1. Can corporate officers be held guilty of a violation of the Tariff and Customs Code for misdeclared, misclassified, and undervalued imported goods of the company?
Yes, if there is a showing that they actively participated in or had the power to prevent the company's wrongful act but were grossly negligent. In Fernandez, et al. v. People of the Philippines (G.R. No. 249606, July 6, 2022), the Supreme Court held that that the President, Vice-President, Treasurer, and Corporate Secretary of Kingson Trading International Corporation (Kingson), which violated Section 3602 in relation to Section 2503 of the Tariff and Customs Code of the Philippines (TCCP), cannot hide behind the cloak of the separate corporate personality of the corporation to escape criminal liability. Citing jurisprudence, the Supreme Court said that to be held criminally liable for the acts of a corporation, there must be a showing that its officers, directors, and shareholders actively participated in or had the power to prevent the wrongful act. The Court ruled that, as responsible corporate officers of Kingston, the petitioners are criminally liable by assenting to the commission by Kingson or by being grossly negligent in directing Kingson's affairs.
In Fernandez, Kingson imported steel products from China and paid around Php5 million in total duties and taxes. The Bureau of Customs found that Kingson underdeclared the value of the imported goods by almost 50%. The Commissioner of Customs seized and forfeited the imported goods.
Kingson filed a Petition for Review with the Court of Tax Appeals (CTA) assailing the forfeiture while the Government filed a criminal complaint against the corporate officers of Kingston for violation of section 3602 in relation to section of the TCCP.
The CTA First Division, CTA En Banc and the Supreme Court all found that the entry of the imported goods was made by means of false or fraudulent shipping documents and that there was intent to evade the payment of taxes and duties in violation of Section 3602 in relation to Section 2503 of the TCCP. A review of the certified true copies of the export documents from China in relation to the Import Entry and Internal Revenue Declaration (IEIRD) and other supporting documents filed by Kingson showed glaring discrepancies as to the consignee's name, description of the imported shipment, and value of shipment, specifically:
- The consignee in the export documents is not Kingson, but Solid Sea Products H.K.;
- The description of the shipment in Kingson's documents state "2,406 bundles of steel products (SCM 440 round bar)," whereas the counterpart export documents indicate: "1,436 bundles of 10MM x 6M and 970 bundles of 12MMx6M or a total of 2,406 bundles";
- The value of shipment as declared by Kingson is US$692,254.00, while the counterpart export documents indicate a value of US$1,281,271.86; and
- Kingson declared the shipment under Tariff Classification heading number No. 7228.60 at 1% rate of duty, while the actual classification of the same shipment based on the chemical analysis of the same steel product showed that it falls under heading number 7214.2000 at 7% rate of duty.
Under Section 2503 of the TCCP, undervaluation, misdeclaration in weight, measurement or quantity of more than thirty percent (30%) shall constitute prima facie evidence of fraud and the imported goods shall ipso facto be forfeited in favor of the Government. The Supreme Court ruled that both Kingson and petitioners failed to provide any plausible explanation for the glaring discrepancies (between the import documents that Kingson filed and the counterpart export documents from the Chinese government), the burden of evidence having shifted to them. Hence, it can be concluded that Kingson and the petitioners willfully and intentionally misdeclared, misclassified, and reduced the value of the shipment by more than 30% to lower the amount of taxes and duties that Kingson should have paid.
The Supreme Court also stressed that Section 1301 of the TCCP imposes a definite burden on persons authorized by law to make the import entry and held that the statements under oath contained therein constitutes prima facie evidence of the importer's knowledge and consent of violations of the provisions of the TCCP when the importation was found to be unlawful. In this case, the Corporate Secretary's active part in the fraud was shown by her signature in the IEIRD containing the fraudulent information as Kingson's attorney-in-fact under the declaration that she "certify[ies] that the information contained in all pages of this Declaration and the documents submitted are to the best of our knowledge and belief are true and correct."
As regards the President, Vice-President, and Treasurer of Kingson, the Supreme Court ruled that there was circumstantial evidence to prove that these corporate officers, who are also the incorporators, board members, and stockholders of Kingson, undoubtedly knew of the importation of steel from China. First, their denial of the alleged fraud, insisting that Kingson's declarations were merely based on the documents provided by the foreign shipper, is pregnant with an admission, i.e., that they were personally aware of the details of the shipment and the contents of the submitted importation documents. Second, the Corporate Secretary testified that when the defect in the documents was discovered, the corporate officers of Kingson had a meeting to rectify the same and an addendum was executed to correct the error. And finally, the corporate officers failed to rebut the fact that they assented or even permitted the falsification to happen, not only of the documents appended to the IEIRD, but also of the falsified chemical analysis in a bid to secure a lower tariff classification rate.
