, 2013.cralawred
Issues
The main issues to be resolved are:ChanRoblesVirtualawlibrary
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 PhP35 Billion
upon maturity without any deduction whatsoever.79 They add that the Government
cannot impair the efficacy of the [Bonds] by arbitrarily, oppressively and unreasonably
imposing the withholding of 20% FWT upon the [Bonds] a mere eleven (11) days
TAXATION 1 Atty. Ortega
Cordero
before maturity and after several, consistent categorical declarations that such bonds
are exempt from the 20% FWT, without violating due process80 and the constitutional
principle on non-impairment of contracts.81 Petitioners aver that at the time they
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.82 [R]egardless of
whether or not the 2001 BIR Rulings are correct, the fact remains that [they] relied
[on] good faith thereon.83chanRoblesvirtualLawlibrary
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.84 They
allege that the 2004, 2005, and 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.85 Furthermore, they contend that the Bureau of Internal 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[.]86 Thus, [t]he 2011 BIR Ruling clearly amount[ed] to an unauthorized
act of administrative legislation[.]87chanRoblesvirtualLawlibrary
Petitioners further argue that their income from the Bonds is a trading gain, which is
exempt from income tax.88 They insist that [t]hey are not lenders whose income is
considered as interest income or yield subject to the 20% FWT under Section 27
(D)(1) of the [1997 National Internal Revenue Code]89 because they acquired the
Government Bonds in the secondary or tertiary
market.90chanRoblesvirtualLawlibrary
Even assuming without admitting that the Government Bonds are deposit substitutes,
petitioners argue that the collection of the final tax was barred by prescription.91 They
point out that under Section 7 of DOF Department Order No. 141-95,92 the final
withholding tax should have been withheld at the time of their issuance[.]93 Also,
under Section 203 of the 1997 National Internal Revenue Code, internal revenue
taxes, 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.94chanRoblesvirtualLawlibrary
Moreover, petitioners contend that the retroactive application of the 2011 BIR Ruling
without prior notice to them was in violation of their property rights,95 their
constitutional right to due process96 as well as Section 246 of the 1997 National
Internal Revenue Code on non-retroactivity of rulings.97 Allegedly, it would also have
an adverse effect of colossal magnitude on the investors, both local and foreign, the
Philippine capital market, and most importantly, the countrys standing in the
international commercial community.98 Petitioners explained that unless enjoined,
the governments 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 lenders rights, and
strength of investor protection.99 They cited the countrys ranking in the World
Economic Forum: 75th in the world in its 20112012 Global Competitiveness Index,
111thout 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.100 It would also
23 | P a g e
allegedly send a reverberating message to the whole world that there is no certainty,
predictability, and stability of financial transactions in the capital markets[.]101 [T]he
integrity of Government-issued bonds and notes will be greatly shattered and the
credit of the Philippine Government will suffer102 if the sudden turnaround of the
government will be allowed,103 and it will reinforce investors perception that the level
of regulatory risk for contracts entered into by the Philippine Government is
high,104 thus resulting in higher interest rate for government-issued debt instruments
and lowered credit rating.105chanRoblesvirtualLawlibrary
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 power106when she issued the assailed 2011 BIR Ruling
which ruled that all treasury bonds are deposit substitutes regardless of the number
of lenders, in clear disregard of the requirement of twenty (20) or more lenders
mandated under the NIRC.107 They argue that [b]y her blanket and 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.108 Petitioners-intervenors RCBC and RCBC Capital further
argue that the 2011 BIR Ruling will cause substantial impairment of their vested
rights109 under the Bonds since the ruling imposes new 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.110 They added that [t]he exemption from
the twenty percent (20%) final withholding tax [was] the primary inducement and
principal consideration for [their] participat[ion] in the auction and underwriting of
the PEACe Bonds.111chanRoblesvirtualLawlibrary
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.112chanRoblesvirtualLawlibrary
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.113chanRoblesvirtualLawlibrary
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.114chanRoblesvirtualLawlibrary
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[;]115 (b) 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)
TAXATION 1 Atty. Ortega
Cordero
of the 1997 NIRC[;]116 (c) the tax exemption privilege relating to the issuance of the
