SC rules PEACe bonds exempt from final tax

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The Supreme Court (SC) has junked a 2011 Bureau of Internal Revenue (BIR) order imposing a 20 percent final withholding tax on the Poverty Eradication and Alleviation Certificates (PEACe) bonds issued by the government.

According to a 39-page decision of Associate Justice Marvic Leonen, the SC en banc has given its nod to a petition for mandamus, prohibition and certiorari filed by eight banks that sought to annul BIR Rulings No. 370-2011 and No. 378-2011 for being unconstitutional and contrary to law.

The PEACe bonds were originally issued by the Bureau of Treasury to Rizal Commercial Banking Corporation (RCBC) Capital, in behalf of the Caucus of Development NGO Networks (CODE-NGO), and subsequently sold to the secondary markets, including the eight petitioner banks. Net proceeds from the sale will be used to endow a permanent fund to finance accredited non-government organizations throughout the country.

Before the bonds matured, the bureau had issued the assailed rulings imposing withholding tax “not only on RCBC/CODE-NGO but also on “all subsequent holders of the Bonds,’’ the decision said.


Also, the SC reprimanded respondent Bureau of Treasury (BTr) for its continued retention of the amounts withheld. “Respondent BTr had the duty to obey the TRO 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,” the decision said.

The petition before the High Court asked for a temporary restraining order (TRO) against implementation by the Bureau of Treasury of the BIR rulings, which motion was granted then. But the government agency failed to comply with the order.

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

Based on the National Internal Revenue Code (NIRC), monetary benefits from deposit substitutes are subject to a 20 percent final withholding tax. The code also defines “deposit substitutes as an alternative form of obtaining funds from the public . . . other than deposits, through the issuance, endorsement or acceptance of debt instruments for the borrower’s own accounts…”

“Congress specifically defined ‘public’ to mean twenty (20) or more individual or corporate leaders at any one time. Hence, the number of lenders is determinative of whether a debt instrument should be considered a deposit substitute and consequently subject to 20 percent final withholding tax,” the decision said.

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

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

In the ruling, the SC clarified that a subsequent sale and distribution of the PEACe bonds to 20 or more lenders/investors, would oblige RCBC Capital and CODE-NGO to withhold the 20-percent final tax on the interest/discount from the bond. In doing so, the decision also nullified three previous 2001 BIR rulings, which interpreted the phrase “at any one time” to mean at the point of origination alone.

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