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TAX REVIEWER: LAW OF BASIC TAXATION IN THE PHILIPPINES BY: Benjamin B.

Aban
NOTES (PROF. CABANEIRO) A2011

JUICY

Chapter 5: TAX ADMINISTRATION AND


ENFORCEMENT

3. Make assessments and prescribe additional requirements for


tax administration and enforcement.

IN GENERAL
Agencies involved in tax administration
1. Bureau of Internal Revenue
2. Bureau of Customs
3. Provincial, city and municipal assessors and treasurers
Bureau of Internal Revenue
Headed
by
the
Commissioner
and
Commissioners
Assistant Commissioners and Division Chiefs
Regional Directors
Revenue District Officers
Revenue Enforcement Officers or Examiners

two

Deputy

Sources of Revenue: The ff are deemed National Internal


Revenue Taxes:
Income Tax
Estate and Donors taxes
Value-Added tax
Other percentage taxes
Excise taxes
Documentary stamp taxes
Such other taxes as are or hereafter may be imposed and
collected by the BIR.
POWERS OF THE COMMISSIONER OF INTERNAL REVENUE
General powers of the Commissioner of Internal Revenue
1. Interpret tax laws and to decide tax cases.
2. Obtain information and to summon, examine, and take
testimony of persons.

Power to interpret tax laws


The power to interpret the provisions of the NIRC and other
tax laws shall be under the exclusive and original
jurisdiction of the Commissioner.
This power is subject to review by the Secretary of Finance.
Jurisdiction of Commissioner re. tax cases
The Commissioner has the power to decide:
1. disputed assessments;
2. refunds of the internal revenue taxes, fees, or other
charges;
3. penalties imposed in relation thereto; or
4. other matters arising under this Code or other laws or
portions thereof administered by the Bureau of Internal
Revenue
This is subject to the exclusive appellate jurisdiction of the
Court of Tax Appeals.
Power of the Commissioner to obtain information, and to
summon, examine, and take testimony of persons
Commissioner has power to obtain information and to
summon, examine and take testimony of persons in:
1. ascertaining the correctness of any return; or
2. in making a return when none has been made; or
3. in determining the liability of any person for any internal
revenue tax; or
4. in collecting any such liability; or
5. in evaluating tax compliance
Such power includes:
1. To examine any book, paper, record or other data which
may be relevant or material to such inquiry.

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TAX REVIEWER: LAW OF BASIC TAXATION IN THE PHILIPPINES BY: Benjamin B. Aban
NOTES (PROF. CABANEIRO) A2011

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2. To obtain or a regular basis from any person other than


the person whose internal revenue tax liability is subject
to audit or investigation, or from any office or officer of
the national and local governments, government
agencies and instrumentalities any information.
3. To summon the person liable for tax or required to file a
return, or any officer or employee of such persons, or
any person having possession, custody, or care of the
books of accounts and other accounting records, or any
other person, to appear before the Commissioner or his
duly authorized representatives.
4. To take such testimony of the person concerned, under
oath, as may be relevant or material to such inquiry.
5. To cause revenue officers and employees to make a
canvass from time to time of any revenue district or
region and inquire after and concerning persons therein
who may be liable to pay any internal revenue tax.
Power of the Commissioner to make assessments and
prescribe additional requirements for tax administration
and enforcement
1. Examination of returns and determination of the tax due.
2. Assess the proper tax on the best evidence obtainable.
3. Conduct inventory-taking, surveillance and to prescribe
presumptive gross sales and receipts.
4. Issue jeopardy assessments and terminate the taxable
period.
5. Prescribe real property values.
6. Inquire into bank deposit accounts.
7. Accredit and register tax agents.
8. Prescribed
additional
procedural
or
documentary
requirements.
Authority of the Commissioner to delegate power:
The Commissioner may delegate his powers to any or such
subordinate officials with the rank equivalent to a DIVISION
CHIEF OR HIGHER subject to certain limitations. Provided the
ff CANNOT be delegated:

1. The power to recommend the promulgation of rules and


regulations by the Sec of Finance
2. The power to issue rulings of first impression or to reverse,
revoke, or modify any existing ruling of the Bureau
3. The power to compromise or abate except liabilities less
than P500,000.
4. The power to assign or reassign internal revenue officers to
establishments where the articles subject to excise tax are
produced or kept.
Examination of returns and determination of the tax due
After the filing of the return, the Commissioner or his duly
authorized representative may authorize the examination of
any taxpayer and the assessment of the correct amount of
tax.
However, failure to file a return does not prevent the
Commissioner from authorizing the examination of the
taxpayer.
Any return, statement or declaration filed in any office
authorized to receive the same shall not be withdrawn
However, such may be modified, changed or amended
within three (3) years from the date of their filing provided
no notice for audit or investigation for such return,
statement or declaration has been actually served upon the
taxpayer.
Assess the proper tax on the best evidence obtainable
A Commissioner is given the power to assess deficiency tax
based on the best evidence obtainable:
1. when a report required by law as a basis for the
assessment of any national internal revenue tax shall
not be forthcoming within the time limit fixed by law or
rules and regulations; or
2. when there is reason to believe that any such report is
false, incomplete or erroneous.
In Bonifacia Sy Po V. CTA, the Supreme Court upheld the
assessment made by the Commissioner on the basis of the
bottles of wine seized and the worn statements of the

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TAX REVIEWER: LAW OF BASIC TAXATION IN THE PHILIPPINES BY: Benjamin B. Aban
NOTES (PROF. CABANEIRO) A2011

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former employees of the Silver Cup Wine Factory for failure


of the latters proprietor to submit the factorys book of
accounts and related records despite repeated demands by
the BIR.
Conduct inventory-taking, surveillance and to prescribe
presumptive gross sales and receipts
Commissioner may, at any time, during the taxable year,
order inventory-taking of goods of any taxpayer as a basis
for determining his internal revenue tax liabilities.
Commissioner may also place the business operations of
any person, natural or juridical, under observation or
surveillance if there is reason to believe that such person is
not declaring his correct income, sales or receipts for
internal revenue tax purposes.
Commissioner may also prescribe presumptive gross sales
and receipts in the following instances:
1. When it is found that a person has failed to issue
receipts and invoices in violation of the NIRC; or
2. When there is reason to believe that the books of
accounts or other records do not correctly reflect the
declarations made or to be made in a return.
Under the presumptive gross sales or receipts method, the
Commissioner, after taking into account the sales, receipts,
income, or other taxable base of other persons engaged in
similar situations or circumstances or after considering other
relevant information, prescribe a minimum amount of such
gross receipts, sales, and taxable base.
Such amount so prescribed shall be prima facie correct for
purposes of determining the internal revenue tax liabilities
of such person.
Issue jeopardy assessments and terminate the taxable
period
A jeopardy assessment is one issued by the Commissioner if
the believes that the collection of the tax is in jeopardy due
to delay and other causes.

The Commissioner may issue a jeopardy assessment when


it comes to his knowledge that a taxpayer is:
1. retiring from business subject to tax; or
2. intending
a. to leave the Philippines; or
b. to remove his property therefrom; or
c. to hide or conceal his property; or
3. performing any act tending to obstruct the proceedings
for the collection of the tax for the past or current
quarter or year or to render the same totally or partly
ineffective.
In such cases, the Commissioner may assess and collected
the tax immediately without the usual formalities. Among
others, the Commissioner shall:
1. declare the tax period of such taxpayer terminated any
time; and
2. send the taxpayer a notice such decision together with a
request for the immediate payment of the tax for the
period so declared terminated and the tax for the
preceding year or quarter, or such portion thereof as
may be unpaid.
Said taxes shall be due and payable immediately and shall
be subject to all the penalties prescribed by law, unless paid
within the time fixed in the demand made by the
Commissioner.

Prescribe real property values


Commissioner is empowered to divide the Philippines into
different zones or areas and to determine the fair market
value of real properties located in each zone or area after
consultation with private and public appraisers.
For purposes of computing any internal revenue tax, the
value of the property shall be, whichever is higher of:
1. the fair market value as determined by the
Commissioner; or
2. the fair market value as shown by the schedule of values
of the Provincial and City Assessors.
Inquire into bank deposit accounts

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TAX REVIEWER: LAW OF BASIC TAXATION IN THE PHILIPPINES BY: Benjamin B. Aban
NOTES (PROF. CABANEIRO) A2011

Commissioner may inquire into the bank deposits of:


1. a decedent to determine his gross estate; and
2. any taxpayer who has filed an application for
compromise of his tax liability by reason of financial
incapacity to pay his tax liability.
There is really no conflict with RA 1405 or the Law on
Secrecy of Bank Deposit Act in case of compromises due to
the financial inability to pay of the taxpayer since an
application for compromise shall not be considered unless
and until the taxpayer waives in writing his privilege under
RA 1405. Such waiver constitutes the authority of the
Commissioner to inquire into the bank deposits of the
taxpayer.

RULE
ON
ESTOPPEL
AND
SOME
COMPLIANCE
REQUIREMENTS
Rule on no estoppel against the government
It is settled rule of law that in the performance of its
governmental functions, the State cannot be estopped by
the neglect of its agents and officers. Nowhere is this more
true than in the field of taxation.
[Commissioner v.
Procter and Gamble Co., G.R. No. 66838, April 15, 1988]
Similarly, estoppel does not apply to deprive the
government of its right to raise defenses even if these
defenses are being raised for the first time on appeal.
[Commissioner v. Procter and Gamble Co., G.R. No.
66838, April 15, 1988] However, this was reversed in a
subsequent resolution issued by the Supreme Court in the
same case. [Commissioner v. Procter and Gamble Co.,
G.R. No. 66838, December 2, 1991, Resolution)]
Estoppel against the taxpayer
While the principle of estoppel may not be invoked against
the government, this is not necessarily true in the case of
the taxpayer.
Some compliance requirements

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All corporations, companies, partnerships or persons


required by law to pay internal revenue taxes shall keep a
journal and a ledger or their equivalents.
Those earning below P50,000 quarterly may adopt a
simplified set of bookkeeping records.
Those earning more than P150,000 quarterly shall have
their books of accounts audited and examined yearly by
independent certified public accountants.
They have option to keep subsidiary books as the needs of
their business may require.
All books or records must be in a native language, English or
Spanish, if not, translate to these languages.
All the books of accounts, including the subsidiary books
and other accounting records, shall be preserved for a
period beginning from the last entry in such book until the
last day prescribed by Section 203 within which the
Commissioner is authorized to make an assessment.
Said books are records may be examined only once in a
taxable year, with some exceptions.

ASSESSMENT OF INTERNAL REVENUE TAXES


Tax assessment
An assessment is the official action of an administrative
officer in determining the amount of tax due from a
taxpayer, or it may be a notice to the effect that the amount
therein stated is due from a taxpayer as a tax with a
demand for payment of the tax or deficiency stated therein.
An assessment is a finding by the taxing agency that the
taxpayer has not paid his current taxes. It is also notice to
the effect that the amount stated therein is due as tax and
is a demand for payment thereof.
The Local Government Code defines assessment as the act
or process of determining the value of a property or portion
thereof subject to tax, including the discovery, listing,
classification, and appraisal of properties.
The BIR assessment is usually embodied in a demand letter
or in a BIR form known as the assessment notice.

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TAX REVIEWER: LAW OF BASIC TAXATION IN THE PHILIPPINES BY: Benjamin B. Aban
NOTES (PROF. CABANEIRO) A2011

Letter of authority
This is the authority issued by the Revenue Regional
Director and given to a revenue officer assigned to perform
assessment functions to examine taxpayers within the
jurisdiction of the district in order to collect the correct
amount of tax, or to recommend the assessment of any
deficiency tax due in the same manner that the said acts
could have been performed by the Revenue Regional
Director himself.
Kinds
1.
2.
3.
4.

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of assessment
Self assessment
Deficiency assessment
Illegal and void assessment
Erroneous assessment

Self assessment
One in which the tax is assessed by the taxpayer himself.
The amount of tax is reflected in the tax return that is filed
by him and the tax assessed is paid at the time he files the
return. This system of filing of return and payment of tax is
known as the pay-as-you-file system.
Tax so assessed is known as self assessed tax.
Deficiency assessment
This is an assessment made by the tax assessor himself
whereby the correct amount of the tax is determined after
an examination or investigation is conducted.
The liability is determined and is thereafter assessed for the
following reasons:
1. The amount ascertained exceeds that which is shown as
the tax by the taxpayer in his return;
2. No amount of tax is shown in the return; or
3. The taxpayer did not file any return at all.
Illegal and void assessment
This is an assessment wherein the tax assessor has no
power to act at all.

Erroneous assessment
This is an assessment wherein the assessor has the power
to assess but errs in the exercise of the power.
Principles governing tax assessments
1. Assessments are prima facie presumed correct and made in
good faith.
2. It is the taxpayer and not the BIR who has the duty of
proving otherwise.
3. Assessments shld not be based on presumptions but on
actual facts.
4. Assessment is discretionary on the Commissioner who
cannot therefore be compelled to assess a tax when he or
she believes that there is no basis for such assessment.
5. The authority vested in the Commissioner to assess taxes
may be delegated. However, it is settled that the power to
make final assessment cannot be delegated.
6. Assessments must be directed to the right party.
Investigative power of the Commissioner; factual basis of
assessments
Inasmuch as assessments are based on facts, the
Commissioner is given the power to obtain information
which serves as basis for said assessments, and is also
given the means to secure them. [See powers of the
Commissioner]
Means employed in the assessment of tax
1. Examination of returns and determination of the tax due
2. Assess the proper tax on the best evidence obtainable
3. Conduct inventory-taking, surveillance and to prescribe
presumptive gross sales and receipts
4. Issue jeopardy assessments and terminate the taxable
period
5. Prescribe real property values
6. Inquire into bank deposit accounts
7. Accredit and register tax agents

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TAX REVIEWER: LAW OF BASIC TAXATION IN THE PHILIPPINES BY: Benjamin B. Aban
NOTES (PROF. CABANEIRO) A2011

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8. Prescribe
additional
procedural
or
documentary
requirements.
The Confidentiality Rule:
Although Sec. 71 of the 1997 Tax Code provides that tax
returns shall constitute public records, it is still confidential
in nature and may not be inquired into in unauthorized
cases. Those employees of the BIR found guilty are subject
to penalty or imprisonment.
Exceptions to the Confidentiality Rule:
1. When the inspection of the return is authorized upon the
written order of the President of the Philippines.
2. When the inspection is authorized under Finance Regulation
No. 33 of the Sec of Finance.
3. Whent the production of the tax return is MATERIAL
EVIDENCE in a criminal case.
4. When authorized by the taxpayer himself.
The net worth method
A very effective method of determining taxable income and
the deficiency income tax due thereon is the net worth
method or what is otherwise known as the inventory
method of income tax verification.
The method is an extension of the accounting principle:
Assets minus liabilities equals net worth. The taxpayers net
worth is determined both at the beginning and at the end of
the same taxable year. The increase or decrease in net
worth is adjusted by adding all non-deductible items and
subtracting therefrom non-taxable receipts.
The legal basis for the use of the net worth method is the
authority of the Commissioner to adopt an accounting
method that clearly reflects the income.
Conditions for the use of the net worth method
1. That the taxpayers books do not clearly reflect his income
or the taxpayer has no books, or if the has books, he refuses
to produce them.

2. That there is evidence of a possible source or sources of


income to account for the increases in net worth or the
expenditures.
3. The there is a fixed starting point or opening net worth.
4. That the circumstances are such that the method does
reflect the taxpayers income with reasonable accuracy and
certainty and proper and just additions of personal expenses
and other non-deductible expenditures were made and
correct, fair and equitable credit adjustments were given by
way of eliminating non-taxable items.
Requisites of a valid assessment
1. Post-reporting notice or notice for an informal conference
after the tax audit.
2. Pre-assessment notice sent to the taxpayer, except in
several instances.
3. The taxpayers shall be informed in writing of the law and
the facts upon which the assessment is made.
4. Assessment must be made within the prescribe period.
Pre-assessment notice
This is a notice in writing which is sent to the taxpayer at
the address indicated in his return or at his last known
address as stated in his notice of change of address if the
Commissioner or his duly authorized representative finds
that taxes should be assessed against the taxpayer. As
such, the taxpayer is first notified of said findings before an
assessment is issued.
When pre-assessment notice not required
1. When the finding for any deficiency tax is the result of a
mathematical error in the computation of the tax as
appearing on the face of the return;
2. When a discrepancy has been determined between the tax
withheld and the amount actually remitted by the
withholding agent;
3. When a taxpayer who opted to claim a refund or tax credit
of excess creditable withholding tax for a taxable period was
determined to have carried over and automatically applied

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the same amount claimed against the estimated tax


liabilities for the taxable quarter or quarters of the
succeeding taxable year;
4. When the excise tax due on excisable articles has not been
paid; or
5. When an article locally purchased or imported by an exempt
person, such as, but not limited to, vehicles, capital
equipment, machineries and spare parts, has been sold,
traded or transferred to non-exempt persons.
Deficiency or delinquency
Deficiency is the amount by which the tax due exceeds the
sum of the amount of the tax shown on a taxpayers return
plus amounts previously assessed or collected as deficiency,
less any credits, refunds, or other payments due the
taxpayer, i.e. the amount a taxpayer is deficient in his tax
payments.
Delinquency is the state of a person upon whom the
personal obligation to pay the tax has been fixed by lawful
assessment and he thereafter fails to pay the tax within the
time prescribed by law.
ADDITIONS TO THE TAX
Additions to the tax
Additions to the tax are increments to the basic tax incident
to the taxpayers non-compliance with certain legal
requirements like the taxpayers refusal or failure to pay
taxes on time and/or violations of taxing provisions in the
law.
What are the additions to the tax?
1. Civil penalty or surcharge
2. Interest
3. Other civil penalties and administrative fines
Civil penalty or surcharge
The civil penalty or surcharge may either be 25% or 50% of
the tax depending on the nature of the violation.

The payment of the surcharge is mandatory and the


Commissioner is not vested with any authority to waive or
dispense with the collection thereof.
An extension of time to pay taxes granted by the
Commissioner does not excuse payment of the surcharge.
The 50% surcharge is not a criminal penalty but a civil or
administrative sanction provided primarily as a safeguard
for the protection of the State revenue and to reimburse the
government for the heavy expense of investigation and the
loss resulting from the taxpayers fraud.

Cases where the civil penalties or surcharges are imposed


1. 25%
a. Failure to file any return and to pay the tax due
thereon as required by the NIRC or rules.
b. Filing a return with an internal revenue officer other
than those with whom the return is required to be
fired. Not authorized officer.
c. Failure to pay the deficiency tax within the time
prescribed for its payment in the notice of
assessment.
d. Failure to pay the full or part of the amount of tax
shown on any return, or the full amount of tax due
for which no return is required to be filed, on or
before the date prescribed for its payment.
2. 50%
a. In case of willful neglect to file the return within the
period prescribed by the NIRC or rules
b. In case a false or fraudulent return is willfully made.
Substantial underdeclaration or overdeclaration
A substantial underdeclaration of taxable sales, receipts or
income, or a substantial overstatement of deductions shall
constitute prima facie evidence of a false or fraudulent
return.

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TAX REVIEWER: LAW OF BASIC TAXATION IN THE PHILIPPINES BY: Benjamin B. Aban
NOTES (PROF. CABANEIRO) A2011

Failure to report sales, receipts or income in an amount


exceeding 30% of that declared per return and a claim of
deductions in an amount exceeding 30% of actual
deductions shall render the taxpayer liable for substantial
underdeclaration of sales, receipts or income or for
overstatement of the deductions.

Interest
This is an increment on any unpaid amount of tax assessed
at the rate of 20% per annum or such higher rate as may be
prescribed by the regulations from the date prescribed for
payment until the amount is fully paid.
Classes of interest
1. Deficiency interest
2. Delinquency interest
3. Interest on extended payment
Deficiency interest
Any deficiency in the tax due shall be subject to the interest
of 20% per annum which shall be assessed and collected
from the date prescribed for its payment until the full
payment thereof.
When delinquency interest imposed?
Delinquency interest is imposed in case of failure to pay:
1. The amount of the tax due on any return required to be
filed; or
2. The amount of tax due for which no return is required; or
3. A deficiency tax or any surcharge or interest thereon on
the issue date appearing in the notice and demand of
the Commissioner.
Rate is 20% per annum until the amount is fully paid which
interest shall form part of the tax.
Interest on extended payment

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This is imposed when taxpayer has opted to pay by


installment but he fails to pay the tax or any installment on
the prescribed date for payment.
It is also imposed where Commissioner has authorized the
extension of the time for payment of the tax.

Administrative fines or penalties


1. Failure to file certain information returns
2. Failure of a withholding agent to collect and remit the tax
3. Failure of a withholding agent to refund excess withholding
tax
STATUTORY OFFENSES AND THEIR PENALTIES
General points re. crimes and offenses
Any person convicted of a crime penalized by the NIRC shall,
in addition to being liable for the payment of the tax, be
subject to the penalties imposed in the Code.
Payment of the tax due after apprehension shall not
constitute a valid defense in any prosecution for violation of
any provision of the NIRC or in any action for the forfeiture
of untaxed articles.
Any person who willfully aids or abets in the commission of
a crime penalized in NIRC or who causes the commission of
any such offense by another shall be liable in the same
manner as the principal.
If the offender is not a Filipino Citizen, he shall be deported
immediately after serving the sentence without further
proceeding for deportation.
If the offender is a public officer or employee, the maximum
penalty prescribed for the offense shall be imposed and in
addition, he shall be dismissed from the public service and
perpetually disqualified from holding any public office, to
vote and to participate in any election.
If the Offender is a Certified Public Accountant, his
certificate as a CPA, shall, upon conviction, be automatically
revoked or cancelled.
In the case of associations, partnerships, or corporations,
the penalty shall be imposed on the partner, president,

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general manager, branch manager, treasurer, officer-incharge, and employees responsible for the violation.
Give examples of crimes and offenses
1. Attempt to evade or defeat tax
Any person who willfully attempts in any manner to evade
or defeat any tax imposed under the NIRC or the payment
thereof.
2. Failure to file return, supply correct information, pay tax,
withhold and remit tax, and refund excess tax withheld on
compensation.
3. Unlawful pursuit of business.
4. Unlawful possession or removal of articles subject to excise
tax without payment of the tax.
5. Failure or refusal to issue receipts or sales or commercial
invoices, violations related to the printing of such receipts or
invoices and other violations.
Prescription for violations of any provision of the NIRC
All violations of any provision of the NIRC shall prescribe in 5
years.
Prescription shall begin to run from the day of the
commission of the violation of the law, and if the same be
not known at the same time, from the discovery thereof
and the institution of judicial proceedings for its
investigation and punishment.
The prescription shall be interrupted when proceedings are
instituted against the guilty persons and shall begin to run
again if the proceedings are dismissed for reasons not
constituting jeopardy.
The term of prescription shall not run when the offender is
absent from the Philippines.
When is informers reward given?
An informers reward is given to persons instrumental in the:
1. discovery of violations of the NIRC; and
2. discovery and seizure of smuggled goods.

Requisites for informers reward for violations of the NIRC


1. This may be claimed by any person, except an internal
revenue official or employee or other public official or
employee, or his relatives within the sixth degree of
consanguinity.
2. Persons voluntarily gives definite and sworn information, not
yet in the possession of the Bureau of Internal Revenue.
Information should not refer to a case already pending or
previously investigated or examined by the Commissioner or
any of his agents.
3. Information leads to the discovery of frauds upon the
internal revenue laws or violations or any of the provisions
thereof.
4. There is recovery of revenues, surcharges and fees and/or
conviction of the guilty party and/or the imposition of any
fine or penalty. In the reverse, if no revenue, surcharges or
fees be actually recovered or collected, such person shall
not be entitled to a reward.
5. Reward shall be equivalent to ten percent (10%) of the
revenues, surcharges or fees recovered and/or any fine or
penalty imposed and collected or P1,000,000 per case,
whichever is lower.
The same amount of reward shall be also given to an
information where the offender has offered to compromise
the violation of law committed by him and his offer has been
accepted by the Commissioner and collected from the
offender.
Discovery and seizure of smuggled goods
To encourage the public to extend full cooperation in
eradicating smuggling, a cash reward equivalent to 10% of
the fair market value of the smuggled and confiscated
goods or P1,000,000 per case, whichever is lower.
Reward subject to income tax
The cash rewards of informers shall be subject to income tax
collected as a final withholding tax, at the rate of ten percent
(10%).

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