MANILA, Philippines - The Bureau of Internal Revenue (BIR), through the Office of the Solicitor General (OSG), asked the Supreme Court (SC) on Wednesday to junk a petition filed by 8 banks against a BIR ruling that imposes a 20% final withholding tax (FWT) on the government's Poverty Eradication and Alleviation Certificates (PEACe) bonds, which matured last Oct. 18.

In its 137-page comment on the petition filed by by Banco de Oro, Bank of Commerce, China Banking Corporation, Metropolitan Bank and Trust Co., Philippine Bank of Communications, Philippine National Bank, Philippine Veterans Bank, and Planters Development Bank, the BIR maintained that it did not commit grave abuse of discretion in issuing BIR Ruling No. 370-2011 dated Oct. 7, 2011 that seeks to impose the FWT.

The banks were able to secure a temporary restraining order (TRO) from the high court last Oct. 18, while the merits of the petition have yet to be decided.

'Serious procedural infirmities'

In its comment, the BIR alleged that the petition "suffers from serious procedural infirmities" and that the banks did not exhaust all administrative remedies available to them before elevating their case to the high court.

"Petitioners proceeded to the Honorable Court to question the 2011 BIR ruling issued by respondent CIR instead of asking for a reconsideration, and, if the ruling is still adverse, to appeal the same to respondent Secretary of Finance. This violated the doctrine of exhaustion of administrative remedies," the comment read.

This action by petitioners did not afford the CIR or finance chief the opportunity to "correct their mistakes, if any, and dispose of the case," the BIR claimed.

"These omissions on the part of the petitioners are an obvious contravention of the doctrine of exhaustion of administrative remedies," the comment read.

The BIR pointed out that the banks cannot act on a "mere conjecture or speculation" that the finance chief would deny their appeal, thus, prompting them to seek recourse from the high court.

The BIR also accused the petitioners of violating the hierarchy of courts, stressing that "there is yet no impending danger or threat to the Philippine economy, as feared by petitioners to allow them to directly seek relief" from the high tribunal "without violating the doctrine of hierarchy of courts." 

"In the absence of special reasons, a petitioner cannot disregard the doctrine of the hierarchy of courts," the comment read.

The BIR stressed that, after exhausting all available administrative remedies, the petitioners should have elevated their case to the Court of Tax Appeals (CTA).

The BIR also argued that the petition was filed "out of time" since it also assails, not only the 2011 BIR ruling, but also rulings of the agency in 2004 and 2005, thereby violating the legal prohibition on collateral attack.

'Interest income subject to income tax'

While petitioner claimed that any gain or income from the PEACe bonds is exempt from both final and ordinary income taxes, that their income is in the nature of a trading gain and not interest income, and the subject bonds have a maturity of more than 5 years, the BIR asserted that interest is not the same as trading gain.

"It is clear that there is a distinction between 'gains derived from dealings in property and 'interests', which are separately classified as items of gross income," the comment read.

"Since the gain realized by the petitioners from the PEACe bonds is not a trading gain but interest income, it is subject to income tax," the comment read.

The BIR insists that the banks earned interest income from the PEACe bonds because, when a permanent investment in bonds is acquired at a discount, the discount over the life of the bonds is, by practice, amortized in order "to bring the investment in bonds balance to face value on the date of maturity." 

"From the point of view of both law and accounting, it is absolutely certain that petitioners have earned interest income from their investment in the PEACe Bonds, which must be properly subject to income tax," the comment read.

'FWT not an impairment of contract obligations'

The BIR stressed that the Bureau of the Treasury (BTr) has no power to contractually grant tax exemption in favor of petitioners, and in the absence of any enabling law granting the BTr the power or authority to contract away a tax imposed by law, no tax exemption may be granted by it.

The BIR stressed that the right to enter into contracts is one of the liberties guaranteed by the Constitution, which prohibits the passage of any law impairing the obligation of contracts.

"It bears stressing that since the enactment of the Tax Code of 1997 there has been no change in the tax laws with regard to taxation of the interest income from deposits and deposit substitutes as would justify the invocation of Section 10 of Article III of the Constitution, which provides that 'no law impairing the obligation of contracts shall be passed,'" the comment read.

'No deprivation of property committed'

The BIR argued that petitioners were not deprived of the opportunity to question and challenge the 20% FWT on the PEACe bonds, except that they "simply did not avail of such opportunity at the earliest possible time."

"There is no palpable violation of petitioners’ constitutional right to due process. Considering that it is the law itself that imposed the 20% FWT, respondent CIR only clarified the imposition of the law through the issuance of 2004 and 2011 BIR rulings," the comment read. 

It further said  that "the contention of petitioners that the withholding of the 20% FWT from the discount or interest income realized from the issuance of the PEACe Bonds is arbitrary and oppressive is misplaced." 

The BIR also slammed petitioners' assertion that government's refusal to pay the full value of the bonds upon maturity "has devastating implications that will adversely impact" the capital markets and "wreak havoc" on the country's financial stability by calling these "purely speculative and highly self-serving."

Retroactive effect

The BIR maintained that since it was interpretive of the National Internal Revenue Code (NIRC) of 1997, the 2011 assailed BIR ruling was to retroact to January 1, 1998, the effectivity date of the NIRC. 

The ruling, the BIR pointed out, is a corrective measure that effectively and properly revokes the 2001 BIR rulings, which created a "clearly unwarranted distortion of the definition of deposit substitutes."

It further points out that this does not unjustifiably prejudice petitioners since "with 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." 

"Basic is the principle that 'taxes are the lifeblood of the nation.' The primary purpose is to generate funds for the State to finance the needs of the citizenry and to advance the common weal. One shall not lose sight of the possible loss of huge revenues by the government because of erroneous determinations made by its past BIR commissioners," the comment read.