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The Bureau of Treasury announced that "P30.0B worth of 10-year Zero [-] Coupon Bonds [would] be auctioned on October 16, 2001”.The notice stated that the Bonds shall be issued to not more than 19 buyers/lenders. 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). After the auction, RCBC which participated on behalf of CODE-NGO was declared as the winning bidder having tendered the lowest bids. 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,resulting in a discount of approximately P24.83 billion. RCBC Capital entered into an underwriting Agreementwith CODE-NGO, whereby RCBC Capital was appointed as the Issue Manager and Lead Underwriter for the offering of the PEACe Bonds. 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. The Bureau of Internal Revenue, citing three (3) of its rulings rendered in 2004 and 2005, namely: BIR Ruling No. 007-04dated July 16, 2004; BIR Ruling No. DA-491-04dated September 13, 2004; and BIR Ruling No. 008-05dated July 28, 2005, declared the following: 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. On October 17, 2011, replying to an urgent query from the Bureau of Treasury, the Bureau of Internal Revenue issued BIR Ruling No. DA 378-2011clarifying 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.’"Also on the same date, petitioners filed a petition for certiorari, prohibition, and/or mandamus (with urgent application for a temporary restraining order and/or writ of preliminary injunction)before this court. October 18, 2011, this court issued a temporary restraining order (TRO)"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 there from shall be withheld by the petitioner banks and placed in escrow pending resolution of [the] petition." On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of court to intervene and to admit petition-in-intervention dated October 27, 2011, which was granted by this court on November 15, 2011.