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[;]117 and (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[.]118 CODE-NGO additionally
argues that impleading it in a Rule 65 petition was improper because: (a) it involves
determination of a factual question;119 and (b) it is premature and states no cause of
action as it amounts to an anticipatory third-party
claim.120chanRoblesvirtualLawlibrary
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 of courts, resulting in a lack of cause of action that justifies the dismissal of
the petition.121 According to them, the jurisdiction 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.122 They point out that
a case 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.123chanRoblesvirtualLawlibrary
Respondents further take issue on the timeliness of the filing of the petition and
petitions-in-intervention.124 They argue that under the guise of mainly assailing the
2011 BIR Ruling, petitioners 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
4.125chanRoblesvirtualLawlibrary
Respondents contend that the discount/interest income derived from the PEACe
Bonds is not a trading gain but interest income subject to income tax.126 They explain
that [w]ith the payment of the PhP35 Billion proceeds on maturity of the PEACe
Bonds, Petitioners receive an amount of money equivalent to about PhP24.8 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 PhP10.2
Billion[.]127chanRoblesvirtualLawlibrary
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[;]128 [t]here has been no change in the laws governing the taxability of interest
income from deposit substitutes and said laws are read into every contract[;]129[t]he
assailed BIR Rulings merely interpret the term deposit substitute in accordance with
the letter and spirit of the Tax Code[;]130 [t]he withholding of the 20% FWT does not
result in a default by the Government as the latter performed its obligations to the
24 | P a g e
bondholders in full[;]131 and [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.132chanRoblesvirtualLawlibrary
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.133 Their imposition of the 20% final withholding tax is not arbitrary
because they were only performing a duty imposed by law;134 [t]he 2011 BIR Ruling is
an interpretative rule which merely interprets the meaning of deposit substitutes [and
upheld] the earlier construction given to the term by the 2004 and 2005 BIR
Rulings.135 Hence, respondents argue that there was no need to observe the
requirements of notice, hearing, and publication[.]136chanRoblesvirtualLawlibrary
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 well as 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.137 Allegedly, the sudden and drastic drop including virtually zero trading
for 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.138chanRoblesvirtualLawlibrary
Moreover, they contend that the assailed 2011 BIR Ruling is a valid exercise of the
Commissioner of Internal Revenues rule-making power;139 that it and the 2004 and
2005 BIR Rulings did not unduly expand the definition of deposit substitutes by
creating an unwarranted exception to the requirement of having 20 or more
lenders/purchasers;140 and the word any in Section 22(Y) of the National 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.141chanRoblesvirtualLawlibrary
Respondents further argue that a retroactive application of the 2011 BIR Ruling will
not unjustifiably prejudice petitioners.142 [W]ith or without the 2011 BIR Ruling,
Petitioners would be liable to pay a 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.143 Section 7 of DOF
Department Order No. 141-95 also provides that income derived from Treasury bonds
is subject to the 20% final withholding tax.144 [W]hile revenue regulations as a
general rule have no 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.145chanRoblesvirtualLawlibrary
Finally, respondents submit that there are a number of variables and factors affecting
a capital market.146 [C]apital market itself is inherently unstable.147 Thus,
[p]etitioners argument that the 20% final withholding tax . . . will wreak havoc on the
TAXATION 1 Atty. Ortega
Cordero
financial stability of the country is a mere supposition that is not a justiciable
issue.148chanRoblesvirtualLawlibrary
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.149 They add that 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[.]150 The remedy of petitioners is to claim a tax refund
under Section 204(c) of the Tax Code should their position be upheld by the
Honorable Court.151chanRoblesvirtualLawlibrary
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.152chanRoblesvirtualLawlibrary
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;
o 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 of property 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.
25 | P a g e
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 Revenues 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 predecessors
rulings especially when the latters 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 of filing 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.
