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Taxation Case Digest: Association of International Shipping Lines v. Sec. of Finance (2020)

Association of International Shipping Lines v. Sec. of Finance
G.R. No. 222239, January 15, 2020
SC First Division
Lazara-Javier, J.

Lessons Applicable: Res judiciata, Petition for Declaratory Relief, Income tax and VAT on demurrage and detention fees, Interpretative and internal rule

Laws Applicable: CA 55, RA 9337, RMC 31-2008

  • July 1, 2005: Republic Act No. 9337 (RA 9337) was enacted amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 236, 237 and 288 of the 1997 National Internal Revenue Code, as amended. (NIRC)
  • January 30, 2008: Commissioner of Internal Revenue (CIR) Lilian Hefti issued Revenue Memorandum Circular No. 31-2008 (RMC 31-2008) seeking to clarify certain provisions of the NIRC with portions, to wit:  
    • Q-3: Are on-line international sea carriers subject to VAT?
    • A-3:    No. On-line international sea carriers  are  not  subject  to  VAT  they  being subject to percentage tax under Title V of the Tax Code. xxx However, if these on-line international sea carriers engage in other transactions not exempt under Section 119 of the Code, they shall be liable to the twelve percent (12%) VAT on these transactions. 
    • Q-4: Are demurrage fees collected by on-line international sea carriers due to delay by the shipper in unloading their inbound cargoes subject to tax?
    • A-4: Yes, Demurrage fees, which are in the nature of rent for the use of property of the carrier in the Philippines is considered income from Philippine source and is subject to income tax under the regular rate as the other types of income of the on-line carrier. Said other line of business may likewise be subject to VAT or percentage tax applying   the   rule   on   threshold   discussed   in   the   succeeding paragraph.
    • Q-5: Are detention fees and other charges collected by international sea carriers subject to tax?
    • A-5: Detention fees and other charges relating to outbound cargoes and inbound  cargoes  are  all  considered  Philippine-sourced  income  of the international  sea  carriers  they  being  collected  for  the  use  of property  or  rendition  of  services  in  the  Philippines, and are subject to the Philippine income tax under the regular rate, and to the Value added  tax,  if  the  total  annual  receipts  from  all  the  VAT-registered activities   exceeds   one   million   five   hundred   thousand pesos (P1,500,000.00).  However, if the total annual gross receipts do not exceed one million five hundred thousand pesos, said taxpayer is liable to pay the 3% percentage tax.

    • Q-14: Are sales of goods, supplies, equipment, fuel and services to persons engaged in international shipping operations subject to VAT? 
    • A-14: The sale of goods, supplies, equipment, fuel and services (including leases of property) to the common carrier to be used in its international sea transport operations is zero-rated.  Provided,  that  the same is limited to goods, supplies, equipment, fuel and services pertaining   to   or   attributable   to   the   transport   of   goods   and passengers from  a  port  in  the  Philippines  directly  to  a  foreign  port  without  docking  or  stopping  at  any  other  port  in  the  Philippines  to  unload  passengers  and/or  cargoes  loaded  in  and  from  another domestic  port xxx

