BIR Ruling No. 085-10

October 6, 2010 BIR RULING NO. 085-10 000-00 Mr. Danilo A. Lihaylihay 25 Kaunlaran Street, Batasan Hills Quezon City Sir : This has reference to your letter dated January 18, 2010 requesting for the disbursement or payment of your informer's rewards in the amount of PhP900,000,000.00 in relation to the internal revenue tax case of Bangko Sentral ng Pilipinas (BSP) for taxable years 2004, 2005, 2006 and 2007. Also, your letter dated January 25, 2010 requests for the disbursement or payment of Php54,375,886.26 informer's reward on the compromise payments made by Bank of America (BA) on its internal revenue tax case for taxable year 1995 and prior years. The Presidential Anti-Graft Commission (PAGC) was furnished copies of your letters. Recognizing our authority to address the aforementioned issues, PAGC endorsed your letters to our office for advice of action. Bangko Sentral ng Pilipinas Records show that on April 24, 2006, you, together with a certain Prudencio T. Malanog, filed an Affidavit of Denunciation under Confidential Information No. 110-2006, denouncing BSP for not paying the correct income tax, creditable withholding tax, documentary stamp tax, withholding tax on compensation, capital gains tax, expanded withholding tax, final taxes on taxable securities, profit remittance tax, onshore tax, final tax on reverse repurchase and gross receipts tax for the years 1998, 1999, 2000, 2001, 2002, 2003, 2004 and 2005. You claim that on account of this information, revenue officers of the Large Taxpayers Service pursued the investigation of the tax liabilities of BSP, which culminated in the issuance of deficiency assessment notices against BSP in the aggregate amounts of P3,935,142,421.95 representing deficiency gross receipts tax (GRT) and final withholding tax (FWT) for taxable year 2004 and P7,371,309,929.28 representing deficiency FWT on the Overnight Reverse Repurchase Agreements (RRP-Onites) for taxable years 2005, 2006 and 2007. DCHIAS BSP appealed the assessments to the Court of Tax Appeals on February 22, 2008 and the case was docketed as CTA Case No. 7732 entitled "Bangko Sentral ng Pilipinas vs. Commissioner of Internal Revenue". However, on July 25, 2008, BSP submitted a letter to the Bureau offering to compromise and/or amicably settle its GRT liability under CTA Case No. 7732 and the FWT assessments on RRP-Onites against BSP for taxable years 2005 to 2007. On July 29, 2008 the said compromise offer of BSP was accepted by then BIR Commissioner Lilian B. Hefti. Thus, on July 30, 2008 Commissioner Hefti communicated her acceptance of the compromise offer of BSP in the amount of Php3,600,000,000.00 which was certified to by the Chief, Revenue Accounting Division, that the collections listed were verified and found included in the ISOSDC data file as representing payment of taxes made through Electronic Filing Payment System and remitted per BTR-JEV and were not included in the list of dishonored checks on file. You are now claiming the reward equivalent to 25% of the total tax collected for taxable years 2004, 2005, 2006 and 2007. While the claim for reward involves various taxable years, for purposes of this opinion, the propriety of the claim arising from the confidential information allegedly instrumental to the recovery of taxes for taxable year 2005 shall not be passed upon because, as of even date, the docket of this particular tax case could not be located by this Office despite diligent efforts. After a careful review of the docket of the case, it is the considered opinion of this Office that, with the exception of 2005, your claim for reward referring to the internal revenue tax case of BSP for taxable years 2004, 2006 and 2007 should be denied for lack of factual and legal basis. Contrary to your claim that your filing of information led to the investigation of BSP's tax liabilities for taxable year 2004, and the eventual collection of taxes through a compromise settlement, the records show that the issuance of the Letter of Authority 00014030 dated April 5, 2005 by the Regional Director of Revenue Region No. 6, Manila (RR-6) authorizing the investigation of BSP's tax liabilities for 2004 was made prior to the date of filing of his Affidavit of Denunciation. Since the case was already pending investigation or examination before the BIR, any information filed referring to the BSP tax case shall no longer entitle you to a reward pursuant to Clause V of Revenue Memorandum Order (RMO) No. 12-93. caIEAD Scrutiny of the records also reveals that the LA authorizing the investigation of the books of accounts and other accounting records of BSP for all internal revenue taxes for 2004 was issued to the Regional Special Task Force created under Revenue Special Order to conduct regular audit on all banks and insurance companies. This means