Courts 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)
TAXATION 1 Atty. Ortega
Cordero
Thus, it was held that [i]f superior administrative officers [can] grant the relief prayed
for, [then] special civil actions are generally not entertained.153 The remedy within
the administrative machinery must be resorted to first and pursued to its appropriate
conclusion before the courts judicial power can be
sought.154chanRoblesvirtualLawlibrary
Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of
administrative remedies:chanroblesvirtuallawlibrary
[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,155 (3) when the
administrative action is patently illegal amounting to lack or excess of 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.156 (Emphasis supplied, citations
omitted)
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.157chanRoblesvirtualLawlibrary
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 Revenues
opinions as his own.158 This position was in fact confirmed in the letter159 dated
October 10, 2011 where he ordered the Bureau of Treasury to withhold the amount
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
26 | P a g e
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. 9282,160 such rulings of the Commissioner of Internal Revenue are
appealable to that court, thus:chanroblesvirtuallawlibrary
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 ruling or after the expiration of the period fixed by
law for action as referred to in 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,161 citing Rodriguez v. Blaquera,162 this
court emphasized the jurisdiction of the Court of Tax Appeals over rulings of the
Bureau of Internal Revenue, thus:chanroblesvirtuallawlibrary
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. . . .
....
TAXATION 1 Atty. Ortega
Cordero
Such revenue orders were issued pursuant to petitioner's powers under Section 245 of
the Tax Code, which states:chanroblesvirtuallawlibrary
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 provisions of 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:chanroblesvirtuallawlibrary
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 to the 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.164chanRoblesvirtualLawlibrary
In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The
Secretary, Department of Interior and Local Government,165 this court noted that the
petition for prohibition was 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 view of 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
27 | P a g e
matter.166chanRoblesvirtualLawlibrary
Here, the nature and importance of the issues raised167 to the investment and banking
industry with 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 is a 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 courts 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 withholding tax 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:chanroblesvirtuallawlibrary
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 from any 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:chanroblesvirtuallawlibrary
TAXATION 1 Atty. Ortega
Cordero
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. 1739168issued in 1980. Later, Presidential Decree No. 1959, effective on
October 15, 1984, formally added the definition of deposit substitutes,
viz:chanroblesvirtuallawlibrary
(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
28 | P a g e
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:chanroblesvirtuallawlibrary
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:chanroblesvirtuallawlibrary
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 borrowers 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
TAXATION 1 Atty. Ortega
Cordero
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.169 On the other hand, respondents theorize that the
word any indicates that the period contemplated is the entire term of the bond and
not merely the point of origination or issuance[,]170 such that if the debt instruments
were subsequently sold in secondary markets and so on, in such a way that twenty
(20) or more buyers eventually own the instruments, then it becomes indubitable that
funds would be obtained from the public as defined in Section 22(Y) of the
NIRC.171 Indeed, in the context of the financial market, the words at any one time
create an ambiguity.
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.172chanRoblesvirtualLawlibrary
The financial markets that facilitate the transfer of debt securities are commonly
classified by the maturity of the securities[,]173 namely: (1) the money market, which
facilitates the flow of short-term 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).174chanRoblesvirtualLawlibrary
Whether referring to money market securities or capital market securities,
transactions occur either in the primary market or in the secondary
market.175 Primary markets facilitate the issuance of new securities. Secondary
markets facilitate the trading of existing securities, which allows for a change in the
ownership of the securities.176 The transactions in primary markets exist between
issuers and investors, while secondary market transactions exist among
29 | P a g e
investors.177chanRoblesvirtualLawlibrary
Over time, the system of financial markets has evolved from simple to more complex
ways of carrying out financial transactions.178 Still, all systems perform one basic
function: the quick mobilization of money from the lenders/investors to the
borrowers.179chanRoblesvirtualLawlibrary
Fund transfers are accomplished in three ways: (1) direct finance; (2) semidirect
finance; and (3) indirect finance.180chanRoblesvirtualLawlibrary
With direct financing, the borrower and lender meet each other and exchange
funds in return for financial assets181 (e.g., purchasing bonds directly from the