    • Q-34: Are commission incomes received by the local shipping agents from their foreign principals subject to VAT?
    • A-34: The  commission  income  or  fees  received  by  the  local  shipping agents   for   outbound   freights/fares   received   by   their   foreign principals which are on-line international sea carriers ( touching any port in the Philippines as part of their operation) shall be zero-rated pursuant to the provisions of Section 108(B)(4) of the Code.  Said provision does not require that payments of the commission income or fees for “services rendered to persons engaged in international shipping operations, including leases of property for use thereof,” be paid in acceptable foreign currency in order that such transaction may be zero-rated. On the other hand, commission income or fees received   by   the   local   shipping   agents   pertaining   to   inbound freights/fares     received     by     their     foreign     principals/on-line international sea carriers or pertaining to freights/fares received by off-line international sea carriers shall be subject to VAT at 12%.
  • December 6, 2010: Petitioners Association of International Shipping Lines, Inc. (AISL), APL Co. Pte. Ltd. (APL) and Maersk-Filipinas, Inc. (Maersk) sought to nullify RMC No. 31-2008 via a petition for declaratory relief under Civil Case No. Q-09-64241 praying for the issuance of a writ of preliminary injunction enjoining then CIR and her agents from implementing, enforcing or acting pursuant to or on the basis of the challenged provisions of RMC 31-2008 and render judgment declaring these challenged provisions void.
    • It alleged that RMC 31-2008 was void as it imposed regular tax rate of 30% and 12% VAT on the demurrage and detention fees collected by international shipping carriers from shippers or consignees for delay in the return of containers, on the domestic portion of services to persons engaged in international shipping operations, and on commission income received by local shipping agents from international shipping carriers or in connection with inbound shipments.
  • May 18, 2012: RTC branch 98 in Civil Case No. Q-09-64241 declared as invalid the challenged provisions of RMC 31-2008 insofar as it subjects demurrage and detention fees to the regular corporate income tax under Section 28(A)(1) and 12% VAT.

  •  March 7, 2013: RA 10378 was enacted amending Section 28 (A)(3)(a) of the NIRC which reads:
    • Being incidental to the trade or business of the international carrier, demurrage fees should instead form part of the Gross Philippine Billings (GPB) subject to 2.5% tax under Section 28 (A)(1)(3b) of the NIRC and the same does not expressly impose 12% VAT on the domestic portion of the services rendered by international carriers.
  • December 4, 2013: Petitioners initiated a petition for declaratory relief challenging Section 4.4 of RR 15-2013 (implementing rules of RA 10378) and impleading both the Secretary of Finance and CIR.
    • 4.4) Taxability   of   Income   Other   Than   Income   from International Transport Services. —All items of income derived by international carriers that do not form part of Gross Philippine Billings as defined under these Regulations shall be subject to tax under the pertinent provisions of the NIRC, as amended. 
    •  Demurrage fees, which are in the nature of rent for the use of property of the carrier in the Philippines, is considered income from Philippine source and is subject to income tax under the regular rate as the other types of income of the on-line carrier.
    • Detention fees and other charges relating to outbound cargoes and inbound cargoes are all considered Philippine-sourced income of international sea carriers they being collected for the use of property or rendition of services in the Philippines, and are subject to the Philippine income tax under the regular rate.
  • September 15, 2015: RTC dismissed the petition for declaratory relief
1.    granted the motion for judicial notice of the existence of RMC 31-2008, May 18, 2012 RTC Order in Civil Case No. Q-09-64241 and the enactment of RA 10378 – all these being official acts of different branches of government
2.    Declared that it had no jurisdiction over the petition for declaratory relief pursuant to CA 55 which removed from RTC the authority to rule on cases involving one’s liability for tax, duty, or charge collectible under any law administered by the Bureau of Customs (BOC) or BIR
3.    Ruled against res judicata because:
a.    res judicata does not give rise to a cause of action for the purpose of initiating a complaint
b.    RA 10378 constituted a supervening event which negated the application of res judicata
c.    there is no similarity of parties, subject matters, and cause of action
d.    it found RR 15-2013 to be reasonable tax regulation and an interpretative issuance, the effectivity of which does not require a public hearing nor prior registration with the UP Law Center.  

  • January 8, 2016:  Petitioners’ partial motion for reconsideration was denied
  •  Petitioners, on pure questions of law, sought for Supreme Court’s discretionary appellate jurisdiction to review.  They reiterated the arguments raised in their petition for declaratory relief.  
1.    Does res judicata apply in this case?
2.    Is a petition for declaratory relief proper for the purpose of invalidating RR 15-2013?
3.    Is RR 15-2013 a valid rule?