2. Can news articles be a valid basis of a tax assessment?
No. In Spouses Pacquiao v. Commissioner of Internal Revenue (CTA Case No. 8683, September 29, 2022), the CTA Special Third Division cancelled the deficiency income tax assessment against the taxpayers for lack of sufficient basis because news articles are "hearsay evidence, twice removed, and are thus without any probative value."
In this case, the income of spouses Emmanuel D. Pacquiao (Pacquiao) and Jinkee J. Pacquiao were sourced from the United States of America (US) and the Philippines. Their USsourced income was derived from Pacquiao's boxing matches and the related pay-per-view shares and closed-circuit sales. Their Philippine-sourced income consisted of talent fees for product endorsements, advertising commercials, and television appearances. The spouses were assessed deficiency income tax for taxable years 2008 and 2009 amounting to PhP2,261,217,439.92, which they assailed by filing a petition for review with the CTA.
The tax assessment was based principally on news articles discussing the boxing purse of Pacquiao or the pre-agreed amount of money he will receive for completing a fight, and the related pay per view hits for each fight. In setting aside the tax assessment, the CTA ruled that the news articles cannot provide valid support for a tax assessment because their authors have no personal knowledge on the transactions involved. Also, no other evidence corroborated the information contained in the news articles. Finally, it was not shown that the revenue officers conducted due diligence to confirm the veracity of the news articles.
While the CTA recognizes that the Commissioner of Internal Revenue (CIR) has the power to issue tax assessments based on the best evidence obtainable in the absence of accounting records or when they are false, incomplete, or erroneous pursuant to Section 6(B) of the Tax Code, as amended, the CTA held that this power cannot be exercised arbitrarily and capriciously. In addition, the CTA ruled that the taxpayers' rights to due process were violated when the Formal Letter of Demand (FLD) here only stated that the deficiency income tax assessment is based on the alleged "best possible sources," without specifying the source documents used as basis. The CTA further noted that the FLD made no reference to the news articles, and it was only during the hearing of the case that these articles were presented.
A motion for reconsideration of the decision is currently pending
CTA decisions, while persuasive, do not become the law of the land, unlike decisions of the Supreme Court.
3. For the sale of service (other than processing, manufacturing, or repacking of goods) to a foreign corporation doing business outside the Philippines to be considered a value-added tax zero-rated sale, does the relevant service agreement have to specifically state that the services are to be performed only in the Philippines?
Yes. In Procter & Gamble International Operations SA-ROHQ v. Commissioner of Internal Revenue (CTA Case Nos. 9768 & 9829, October 5, 2022), the CTA First Division ruled that the taxpayer, which is the Regional Operating Headquarters of a foreign corporation, is not entitled to a value-added tax (VAT) refund, or the issuance of a tax credit certificate (TCC) of its unutilized input VAT allegedly attributable to zero-rated sales of service, for its failure to establish that the services it rendered to its client-affiliates abroad were performed in the Philippines. The CTA found that the service agreements between the taxpayer and its client-affiliates do not categorically state that the services shall be performed by the taxpayer in the Philippines only.
In this case, the taxpayer filed with the Bureau of Internal Revenue – Large Taxpayers Services Regular Audit Division, an administrative claim for refund of and/or the issuance of a TCC for the first quarter of fiscal year (FY) 2016, covering the period from July 1 to September 30, 2015, in the amount of PhP37,374,865.93, and the second quarter of FY 2016, covering the period from October 1 to December 31, 2015, in the amount of PhP14,367,836.27.
The CIR neither approved nor denied the administrative claim for refund for the period covering July 1 to September 30, 2015. On the other hand, the CIR denied the administrative claim for refund for the period covering October 1 to December 31, 2015. Thus, the taxpayer filed separate petitions for review for both claims, which were eventually consolidated and heard by the CTA.
In denying both claims for refund, the CTA ruled that it is indispensable that the taxpayer is able to prove that the services it rendered to its client-affiliates were rendered in the Philippines and not abroad in order for such sales to be treated as VAT zero-rated sales. Here, all the service agreements contain a standard provision providing that the taxpayer shall not be construed to provide services to its clientaffiliates outside of the taxpayer's normal place of business "other than on an occasional basis." The CTA interpreted the phrase "other than on an occasional basis" to mean that the taxpayer may render services both in the Philippines and abroad. Thus, the taxpayer failed to prove that the services here were actually performed in the Philippines only and not abroad.
A motion for reconsideration of the decision is currently pending.
CTA decisions, while persuasive, do not become the law of the land, unlike decisions of the Supreme Court.
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