Case No.

Banco de Oro et al. vs. Republic of the Philippines et al.

G.R. No. 198756 January 13, 2015

Facts

On October 7, 2011, the Commissioner of Internal Revenue

issued BIR Ruling No. 370-2011, declaring that the Poverty
Eradication and Alleviation Certificates (PEACe) Bonds, being
deposit substitutes, are subject to the 20% final withholding tax
and that all treasury bonds regardless of the number of
purchasers or lenders at the time of origination or issuance are
considered deposit substitutes. Pursuant to this ruling, the
Secretary of Finance directed the Bureau of Treasury to withhold a
20% final tax from the face value of the PEACe Bonds upon their
payment at maturity on October 18, 2011.

In the sale of the PEACe Bonds involving the petitioners, 35

billion bonds were issued by the Bureau of Treasury to RCBC or
CODE-NCGO at 10.2 billion; and RCBC Capital on behalf of the
CODE-NGO sold and distributed the bonds to undisclosed
investors at 11.996 billion pesos.

The petitioners filed a petition for certiorari, prohibition

and/or mandamus under Rule 65 of the Rules of Court to annul
the CIRs ruling for being unconstitutional and for having been
issued without jurisdiction or with grave abuse of discretion
amounting to the lack or excess or jurisdiction, to prohibit the
Bureau of Treasury (BT) from withholding the FWT and to
command the BT to pay the full amount of the face value of the
government bonds upon maturity, and to secure a temporary
restraining order (TRO) and a write of preliminary injunction from
enforcing the ruling.

The court granted the TRO but the Bureau of Treasury

continued to retain the collected 20% final withholding tax.

The petitioners argue that 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 that the
2011 BIR Ruling cannot be applied retroactively because:
 a) It will violate the contract clause since 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.

The respondents countered that 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. They argued that the
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 that the petitioners did not observance of the
doctrine of exhaustion of administrative remedies and of
hierarchy of courts.

Issues

1. Whether Rule 65 can be resorted to in interpretative rulings

made by the CIR;
2. Whether the PEACe Bonds are "deposit substitutes" and thus
subject to 20% final withholding tax under the 1997 National
Internal Revenue Code; and

Ruling

1. Yes, Rule 65 can be resorted to in interpretative rulings of

the BIR because jurisprudence allows certain exceptions to
the rule on exhaustion of administrative remedies.

In the case, the exceptions that the issue involved is purely a

legal question and that there are circumstances indicating the
urgency of judicial intervention are present.
 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. 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. Also, the
nature and importance of the issues raised to the investment and
banking industry constitute exceptional and compelling
circumstances and 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 BIR 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.

2. PEACe Bonds may be considered "deposit substitutes" and

may be subject to the 20% final withholding tax under the
1997 National Internal Revenue Code.

Deposit substitutes are 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 (Sec. 22(Y), NIRC).
 From the point of view of the financial market, the phrase,
at any one time would mean every transaction executed in the
primary or secondary market in connection with the purchase or
sale of securities. Therefore, where 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.

However, in the case, 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, it cannot be known as to how many investors the
PEACe Bonds were sold to by RCBC Capital. Therefore, at present,
the PEACe bonds in the subject transactions are not found to be
within the coverage of deposit substitutes. In the future, 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 as provided for in Sec
203 and Sec. 203 of the NIRC.
Case No. 6

The Philippine American Life and General Insurance

Company vs. The Secretary of Finance and The
Commissioner of Internal Revenue

G.R. No. 210987 November 24, 2014

Facts

Philippine American Life and General Insurance Company

(Philamlife) sold its shareholdings in Philam Care Health Systems,
Inc. (PhilamCare) to STI Investments through competitive bidding.
To facilitate the transfer of the shares, Philamlife filed an
application for a certificate authorizing registration or tax
clearance with the Bureau of Internal Revenue (BIR) Large
Taxpayers Service Division. Due to potential donors tax liability,
the petitioner requested a BIR ruling to confirm that the sale was
not subject to donors tax on the grounds that there was no
donative intent so there was no taxable donation as provided in
BIR Ruling [DA-(DT-065) 715-09] and that the shares were sold at
their actual fair market value and at arms length, wherein a bona
fide business arrangement of the dealings done in the ordinary
course of business which is a sale for less than an adequate
consideration is not subject to donors tax; and that donors tax
does not apply to sale of shares sold in an open bidding process.