company issuing them). This method provides certain limitations such as: (a) both
borrower and lender must desire to exchange the same amount of funds at the same
time[;]182 and (b) both lender and borrower must frequently incur substantial
information costs simply to find each other.183chanRoblesvirtualLawlibrary
In semidirect financing, a securities broker or dealer brings surplus and deficit
units together, thereby reducing information costs.184 A broker185 is an individual or
financial institution who provides 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.186 Adealer187 also serves as a
middleman between buyers and sellers, but the dealer actually acquires the sellers
securities in the hope of selling them at a later time at a more favorable
price.188 Frequently, a dealer will split up a large issue of primary securities into
smaller units affordable by . . . buyers . . . and thereby expand the flow of savings into
investment.189 In semidirect financing, [t]he ultimate lender still winds up holding
the borrowers securities, and therefore the lender must be willing to accept the risk,
liquidity, and maturity characteristics of the borrowers [debt security]. There still
must be a fundamental coincidence of wants and needs between [lenders and
borrowers] for semidirect financial transactions to take
place.190chanRoblesvirtualLawlibrary
The limitations of both direct and semidirect finance stimulated the development of
indirect financial transactions, carried out with the help of financial
intermediaries191 or financial institutions, like banks, investment banks, finance
companies, insurance companies, and mutual funds.192 Financial intermediaries
accept funds from surplus units and channel the funds to deficit units.193 Depository
institutions [such as banks] accept deposits from surplus units and provide credit to
deficit units through loans and purchase of [debt] securities.194 Nondepository
institutions, like mutual funds, 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.195 By pooling the resources of [small savers, a financial
intermediary] can service the credit needs of large firms
simultaneously.196chanRoblesvirtualLawlibrary
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).
TAXATION 1 Atty. Ortega
Cordero
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 more lenders/investors, there is deemed to be a public borrowing and the
bonds at that point in time are deemed deposit substitutes. Consequently, the seller is
required to withhold the 20% final withholding tax on the imputed interest income
from the bonds.
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 is broad enough to include all passive incomes subject
to specific tax rates or final taxes.197 Hence, interest income from deposit substitutes
are necessarily part of taxable 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.198 Stated otherwise . . . if there were no withholding tax system in place in
30 | P a g e
this 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.199chanRoblesvirtualLawlibrary
This court, in Chamber of Real Estate and Builders Associations, Inc. v.
Romulo,200 explained the rationale behind the withholding tax
system:chanroblesvirtuallawlibrary
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 governments 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.201 (Citations omitted)
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.202chanRoblesvirtualLawlibrary
Hence, when there are 20 or more lenders/investors in a transaction for a specific
bond issue, the seller is required 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)203 of the 1997 National Internal Revenue
Code, which exempts gains derived 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 or other certificate of indebtedness fall within the general category
of gains derived 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).204 The use of the term gains from sale in Section 32(B)(7)(g)
shows the intent of Congress not to include interest as referred under Sections 24, 25,
27, and 28 in the exemption.205chanRoblesvirtualLawlibrary
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 at which 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
TAXATION 1 Atty. Ortega
Cordero
the time of sale) of the instruments.206chanRoblesvirtualLawlibrary
The Bureau of Internal
Revenue rulings
The Bureau of Internal Revenues interpretation as expressed in the three 2001 BIR
Rulings is not consistent with law.207 Its interpretation of at any one time to mean at
the point of origination alone is 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 . . . regardless of the number of
purchasers/lenders at the time of origination/issuance are considered deposit
substitutes.208 Being the subject of this petition, it is, 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.209 That construction which will leave every word
operative will be favored over one that leaves some word, clause, or sentence
meaningless and insignificant.210chanRoblesvirtualLawlibrary
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 of great 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,211 this
court upheld the 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 Code and,
hence, [cannot] be given weight for to do so would, in effect, amend the
statute.212 Thus:chanroblesvirtuallawlibrary
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,
31 | P a g e
instead of remaining consistent and in harmony with, the law they seek to apply and
implement.213 (Citations 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.214chanRoblesvirtualLawlibrary
In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,215
this
court nullified Revenue Memorandum Order (RMO) No. 15-91 and RMC No. 43-91,
which imposed a 5% lending investor's tax on pawnshops.216 It was held that the
[Commissioner] cannot, in the exercise of [its 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.217chanRoblesvirtualLawlibrary
