BIR Ruling [DA-226-99]

April 13, 1999 BIR RULING [DA-226-99] Hon. Edgardo B. Espiritu Secretary of Finance Manila S i r : We are forwarding herewith for your approval the herein claim for informer's reward of Mr. Generoso C. Lualhati under then Section 281(1) of the Tax Code, as amended (now Sec. 282 (A) of the Tax Code of 1997), including the entire docket (consisting of 5 folders) relative to the internal revenue tax case of Manila Electric Company (MERALCO) covering the taxable years 1988 to 1992. The records show that on June 3, 1993, the informer submitted an Affidavit which was denominated as Confidential Information No. 66-93 denouncing Meralco for "evading payment of correct taxes by unlawfully inflating its cost of sale or cost of power it purchases from the National Power Corporation (NPC) by bloating it with 15 percent (15%) in unsubstantiated system loss of which amount 5% is claimed by Meralco to be pilfered or stolen and the balance in technical loss. Thus, its taxable net income is automatically decreased by 10% in technical loss and 5% pilfered loss or about P800 M a year minimum since 1990". On the basis of the recommendation of the examiners of the Tax Fraud Division as contained in their preliminary investigation, Letter of Authority No. 0000196C and 0000197C were issued by this Office to investigate Meralco for taxable years 1988 to 1989 and 1990 to 1992. In their report of investigation dated October 9, 1996, the examiners reported that ''verification of the income and expense accounts, as well as the assets and liability accounts, revealed that the transaction during the period under investigation were properly recorded . . . ." However, there was found from Meralco deficiency income, franchise, withholding and documentary stamp taxes, including increment, covering taxable years 1988 to 1992 in the total amount of P10,004,000.69 which amount was paid by Meralco on October 17, 1996 under various Authority to Accept Payment (ATAP) as follows: cdtech In the same report of investigation, the examiners negated the informers allegation of fraud committed by Meralco when they stated: ". . . On the other hand, the issues brought by the informer under confidential information No. 66-93 on system losses and pilferages were already found by the undersigned to be without basis and cannot stand scrutiny in any forum for tax assessment purposes. System losses and pilferages were not charged by the taxpayer as a deduction from revenue, it only affected the prices per kilowatt hour charged to consumers since cost per kilowatt hour includes the cost of electric power lost from system loss and pilferages." "The issue on the unreconciled purchases as per financial statements is resolved and found to be cut-off difference or adjustments either from NPC's record or MERALCO's record. No tax effect was noted in this issue . . . ." Gleaned from the foregoing, it is obvious that the investigating examiners were not in favor of recommending the granting of reward to the herein informer. We beg however, to disagree. In the case of Penid vs. Virata ( 121 SCRA 166-173 ), the Supreme Court found that although the confidential information filed by the informer for underpayment of taxes did not include Pan Fil Co., Inc. in the list of shipping companies attached thereto, the Supreme Court directed the 25% reward to include the underpayment of Pan Fil Co., Inc. The Supreme Court citing Section 4 of Finance Regulations No. 1 said that: ". . . In essence, what is vital under the above cited legislation and its implementing rule is that the information has led to or had been instrumental in the discovery of the fraud upon or violation of any provisions of the Internal Revenue or Tariff and Customs Law, and that such discovery resulted in the recovery or collections of revenues, surcharges and fees. . . ." The Supreme Court further held that: ". . . The inclusion of Pan Fil Co., Inc., among the firms investigated, was the direct, logical and necessary consequence of the information given by petitioners during their interview by BIR Examiner Cadutan. Because of said information, the probe was extended to other companies and agents not listed . . .." Applying the foregoing: (1) The information given "led to or was instrumental in the discovery of the deficiency taxes of Meralco. Because of the information, the examiners had to verify and investigate other areas of taxpayer's income tax return, i.e., deductions. And it was the information that made it possible for the examiners to open taxpayer's books and conduct an extensive investigation and eventually come out with the deficiency assessments. (2) Were it not for information given, the BIR could not have opened the investigation for some of the taxable years involved for the reason that the same already prescribe. The nature of the information made the investigation qualify as a "fraud" investigation giving the BIR the legal authority to conduct the investigation even though the same was done beyond the five (5)-year period. (3) As a direct, logical and necessary consequence of the information which largely dealt on "overclaimed deduction", the BIR examiner assessed deficiency income tax disallowing a deduction where no withholding tax was paid. The focus of the examiner, insofar as income tax was concerned, was also on "deductions". The fact that the examiner disallowed the "deduction" in effect meant that the taxpayer "overclaimed" its deductions. The denunciation pertains to an "overclaimed" deduction too. Hence, it can be logically concluded that it is the confidential information given that led the examiner to focus on "deductions". The records show that the information furnished by the informer was in writing and under oath; that it was not yet in the possession of the Bureau of Internal Revenue nor is the aforesaid tax liability pending or previously investigated by an official or employee of the Bureau or Department of Finance; and that the informer is, as represented, not related to internal revenue official or employee or to any public officer within the six degree of consanguinity. It appearing that the information furnished by Mr. Generoso C. Lualhati was instrumental in the discovery of a violation of internal revenue laws and in the recovery of taxes which otherwise would not have been affected, it is respectfully recommended that he be paid the amount equivalent to 15% of P10,004,000.69 or the amount of P1,500,600.00 as informer's reward pursuant to Section 281(1) of the Tax Code, as amended, the law applicable herein. The said reward shall not be subject to the 10% final tax imposed under Section 282(A) of the Tax Code of 1997 for the reason that R.A. No. 8424 does not contain provisions providing for its retroactive application (Opinion No. 67, S. 1998 of the Secretary of Justice). cdta Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue