PEACe Bonds - BIR and other concerned agencies did not DEFY the order of the Court - TRO was not received in time

On Nov. 2, 2011, the Department of Finance, the Bureau of Internal Revenue and Bureau of the Treasury through the Office of the Solicitor General filed their Comment in the PEACe Bonds case now pending with the Supreme Court (G.R. No. 198756).

Among the matters presented in the Government’s Comment was that the Supreme Court’s Temporary Restraining Order was received only on October 19, 2011, or a day after the PEACe Bonds had matured and the 20% final tax on the interest income from the same was withheld.

As stated in the Comment, the tax was withheld “inasmuch as: (1) no TRO was received enjoining the implementation of the 2011 BIR Rulings; (2) the 20% FWT had not yet been collected … and the period for the collection thereof had not yet expired … and (3) …. considering the stiff statutory penalties prescribed under Sections 251 and 255 of the Tax Code in case of willful failure to withhold a tax.”

Contrary to some news reports, the agencies concerned did not “defy” the Order of the Court. The agencies simply did not receive the TRO before they were required by law to withhold the tax. It must be stressed that the DOF, BIR and BTr had absolutely no discretion to defer the withholding of the tax.

Failure by a withholding agent to withhold a tax is penalized by (a) imprisonment of between 1 year to 10 years; (b) a fine of not less than P10 thousand; and (c) a penalty equal to the amount of tax not withheld under Sections 251 and 255 of the Tax Code.

Had the agencies received the TRO before the close of business on October 18, 2011, compliance would not have been a problem. However, since the TRO was received only on the day after the tax had been withheld, compliance with the TRO was no longer possible since Section 58 of the Tax Code provides that “The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the government until paid to the collecting officers.”

Disbursement of the taxes withheld in trust for the government to other persons would make the withholding agent liable for the crime of Estafa.

Under the Rules of Court promulgated by the Supreme Court, court orders are required to be “served upon the parties affected” (Rule 13, Section 4). Moreover, service may be made personally or by mail (Rule 13, Section 5). And, personal service is complete upon actual delivery of the order (Rule 13, Section 10).

Considering the criminal and civil penalties for failure to withhold a tax, government officials waited until the very last minute for the reported TRO. Unfortunately, no TRO arrived in time.

Also in its Comment, the Government pointed out that, based on the submissions of the petitioner banks themselves, “it was CODE-NGO and RCBC Capital/RCBC which made unequivocal representations as to the supposed ‘tax exempt’ nature of the PEACe Bonds…” and not the Bureau of Treasury

Without a law giving it such authority, the Bureau of Treasury, by itself, has no power to contractually grant a tax exemption in favor of the petitioners since such power is exclusively legislative.

The Department of Finance and its concerned bureaus has consistently called on interested parties to refrain from issuing misleading and inflammatory statements to the media and to allow the courts to resolve the issues surrounding the tax treatment of the PEACe Bonds.