The Commissioner on Internal Revenue (CIR) denied

Philamlifes request holding that donors tax became imposable
on the price difference [Sec. 100 of the National Internal Revenue
Code (NIRC)] between the selling price of the shares sold and the
book value based on the financial statements of Philamcare; and
that BIR Ruling [DA-(DT-065) 715-09], on which petitioner
anchored its claim, has already been revoked by Revenue
Memorandum Circular (RMC) No. 25-2011.

Aggrieved, petitioner requested respondent Secretary of

Finance (Secretary) to review the CIRs ruling. The Secretary
affirmed the CIRs assailed ruling.

Petitioner elevated the case to the Court of Appeals (CA) via

a petition for review under Rule 43. The CA dismissed the petition
on the ground that it is the Court of Tax Appeals (CTA), which has
jurisdiction involving the exercise of the Commissioner of Internal
Revenues power to interpret the NIRC and other tax laws and
that the review can be categorized as "other matters arising
under the NIRC or other laws administered by the BIR."
Subsequently, the CA denied reconsideration of its decision.

Issues

1. Whether the ruling of the CIR is subject to review by the CTA;

2. Whether the appellate power of the CTA includes certiorari;
and
3. Whether the price difference between the selling price of the
shares and the book value is subject to donors tax.

Ruling

1. Yes, the ruling of the Commissioner of Internal Revenue is

subject to review by the CTA.

Sec. 7(a)(1) of Republic Act No. 1125 impliedly vests with the
CTA the jurisdiction over the CA petition as "other matters"
arising under the NIRC or other laws administered by the BIR. The
law provides that the CTA shall exercise exclusive appellate
jurisdiction to review by appeal the decisions of the CIR 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. Even though the
law suggests that it only covers rulings of the CIR, the Supreme
Court held that it is sufficient enough to include appeals from the
Secretarys review under Sec. 4 of the NIRC.

In addition, it is axiomatic that laws should be given a

reasonable interpretation which does not defeat the very purpose
for which they were passed. To leave undetermined the mode of
appeal from the Secretary would be an injustice to taxpayers
prejudiced by his adverse rulings. To remedy this situation, the
Supreme Court implied from the purpose of RA 1125 and its
amendatory laws that the CTA is the proper forum with which to
institute the appeal.

2. Yes, the appellate power of the CTA includes certiorari.

Under the Section 1, Art. VIII of the 1987 Constitution,

judicial power shall be vested in one Supreme Court and in such
lower courts as may be established by law and that judicial power
includes the duty of the courts of justice to settle actual
controversies involving rights which are legally demandable and
enforceable, and to determine whether or not there has been a
grave abuse of discretion amounting to lack or excess of
jurisdiction on the part of any branch or instrumentality of the
Government.

The power of the CTA includes that of determining whether

there has been grave abuse of discretion amounting to lack or
excess of jurisdiction on the part of the Regional Trial Court in
issuing an interlocutory order in cases falling within the exclusive
appellate jurisdiction of the tax court. It thus, follows that the CTA,
by constitutional mandate, is vested with jurisdiction to issue
writs of certiorari in these cases.

Also, in order for any appellate court to effectively exercise

its appellate jurisdiction, it must have the authority to issue,
among others, a writ of certiorari. In transferring exclusive
jurisdiction over appealed tax cases to the CTA, it can reasonably
be assumed that the law intended to transfer also such power as
is deemed necessary, if not indispensable, in aid of such appellate
jurisdiction.

3. Yes, the price difference between the selling price and book
value of the shares is subject to donors tax.

The absence of donative intent does not exempt the sales of

stock transaction from donor's tax since Sec. 100 of the NIRC
categorically states that the amount by which the fair market
value of the property exceeded the value of the consideration
shall be deemed a gift. Thus, even if there is no actual donation,
the difference in price is considered a donation by fiction of law.