In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance
Secretary,218 this court stated that the Commissioner of Internal Revenue is not bound
by the ruling of his predecessors,219but, to the contrary, the overruling of decisions is
inherent in the interpretation of laws:chanroblesvirtuallawlibrary
[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 it is
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.220 (Emphasis supplied, citations omitted)
Tax treatment of income derived
from the PEACe Bonds
The transactions executed for the sale of the PEACe Bonds are:
TAXATION 1 Atty. Ortega
Cordero
1. The issuance of the P35 billion Bonds by the Bureau of Treasury to
RCBC/CODE-NGO at P10.2 billion; and
2. The sale and distribution by RCBC Capital (underwriter) on behalf of
CODE-NGO of the PEACe Bonds to undisclosed investors at P11.996 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 agreement221and RCBC term sheet222 reveals that the settlement
dates for the sale and distribution by RCBC Capital (as underwriter for CODE-NGO) of
the PEACe Bonds to various undisclosed investors at a purchase price of
approximately P11.996 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
P10.2 billion borrowing received by the Bureau of Treasury in exchange for the P35
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 turned around and sold said PEACe Bonds, whether in
whole or part, simultaneously to 20 or more lenders or investors.
We note, however, that under Section 24223 of the 1997 National Internal Revenue
Code, interest income received by individuals from long-term 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, or
any 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)
failure to file a return, to be computed from the time of discovery of the falsity, fraud,
or omission. Section 203 states:chanroblesvirtuallawlibrary
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
32 | P a g e
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.224 Moreover, service may be made personally or by mail.225 And,
[p]ersonal service is complete upon actual delivery [of the order.]226 This courts
temporary restraining order was received 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 reports227cited by petitioners were posted minutes
before the close of office hours or late in the evening of October 18, 2011, and they did
not give the 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 such injunction or order was served on him personally or that
he had notice of the issuance or making of such injunction or
TAXATION 1 Atty. Ortega
Cordero
order.228chanRoblesvirtualLawlibrary
At any rate, [i]n case of doubt, a withholding agent may always protect himself or
herself by withholding the tax due229 and return the amount of the tax withheld
should it be finally determined that the income paid is not subject to
withholding.230 Hence, respondent Bureau of Treasury was justified in withholding
the amount corresponding to the 20% final withholding tax from the proceeds of the
PEACe Bonds, as it received this courts 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 courts temporary
restraining order.231chanRoblesvirtualLawlibrary
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.232 It must be irreversible, e.g., demolition
of properties,233 service of the penalty of imprisonment,234 and hearings on
cases.235 When the act sought to be enjoined has not yet been fully satisfied, and/or is
still continuing in nature,236 the defense of fait accompli cannot prosper.
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 tax237 when it received the
temporary restraining order, it had yet to remit the monies it withheld to the Bureau of
Internal Revenue, a remittance which was due only on November 10, 2011.238 The act
enjoined by the temporary restraining order had not yet been fully satisfied and was
still continuing.
Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001 which prescribes
to national 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.240 The Bureau of Internal Revenue shall
transmit an original copy of the TRA to the Bureau of Treasury,241 which shall be the
basis for recording the remittance of the tax collection.242 The Bureau of Internal
Revenue will then record the amount of taxes reflected in the TRA as tax collection in
the Journal of Tax Remittance by government agencies based on its copies of the
TRA.243 Respondents did not submit any withholding tax return or TRA to prove that
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 Treasurys Journal Entry Voucher No. 11-10-10395244 dated
October 18, 2011 submitted to this court shows:chanroblesvirtuallawlibrary
33 | P a g e
 Account Code Debit Amount Credit Amount
Section 1 of Presidential Decree No. 1967 states:chanroblesvirtuallawlibrary

Bonds Payable-L/T, Dom- 442-360 35,000,000,000.00 Section 1. There is hereby appropriated, out of any funds in the National Treasury not
Zero otherwise appropriated, such amounts as may be necessary to effect payments on
Coupon T/Bonds foreign or domestic loans, or foreign or domestic loans whereon creditors make a call
(Peace Bonds) 10 yr on the direct and indirect guarantee of the Republic of the Philippines, obtained by:
Sinking Fund-Cash 198-001 30,033,792,203.59 a. the Republic of the Philippines the proceeds of which were relent to government-
(BSF) owned or controlled corporations and/or government financial institutions;
Due to BIR 412-002 4,966,207,796.41
b. government-owned or controlled corporations and/or government financial
institutions the proceeds of which were relent to public or private institutions;
To record redemption of
10yr Zero coupon (Peace
c. government-owned or controlled corporations and/or financial institutions and
Bond) net of the 20% guaranteed by the Republic of the Philippines;
final withholding tax
pursuant to BIR Ruling No.
d. other public or private institutions and guaranteed by government-owned or
378-2011, value date,
controlled corporations and/or government financial institutions.
October 18, 2011 per BTr
letter authority and BSP
Bank Statements. The amount of P35 billion that includes the monies corresponding to 20% final
withholding tax is a lawful and valid obligation of the Republic under the Government
The foregoing journal entry, however, does not prove that the amount of Bonds. Since said obligation represents a public debt, the release of the monies
P4,966,207,796.41, representing the 20% final withholding tax on the PEACe Bonds, requires no legislative appropriation.
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 Section 2 of Republic Act No. 245 likewise provides that the money to be used for the
withholding tax was set aside for remittance to the Bureau of Internal Revenue. 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
We recall the November 15, 2011 resolution issued by this court directing respondents subject of another appropriation legislation:chanroblesvirtuallawlibrary
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 SEC. 2. The Secretary of Finance shall cause to be paid out of any moneys in the
resolution of the petition.245 The 20% final withholding tax was effectively placed National Treasury not otherwise appropriated, or from any sinking funds provided
in custodia legis when this court ordered the deposit of the amount in escrow. The for the purpose by law, any interest falling due, or accruing, on any portion of the
Bureau of Treasury could still release the money withheld to petitioners for the latter public debt authorized by law. He shall also cause to be paid out of any such money,
to place in escrow pursuant to this courts directive. There was no legal obstacle to the or from any such sinking funds the principal amount of any obligations which have
release of the 20% final withholding tax to petitioners. 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 . . .
Congressional appropriation is not required for the servicing of public debts in view of In the case of interest-bearing obligations, he shall pay not less than their face value;
the automatic appropriations clause embodied in Presidential Decree Nos. 1177 and in the case of obligations issued at a discount he shall pay the face value at maturity; or
1967. 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
Section 31 of Presidential Decree No. 1177 provides:chanroblesvirtuallawlibrary 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
Section 31. Automatic Appropriations. All expenditures for (a) personnel retirement time to carry out the provisions of this section. The Secretary of Finance shall transmit
premiums, government service insurance, and other similar fixed expenditures, (b) to Congress during the first month of each regular session a detailed statement of all
principal and interest on public debt, (c) national government guarantees of expenditures made under this section during the calendar year immediately preceding.
obligations which are drawn upon, are automatically appropriated: provided, that no
obligations shall be incurred or payments made from funds thus automatically Thus, DOF Department Order No. 141-95, as amended, states that payment for
appropriated except as issued in the form of regular budgetary allotments.

34 | P a g e
TAXATION 1 Atty. Ortega
Cordero
Treasury bills and bonds shall be made through the National Treasurys account with
the Bangko Sentral ng Pilipinas, to wit:chanroblesvirtuallawlibrary

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.

Regarding these legislative enactments ordaining an automatic appropriations

provision for debt servicing, this court has held:chanroblesvirtuallawlibrary

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 in the 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, but largely 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 have delegated its wisdom
to the Executive, on whose part lies the implementation or execution of the legislative
wisdom.246(Citation 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.247chanRoblesvirtualLawlibrarychanrobleslaw

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
courts 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.

35 | P a g e
TAXATION 1 Atty. Ortega
Cordero