HELD: Denied
1.    NO. Res judicata applies in the concept of “bar by prior judgment” if the following requisites concur:
a.    Former judgment or order must be final
b.    Judgment or order must be on the merits
c.    Decision must have been rendered by a court having jurisdiction over the subject matter and the parties – not met since while RMC 31-2008 which is the subject of Civil Case No. Q-09-64241 and RR 15-2013 subject of the present case both treat demurrage and detention fees to be within the prism of regular corporate income tax rate, they emanate from different authority. Moreover, the judgment in Civil Case No. Q-09-64241 which only binds the CIR cannot serve as a judicial precedent for the purpose of precluding the Secretary of Finance from promulgating a similar issuance on the same subject.  It also cannot be judicial precedent to be followed in subsequent cases by all courts in the land as it is rendered by RTC and not SC.
d.    There must be, between the 1st and 2nd action, identity of parties of subject matter and of cause of action – not met since RTC branch 98 in Civil Case No. Q-09-64241 is only binding on herein petitioners and the CIR as lone respondent.  However, in this case, although the petitioners are the same, the respondents are the CIR and the Sec. of Finance.
  • CIR issued RMC 31-2008 on January 30, 2008 under the auspices of Section 4 of the NIRC while Sec. of Finance issued RR 15-2013 on September 20, 2013 in obedience to the legislative directive under Section 5 of RA 103778 and pursuant to his rule-making power under Section 244 of the NIRC.  Both were issued pursuant to their separate powers and prerogatives granted by law.

2.    No. Since there is no actual case involved in a petition for declaratory relief, it cannot be the proper vehicle to invoke the power of judicial review to declare a state as invalid or unconstitutional. As decreed in DOTR v. PPSTA (G.R. No. 230107, July 24, 2018), the proper remedy is certiorari or prohibition. 
  • Nonetheless, the court held in Diaz et al v. Secretary of Finance, et al (G.R. No. 193007, July 19, 2011): “But there are precedents for treating a petition for declaratory relief as one for prohibition if the case has far-reaching implications and raises questions that need to be resolved for the public good. The Court has also held that a petition for prohibition is a proper remedy to prohibit or nullify acts of executive officials that amount to usurpation of legislative authority. xxx Although the petition does not strictly comply with the requirements of Rule 65, the Court has ample power to waive such technical requirements when the legal questions to be resolved are of great importance to the public. The same may be said of the requirement of locus standi which is a mere procedural requisite.”

3.    Yes. RR 15-2013 is a valid interpretative and internal issuance for the guidance of all internal revenue officers and others concerned.  It merely sums up the rules by which international carriers may avail of preferential rates or exemption from income tax on their gross revenues derived from the carriage of persons and their excess baggage based on the principle of reciprocity or an applicable tax treaty or international agreement to which the Philippines is a signatory.  As such it need not pass through a public hearing or consultation, get published nor registered with UP Law Center for its effectivity. 
  • In treating demurrage and detention fees as regular income subject to regular income tax rate, the Secretary of Finance relied on Section 23(A)(I)(3a) of NIRC, as amended by RA 10378, which is still in effect since not amended by Tax Reform for Acceleration and Inclusion (TRAIN) law.
  • Under 55 15-2013, demurrage and detention fees are not deemed within the scope of GPB.  GPB covers gross revenue derived from transportation of passengers, cargo and/or mail originating from the Philippines up to the final destination.  Any other income, therefore, is subject to the regular income tax rate.  When the law is clear, there is no other recourse but to apply it regardless of its perceived harshness.  Dura lex sed lex.
    • Exclusion of demurrage and detention fees from the preferential rate of 2.5% is proper since they are not considered income derived from transportation of persons, goods and/or mail, in accordance with the rule expressio unios est exclusion alterius.
    • Demurrage and detention fees fall within the definition of “gross income” - acquired in the normal course of trade or business 
      • Demurrage fees – rent payment for the vessel
      • Detention fees – use of container