G.R. No. 198756 , January 13, 2015.
BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION, METROPOLITAN BANK & TRUST COMPANY, PHILIPPINE BANK OF COMMUNICATIONS, PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS BANK AND PLANTERS DEVELOPMENT BANK, Petitioners, RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL CORPORATION, Petitioners-Intervenors, CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor, vs. REPUBLIC OF THE PHILIPPINES, THE COMMISSIONER OF INTERNAL REVENUE, BUREAU OF INTERNAL REVENUE, SECRETARY OF FINANCE, DEPARTMENT OF FINANCE, THE NATIONAL TREASURER AND BUREAU OF TREASURY, Respondents.

FACTS

The case involves the proper tax treatment of the discount or interest income arising from the ₱35 billion worth of 10-year zero-coupon treasury bonds issued by the Bureau of Treasury on October 18, 2001, denominated as Poverty Eradication and Alleviation Certificates (PEACe Bonds). The Caucus of Development NGO Networks (CODE-NGO), with the assistance of RCBC and RCBC Capital, proposed the issuance. Prior to the issuance, the Bureau of Internal Revenue (BIR) issued BIR Ruling No. 020-2001 on May 31, 2001, confirming that the PEACe Bonds would not be classified as deposit substitutes and would not be subject to the 20% final withholding tax, as they would be issued to only one entity (CODE-NGO). This ruling was reiterated in subsequent 2001 BIR rulings. The Bureau of Treasury’s auction guidelines for the bonds stated they were “[n]ot subject to 20% withholding tax as the issue will be limited to a maximum of 19 lenders in the primary market.” The bonds were auctioned on October 16, 2001, with RCBC as the winning bidder. RCBC Capital then underwrote and sold the bonds to various petitioner banks in the secondary market. On October 7, 2011, just before the bonds’ maturity, the Commissioner of Internal Revenue issued BIR Ruling No. 370-2011, declaring that the PEACe Bonds, being deposit substitutes, were subject to the 20% final withholding tax, and directed the Bureau of Treasury to withhold the tax from the face value upon maturity on October 18, 2011. The petitioners filed a petition seeking to annul the 2011 BIR Ruling and to prohibit the withholding of the tax.

ISSUE

The central issue is whether the 2011 BIR Ruling, which imposed a 20% final withholding tax on the interest income/discount from the PEACe Bonds by classifying them as deposit substitutes, is valid.

RULING

The Supreme Court ruled that the 2011 BIR Ruling is void. The Court held that the PEACe Bonds are deposit substitutes, and the discount on zero-coupon bonds is interest income subject to the 20% final withholding tax under Section 27(D)(1) of the 1997 Tax Code. However, the government is estopped from collecting the tax due to the principle of equitable estoppel. The BIR’s 2001 rulings unequivocally declared the bonds were not deposit substitutes and not subject to the tax. The Bureau of Treasury and the Department of Finance relied on these rulings in structuring and marketing the bonds, explicitly representing their tax-exempt status in official documents like the auction guidelines and the underwriting agreement. Investors justifiably relied on these official representations. Allowing the government to impose the tax ten years later, at maturity, would be grossly unfair and constitute a breach of faith. The Court emphasized that while taxes are the lifeblood of the government, the power to tax must be exercised with fairness and justice. The government cannot be permitted to revert to its previous position to the prejudice of investors who relied in good faith on its own representations. Therefore, while the bonds are legally subject to the tax, the government is barred by equitable estoppel from collecting it. The petition was granted, and the respondents were permanently prohibited from withholding the 20% final tax on the PEACe Bonds.