that the LA was not issued in relation to an investigation arising from the establishment of fraud or tax evasion but in the exercise of the regular audit functions of the BIR. Significantly, the Memorandum Report of the revenue officers investigating the case fails to mention the relationship between their findings on BSP's deficiency taxes and the purported schemes of tax evasion you alleged in your affidavit. Section 4 of Finance Regulations Order No. 1 provides in part that to be deserving of a reward, the information given by the informer must lead to or be instrumental in the discovery of fraud or violation of any of the provisions of the National Internal Revenue Code and results in the recovery or collection of revenues or collection of compromise in case of amicable settlement. The fact that BSP's tax case for 2004 was already being investigated long before the information was filed clearly negates any right you have to a reward. As to taxable years 2006 and 2007, the information you provided should state the particular facts on which it is based including the tax type and taxable year when fraud has occurred. Verily, one cannot allege the commission of future fraud or violations of tax laws by the person being denounced. In the instant case, it is undisputed that the information you filed covers only taxable years 1998 to 2005. Since there is no information as to fraud or violations committed by BSP for taxable years 2006 and 2007, the claim for reward pertaining to said period should be denied outright for lack of factual and legal basis. In view of the foregoing, this Office hereby recommends to deny your claim for informer's reward pertinent to the internal revenue tax case of BSP for taxable years 2004, 2006 and 2007. EcDSTI Bank of America Records show that on June 6, 1995, Mr. Leodines Cadayona filed a Confidential Information (CI) which was later docketed as CI No. 76-95 denouncing the alleged tax evasion practices of Bank of America for taxable year 1995 and prior years; that on June 25, 1998, you, together with Mr. Cadayona, filed a supplemental denunciation letter against the same taxpayer without having that supplemental information being sworn to before the Law Division, which included 1996 and 1997; and that the BIR was able to collect from Bank of America the total amount of Php217,503,544.07 through a compromise settlement. Hence, you are now claiming the reward equivalent to 25% of the total tax collected. The Assistant Commissioner of Internal Revenue (ACIR), Legal Service through the Law Division, in a Memorandum dated January 30, 2007, to the Deputy Commissioner (DCIR), Legal & Inspection Group (LIG), recommended payment of the reward pursuant to Section 282 (A) of the Tax Code of 1997. However, in a Memorandum to the Commissioner dated April 23, 2007, the DCIR-LIG, made several observations, which are the grounds for the denial of the claim for reward. Thereafter, the DCIR-LIG, referred the Memorandum dated January 30, 2007 of the ACIR-Legal Service to the National Investigation Division (NID) for their comment, to which the NID stated in their Memorandum dated June 20, 2007 that the information you and Mr. Cadayona provided were not instrumental in the collection of taxes and that the same failed to comply with RMO 12-93. In a letter dated November 17, 2007 of ACIR-Legal Service, this Bureau, after a series of review of the propriety of the claim, denied the grant of the reward, on the basis of the Memorandum dated July 23, 2007 of Deputy Commissioner Gregorio V. Cabantac, herein quoted as follows: 1) "The information was not instrumental in the collection of taxes. Under Finance Regulations Order No. 1, Section 4, conditions are required for an information to be considered as entitled to a reward, to wit: 'Results of the Information Which Deserves Reward. In order to entitle an informer to a reward, the information given by him must lead to or be instrumental in the discovery of the fraud or violation of any of the provisions of the Internal Revenue or Tariff and Customs law and results in the recovery or collection of revenues, surcharges and fees and/or the conviction of the guilty party and/or the imposition of any fine or penalty or the collection of compromise in case of amicable settlement. The Supreme Court have opined that "In essence, what is vital under the above-cited legislation and its implementing rule is that the information given had led to or had been instrumental 'in the discovery of the fraud upon or violation of any of the provisions of the Internal Revenue or Tariff and Customs Law,' and that such discovery resulted in the recovery or collection of revenues, surcharges and fees." ESCTaA The fact that the case was referred to the Assessment Service, no prima facie case for fraud or tax evasion can be imputed against subject