The Supreme Court has denied the petition of Colgate-Palmolive Philippines, Inc. (CPPI) and affirmed, with modification, the ruling that the company is liable to pay the Commissioner of Customs (COC) basic deficiency duties and taxes on royalty fees, arrastre and wharfage in the amount of PHP 39,373,571.93, inclusive of the 25% surcharge under Section 248(A)(3) of the National Internal Revenue Code of 1997, as amended (NIRC).
The Case
On October 26, 2006, the COC issued an Audit Notification Letter to CPPI, initiating a post-entry audit covering its imports from October 27, 2003 to October 26, 2006. CPPI received this on November 7, 2006.
On May 8, 2007, the Post-Entry Audit Group (PEAG) issued a Summary of Findings recommending the assessment of PHP 183,701,180.74 in deficiency customs duties on royalties paid to Colgate-Palmolive Company (CPC), and PHP 753,137.61 in deficiency value-added tax (VAT) on arrastre and wharfage fees, both inclusive of two times the penalty.
On June 12, 2007, CPPI objected to the assessment. The PEAG nonetheless issued a Final Audit Report and Recommendations (FARR) assessing a total liability of PHP 204,170,803.00. The COC affirmed the FARR through a letter dated May 5, 2008, which CPPI received on May 26, 2008. On June 24, 2008, CPPI filed a Petition for Review with the CTA Division.
CPPI argued that the royalties it paid to CPC should not be added to the transaction value of the imported goods because they were paid for the use of intellectual property — patents, trademarks and know-how — in the Philippines, and not as a condition for the importation or sale of goods. It said the royalty was not inextricably intertwined with the production of the imported merchandise and therefore not dutiable. It also argued it was not liable for deficiency VAT on wharfage fees and arrastre charges, contending these do not fall under "other charges" under Section 107(A) of the NIRC and that assessing VAT on them would amount to double taxation. Lastly, CPPI claimed the 20% delinquency interest was erroneous because the notice and demand was made by the COC, and not by the Commissioner of Internal Revenue.
The Issue
The central question was whether CPPI is liable to pay the COC the deficiency customs duties, VAT and corresponding surcharges, and whether deficiency and delinquency interest properly apply to its deficiency VAT.
The Ruling
The Court found that the CTA En Banc did not err in affirming the CTA Division's ruling that CPPI is liable to pay the COC the total amount of PHP 39,373,571.93, representing deficiency customs duties, VAT, and corresponding surcharges.
The Court additionally held CPPI liable for deficiency and delinquency interest on the deficiency VAT. In its dispositive portion, the Court ruled: "ACCORDINGLY, Colgate-Palmolive Philippines, Inc.'s Petition for Review on Certiorari is DENIED. The Decision, dated January 4, 2018 and the Resolution, dated June 4, 2018 of the Court of Tax Appeals En Banc, in CTA EB Case Nos. 1471 and 1475 are AFFIRMED WITH MODIFICATION."
The Court ordered CPPI to pay deficiency interest on the deficiency VAT of PHP 4,842,169.59, computed at 20% per annum from the date prescribed for payment (from the time the Bureau of Customs released the importations in October 2003) until December 31, 2017, under Section 249(B) of the 1997 Tax Code; and delinquency interest on the same deficiency VAT at 20% per annum from June 9, 2008 to December 31, 2017, and 12% per annum from January 1, 2018 until full payment.
By the Numbers
- PHP 39,373,571.93 — basic deficiency duties and taxes on royalty fees, arrastre and wharfage, inclusive of 25% surcharge
- PHP 4,842,169.59 — deficiency VAT subject to interest
- PHP 204,170,803.00 — total liability under the FARR
- PHP 183,701,180.74 — recommended deficiency customs duties on royalties
- PHP 753,137.61 — recommended deficiency VAT on arrastre and wharfage fees
- Audit period: October 27, 2003 to October 26, 2006
- 20% per annum interest up to December 31, 2017; 12% per annum from January 1, 2018
The Court's Reasoning
The Court held that deficiency interest under Section 249(B) applies to CPPI's deficiency VAT. It explained that prior to the effectivity of Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN Law) on January 1, 2018, deficiency and delinquency interests were imposed simultaneously. Under the TRAIN Law, as implemented under Section 5 of Revenue Regulations No. 21-2018, there is a prohibition against the double imposition of interest.
Thus, tax liabilities arising prior to the effectivity of the TRAIN Law and remaining unpaid thereafter are simultaneously imposed deficiency and delinquency interest at 20% per annum up to December 31, 2017, after which the new regime applies. The TRAIN Law also lowered the rate of deficiency and delinquency interest to double the legal interest rate for loans or forbearance of any money in the absence of an express stipulation as set by the Bangko Sentral ng Pilipinas, i.e., at 12% per annum, with the 12% delinquency interest rate applying beginning January 1, 2018.
The Court directed that the deficiency and delinquency interest for the period June 9, 2008 to December 31, 2017 be applied simultaneously, in accordance with Sections 247(a), 249(B) and 249(C) of the 1997 NIRC and Section 5 of Revenue Regulations No. 21-2018. From January 1, 2018 onwards, there shall be no simultaneous imposition of deficiency and delinquency interest, pursuant to Republic Act No. 10963 and its implementing regulations.
Source: Supreme Court Decision, G.R. Nos. 240263-64.
This report summarizes a public Supreme Court decision and is not legal advice.