Smile, you’re on candid Customs

Nosy Tarsee’s little birds are chirping about a household-name multinational whose products are probably in your bathroom right now. It just lost a long, expensive fight at the Supreme Court. Let us tell it simply.

The local unit sells famous brands owned by its foreign parent. For this, it pays the parent a royalty of five percent of net sales. Some of its goods are made here. Some are brought in from the parent abroad. Imported goods are subject to customs duties based on their value.

Here is the twist. Customs said the royalty is part of that value. Why? Because the local unit cannot sell the goods under the brand name without paying. If it stops paying, the parent can cancel the deal and take the brands back. So, said Customs, no royalty, no goods, and the royalty gets duties too.

The company argued it was only paying for the right to use the brands. The tax court did not buy it. The Supreme Court did not buy it either, using three simple tests. Is the royalty tied to the goods? Did the buyer pay it? Is it a condition of the sale? The answers were yes to all of the questions.

The company also fought the VAT on port handling fees, which it called double taxation. Also rejected, darlings. The company is taxed as the importer. The port operators are taxed as service providers. Different roles, different taxes.

Now the part that really stings. The lower court refused to add a certain kind of interest, saying it applied only to income, estate, and donor’s taxes. The Supreme Court said that was wrong. The law covers all taxes, VAT included.

So the company now owes two kinds of interest on the unpaid VAT. One runs from 2003, when the goods came in. The other runs from the 2008 demand. Both run at 20 percent a year until the end of 2017. After that, the rate drops to 12 percent and only one kind runs until the bill is paid in full.

In sum, the Court held that the multinational is liable for the total amount of P39 million, representing deficiency customs duties, VAT and corresponding surcharges.

The unpaid VAT itself is only about P4.8 million. But the meter has been running for over 14 years. Small bills grow fat when ignored.

The lesson for other multinationals that pay royalties to their foreign parents? Check your customs value. Check your VAT base. And never assume that waiting is free.

Clue for the curious: think toothpaste. Think smile. Think of what the company must be doing right now, which is probably not smiling.