taxpayer based on the information given. The issuance of the Letter of Authority (LOA) was not premised on the information given or on the establishment of fraud but by virtue of a Revenue Special Order (RSO) creating special teams to conduct regular audit on all banks and insurance companies. The LOA issued under the control of the Enforcement Service should be considered as a regular audit and not as an investigation arising from the establishment of fraud or tax evasion." "On the basis of the facts stated in the affidavit, the complaint for tax evasion against subject taxpayer can not be established considering that the supposed scheme can be considered legal and not contrary to law. This is perhaps the reason why the Revenue Officers of the then Tax Fraud Division recommended the endorsement of the case to the Assessment Service to conduct regular audit and verify whether the subject expenses were properly liquidated and duly supported with receipts. Moreover, a perusal of the memorandum report of the Revenue Officers under LOA 18500 would show that it has failed to mention any connection of their findings with the purported schemes of tax evasion as mentioned in the affidavit. The schemes complained of by Mr. Cadayona do not constitute fraud or tax evasion. The unliquidated traveling and representation expenses would, therefore, be considered as either advances or as compensation income subject to withholding tax, while liquidated expenses would be considered as ordinary expenses and, therefore, allowable as deduction from gross income. Thus, the reward if any, to be given solely to Mr. Cadayona would be 15% of the total payments made on the 1995 deficiency withholding tax in compensation income of P1,194,877.07 or P179,231.56." 2) "The supplemental denunciation letter purportedly signed by Messrs. Leodines R. Cadayona and Danilo A. Lihaylihay could not be the basis for the grant of reward. A. The filing of supplemental denunciation has violated Revenue Memorandum Order 12-93. Being unverified, utmost care should be considered and the allegations stated should not be accepted as plain gospel truths and much more on the purported signatures appearing therein. A comparison of the purported signature of Mr. Cadayona in the supplemental denunciation as compared with the signature in the affidavits executed on July 6 and 31, 1995, and his follow-up letter showed material disparity or deviations raising doubts as to the authenticity of Mr. Cadayona's signature. The supplemental denunciation that give rise to Mr. Lihaylihay's pseudo interest or personality in the investigation of subject taxpayer and in claiming for a reward, thereafter, can be considered as a mere "hitchhiking or getting a free ride" and should not be given any scant consideration. The contents thereof, being made in general terms, could be considered nothing more than a shotgun denunciation, that have included all types of internal revenue taxes imposed on banks, filed for the sole purpose of expecting the best of both worlds of benefits afforded to tax informers. Mere allegations against a taxpayer for non-payment of correct taxes without any valid or authenticated proof should not be countenanced, for to do otherwise would grant an informer the unlimited freedom to claim a reward, which he is unworthy to receive at the expense of the government. Regulations are issued by this Office and the Department of Finance for the purpose of protecting not only the informer and the taxpayer but also to protect the interest of the general public which is ably represented by the government." caTIDE B. Moreover, in its subsequent memorandum dated June 20, 2007 the National Investigation Division (NID) stated that "As to the purported unverified supplemental complaint of Messrs. Cadayona and Lihaylihay, the mere inclusion of additional years and the general allegations of "for not paying the government their correct internal revenue tax liabilities covering years 1996 and 1997" could not in any way constitute or transform the information as instrumental for informer's reward purposes. The information given has not been helpful or has not served as a means for the BIR to assess and collect taxes from Bank of America. The application for liberal interpretation, therefore, could not be applied. The liberal interpretation and application of the rules apply only in proper cases of demonstrable merit and under justifiable causes and circumstances." In view of the foregoing, this Office denies your claim for informer's reward pertinent to the internal revenue tax case of Bangko Sentral ng Pilipinas for taxable years 2004, 2006 and 2007 as well as on the compromise payments made by Bank of America on its internal revenue tax case for taxable year 1995 and prior years. Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue