C O ND IT I O NAL L Y - F R EE A ND D U T Y - EX EM P T IM P OR T AT IO N S
T he T V is ba s ic a l ly th e “ pr ic e p a i d o r pa ya bl e ” f o r t he
T he C M TA i n t ro d uc e s mo d if ic a tio ns to S e c tio n 1 0 5 o f t he TC C P ,
a s a me n de d , o n c o n d i tio na l ly - f r e e i m po r ta t io ns ( no w na me d
c o n di t io na ll y - f re e a n d d u ty - f re e im po r ta tio ns u n de r S e c t io n
8 00) .
O ne o f t he mo r e w e l l - k no w n p r iv i le ge s r e c o g n iz e d u n de r S e c tio n
8 00 is t he d u t y a n d ta x - f re e i m po r ta t io n o f pe r s o n a l a nd
ho us e ho l d e f f e c t s b y “r e t u r ni n g re s i de n ts ” w hic h ha s b e e n
de f i ne d a s na t io na ls w ho ha v e s t a ye d i n a f o re i g n c o u n tr y f o r a
pe rio d o f a t l e a s t s ix mo nt hs .
T he c o n d i tio ns f o r e xe m p t io n ( a s i de f ro m t he r e q u i re me n ts t ha t
t he s a me s ho u l d ne i t he r be o f c o m me rc ia l q ua n t i ty no r i n te n de d
f o r ba r te r , s a le o r h ir e ) a re a s f o l l o ws :
· F o r t ho s e w ho ha ve s ta ye d i n a f o re ig n c o u nt r y f o r a p e r io d o f
a t le a s t 1 0 ye a rs , t he F r e e o n B o a r d ( F o B ) o r F re e C a r ri e r
A rra n ge me n t ( F C A ) v a l ue s ha ll no t e xc e e d P 35 0 , 0 00 a n d th a t t he
pr i vi le ge is no t a va i le d o f w i t hi n 1 0 ye a rs pr io r to t he re t ur n i n g
re s id e nt ’s a rr iv a l.
· I f th e s ta y is a t l e a s t f iv e ye a rs , t he F C A o r F OB va l u e s ha ll no t
e xc e e d P 2 5 0, 0 0 0 a n d t ha t t he p r iv i le ge is no t a va il e d o f wi t h i n
f iv e ye a rs p rio r to t h e re t ur n i ng r e s i de n t ’s a r ri va l.
· I f t he s ta y is l e s s t ha n f i ve ye a rs , t he F C A o r F o B va l ue s ha ll no t
e xc e e d P 1 5 0, 0 0 0 a n d t ha t t he p r iv i le ge is no t a va il e d o f wi t h i n
s ix mo n t hs pr io r to t he re t u r ni n g re s id e nt ’s a rr iv a l.
I n a d d i tio n to t h e a bo ve , re t ur n i ng O ve rs e a s F il i pi no W o r ke rs
( OF W s ) s ha l l ha v e t he pr i vi le ge to br i n g i n ta x a n d d u ty f r e e
ho me a p pl ia nc e s a n d o t he r du ra b le s ( l i mi te d to o ne o f e v e r y
ki n d) o nc e i n a g i ve n c a le n da r ye a r a c c o m pa n yi n g t he m o n t he ir
re t ur n o r a rr i vi n g w it h i n a re a s o na b le t im e ( no t e xc e e di n g 6 0
da ys a f t e r e v e r y re t u rn i n g OF W s r e t u rn) .
R e s i de n ts o f th e P h il i p pi n e s , O F W s o r o th e r F i li p i no s , w h i le
re s id i n g a bro a d o r u po n t he ir re t ur n to t he P h il i p pi n e s , a re a ls o
a llo w e d to br i n g in o r s e n d to t h e i r f a m il ie s o r re la ti ve s i n t he
P h i li p p i ne s “b a l i k ba y a n bo xe s ” ( c o n ta i n i ng pe rs o na l a n d
ho us e ho l d e f f e c ts o n l y) du t y a n d ta x - f r e e , pro vi d e d t h a t t he F C A
va l u e s ha ll no t e xc e e d P 1 50 , 0 0 0 a n d t h e it e ms a r e no t i n
c o m me rc ia l q ua n ti t ie s o r i nt e nd e d f o r ba r te r , s a l e o r f o r h ir e .
T his c a n be a va i le d up to t hr e e t i me s i n a c a le n da r ye a r.
A n y a mo u n t i n e xc e s s o f t he a bo ve t h re s ho l d va l ue s s ha ll ,
ho we ve r, be s u b j e c t to d u ti e s a n d ta xe s .
I n th e t h i rd pa r t o f t h is a r tic le , we s ha l l d is c us s o t he r c ha n ge s
br o u g h t a bo u t by t he C M TA , pa r tic u la rl y t he ru le s o n re la te d -
pa rt y tra ns a c t io ns a nd pe na l ti e s r e la t in g to u n la wf ul im po r ta tio n
and e xpo r ta tio n , mi s d e c la ra tio n , mis c la s s if ic a tio n and
u n de rd e c la ra t io n o f i m po rt e d go o ds .
Related-Party Transactions
Definition
The term related-party transaction is used to describe an arrangement between
two entities that had a special relationship and subsequently conducted business
together. Related-party transactions are typically associated with service
agreements between a parent company and subsidiaries.
R EL AT ED P AR T Y T R AN S AC T IO N S
T he C M TA u p ho l ds t he h ie r a r c hic a l a p p lic a t io n o f t he s i x
me t ho ds o f va lu a t io n o f i m po r te d go o ds , wi t h M e t ho d 1 o r t he
Tra ns a c t io n V a l ue ( TV ) o f t h e i m po rt e d go o ds be i ng t he pr i ma ry
me t ho d.
go o ds w he n s o ld f o r e x po r t to t h e P hi l ip p i ne s , s u bj e c t to c e r ta i n
a dj us t me n ts s uc h a s s e l l in g c o m mis s io ns a n d bro ke ra ge f e e s ,
c o s t o f c o n ta i n e rs , c o s t o f pa c ki n g , a s s is ts , ro ya l t ie s a n d l ic e ns e
f e e s , c o s t o f t ra ns po rt a n d i ns ur a nc e , a mo n g o t he rs .
U nd e r t he r u le s , o ne o f t he li m i t a t io ns o n t h e a p pl ic a tio n o f t he
TV m e t ho d is t h a t , i n c a s e s o f a re la te d p a r t y tr a n s a c t io n , t he
pr ic e be t we e n t he i m po rt e r a n d i ts re la te d f o re ig n s up p l ie r
s ho u ld no t be i nf l ue nc e d b y s uc h a re la tio ns h i p. T he C M TA s ta t e s
t ha t i n o r de r to p ro ve t h e a b s e nc e o f s uc h i nf l ue nc e , t he
im po r te r m us t be a bl e to de mo n s tr a t e t ha t t he d e c la re d va l ue
c lo s e ly a p p ro x i ma te s o ne o f t he f o llo w i n g “ te s t va l ue s ” o c c u r ri n g
a t o r a bo u t th e s a m e ti m e :
· The T V i n s a le s to u n re la te d b uy e rs o f i de n t ic a l o r s im i la r go o ds
for e x po r t to t he s a me c o u n tr y of i m po r ta tio n;
· Th e c us to ms va l u e o f i de n t ic a l o r s i m ila r go o ds a s de te r m i ne d
us i ng the D e d uc t iv e V a l ue M e t ho d; and
· Th e c us to ms va l u e o f i de n t ic a l o r s i m ila r go o ds a s de te r m i ne d
us i ng t h e C o m p u te d V a l ue M e t ho d.
A s i de f ro m t he a p p l ic a tio n o f te s t va l ue s , t he W T O a g re e m e n t
a ls o r e c o g n iz e s t he “c irc u ms ta nc e s o f s a le a na l ys i s ” a s a re m e d y
i n pro vi n g t he a bs e nc e o f s uc h i nf lu e nc e . Th is re me d y , w hic h is
li ke w is e e m bo di e d u nd e r C us to ms A d m i nis t ra ti ve O r de r ( C A O)
No . 4 - 2 0 0 4 a n d C us to ms M e mo ra n d u m O r de r ( C M O) No . 1 6 - 2 0 1 0,
i nvo l v e s s ho w i ng t h e a r m’s l e ng t h na t u re o f th e tr a ns a c tio n b y
pr o v i ng th a t t he p ric e wa s :
· S e t tle d i n a c c o r da nc e wi t h n o rm a l pr ic i ng pr a c t ic e s o f t h e
i nd us t ry;
· S e t t le d i n a ma n ne r c o ns is te n t w it h s a l e s to u n re la te d b uy e rs ;
· A d e qu a t e to e ns ur e re c o v e r y o f a ll c o s ts p l us a pro f i t
e q u iv a le n t to t he f ir m ’s o v e ra l l pro f i t re a l iz e d o ve r a
re pr e s e n ta ti ve pe r io d o f ti m e i n s a le s o f go o ds o f t he s a m e c la s s
o r ki n d.
F a i lu re to e s ta b lis h e i t he r o f t h e a bo ve pro o f s ma y re s u lt i n t h e
de c la re d TV to be re j e c te d f o r p ur po s e s o f c us to ms a p p ra is e me n t
a n d t he p ric e w i ll b e de te rm i ne d us i ng o t he r me t ho ds o f
va l u a t io n i n t he ir s e q ue n t ia l o rd e r.
THE Court of Tax Appeals (CTA) has ruled that in determining whether an interest
expense claimed as a deduction on gross income is paid to a related party, it is the
number of shares of stock owned by the lender in the borrower corporation that
will control, and not the amount of capital subscribed to.
In the case of Phil Foods Properties Inc. v. Commissioner of Internal Revenue, the
CTA allowed as a deduction on the gross income the interest payments made by
Phil Foods to Gardenia Bakeries (Phils.) Inc., which is one of Phil Foods’s
stockholders. The CTA overturned the Bureau of Internal Revenue’s (BIR) finding
and that the deduction of such interest payments to Gardenia should be
disallowed because Phil Foods and Gardenia are related parties, thus, interest

payments on loans between the two are not deductible as expenses in their
business.
The BIR based its finding that Phil Foods and Gardenia are related parties on the
amount of Gardenia’s subscribed capital in Phil Foods, which amounts to around
P12 million, or 80 percent of the subscribed capital of Phil Foods.
Thus, the BIR concluded that interest payments made to Gardenia by Phil Foods
should not be allowed as a deduction because Gardenia owns 80 percent of Phil
Foods, and the two are thus, related parties because either of them has more
than 50-percent ownership in the other.
For the interest payments to be deductible from the gross income as a business
expense, the principal debt must be in connection with the business of the
taxpayer claiming the deduction and was not for his personal use; the interest
expense must have been incurred during the taxable year, was legally due and
must have been stipulated in writing; and the principal debt must not be between
related taxpayers.
But the CTA said that in determining whether one corporation is related to
another, it is the number of subscribed shares of each stockholder, regardless of
their par values, that will control.
In this case, Gardenia only owns around 200,000 shares of Phil Foods, while the
other 300,000 shares are owned by other persons and Gardenia only owns 40
percent of Phil Foods.
Thus, Gardenia and Phil Foods were not considered by the CTA as related parties,
and the interest payments made by Phil Foods to Gardenia cannot be deducted as
expenses from its gross income.
Doing cross-border business with a related party, which includes foreign
subsidiaries and parent companies, can be complicated. A related party is any
entity that can exercise control or significant influence over the operating policies
of another entity. In global trade, it's an individual or business that exercises a 10
percent interest in both the exporter and the ultimate consignee.
A related party transaction occurs during the transfer of resources, services, or
obligations between related parties—regardless of whether a price is charged.
The term "transfer price" refers to the price at which one company sells goods or
services to a related affiliate in its supply chain. While the transfer price may be
negligible, the tax obligations, Customs declaration and reporting requirements
that go along with the transaction are not.
Misdeclaration,misclassification,undervaluation in goods declaration
Multinational organizations can face significant compliance challenges with the
regulations and administrative requirements around transfer pricing, since they
differ from country to country. Tax authorities are increasingly sophisticated in
the way they operate, and are focusing more closely on transfer pricing activities.
However, Customs authorities are also concerned with related party transactions
and any difference between the transaction value and the Customs valuation that
might affect duties collected.
Imported goods are appraised for the payment of duties. In the case of non-
related party transactions, the transaction value is typically used for this appraisal
under the assumption that it reflects prevailing market conditions and is
comparable to similar goods.
However, in a related party transaction, there is no such assumption. Therefore,
Customs authorities must determine the value of the goods on which to base
import duties. Under the "circumstances of sale" test, the transaction value
between a related buyer and seller is acceptable if an examination of the
circumstances of the sale of the imported merchandise indicates that the
relationship between the buyer and the seller did not influence the price actually
paid or payable.
An importer must use reasonable care to determine whether transaction value is
acceptable according to the circumstances of sale or test value conditions (where
the transaction value is close to identical or similar goods exported at or about
the same time as the imported merchandise under review). The importer must
also have sufficient information available to demonstrate how it meets the
particular test conditions before a related party transaction value declaration is
made.
Supply chain managers need to be aware that although there may be legitimate
tax benefits involved with conducting related party transactions, there may still
be tax and duty implications to consider. Both tax and Customs authorities must
be satisfied that the transaction was conducted according to the arm's length
principle.
Therefore, supply chain managers should work closely with compliance
professionals and corporate tax specialists when making decisions about related-
party transactions. And keep in mind it is the importer's responsibility to provide
information and evidence regarding the transaction value to tax and Customs
authorities.
M I SD EC L A R A T I ON , M I SC L A S SIF IC A T IO N, U ND ER VA L U A T I ON I N
G O OD S D EC L A R A T I O N
T he C M TA has i nc r e a s e d t he s urc ha r ge p e na l t y for
mi s d e c la ra t io n, m is c l a s s if ic a t io n a n d u n de r va l ua tio n o f im po r te d
go o ds .
T he r e is m is de c la ra tio n w he n t h e d is c re p a nc y pe r ta i ns to
q ua n ti t y , q ua li t y , de s c ri p t io n, w e i g ht , o r m e a s ur e me n t o f t he
im po r te d go o ds .
M is c l a s s if ic a t io n, o n t he o t he r ha n d , e x is ts w he n i ns uf f ic ie n t o r
w ro n g de s c r i p tio n o f t he go o ds o r us e o f w ro ng ta rif f he a d i ng
wa s de c l a re d r e s ul t i ng i n a d is c r e pa nc y.
U nd e r va l ua tio n is pr e s e n t w he n:
· T he de c la re d va lu e f a ils to dis c lo s e i n f ul l t he p r ic e a c t ua ll y
pa i d o r pa y a ble o r a ny d u tia b l e a dj us t me n t to t he pr ic e ; o r
· W he n an inc o rre c t va lua tio n me tho d is us e d; or
· T he v a l ua t io n r ule s a re no t p ro p e r ly o bs e r ve d.

A n y m is de c la ra tio n , mis c la s s if i c a t io n o r u n de rva l ua t io n o f

im po r te d go o ds r e s ul t i ng i n a d is c re pa nc y ( i n d u ty a n d ta x to be
pa i d) b e t w e e n w ha t is le ga ll y de te r mi ne d u po n a s s e s s m e nt a n d
w ha t is d e c la re d wi l l be s u bj e c t to a f ix e d s u rc h a r ge ra t e o f 2 5 0 %
o f t he d ut y a n d ta x d ue ( pr e v io u s ly , 1 00 % to 2 00 % o f t he d u ty
d ue ) .

S u rc h a r ge , ho w e ve r , w il l no t be i m po s e d w h e n:

· T he dis c re pa nc y in duty is less th a n 1 0 %; or

· The i m po r te r ’s de c l a r e d va l u e a n d /o r t a r if f
he a d i n g/c la s s if ic a t io n:
· R e l ie d on an o f f ic ia l go ve r n me n t r ul i n g; or
· I s re j e c t e d i n a f o r ma l c us to ms dis p u te s e t tl e m e nt p ro c e s s
i nvo lv i n g d if f ic u l t o r h ig h l y te c h n ic a l q ue s tio ns r e la t i n g to t he
a p p lic a t io n of c us to ms v a l ua t io n r u le s a n d /o r t a r if f
c la s s if ic a t io ns .

I f t he mis d e c la ra t io n, m is c l a s s i f ic a tio n o r un d e r va l ua tio n is

i nt e nt io na l o r f ra u d ul e nt ( s uc h a s w he n a f a ls e o r a l te re d
do c u me n t is s u b mi t te d o r w he n f a ls e s t a t e m e nt s o r i nf o r ma tio n
a re k no w i ng l y ma de ) , a 5 0 0 % s u rc ha rg e ( o f t h e d u ty a n d ta x d ue )
w il l be im po s e d o n t he i m po r t e r a n d to t ho s e w ho wi l lf ul l y
pa rt ic i pa te d i n t he f r a u d u le n t a c t. T he i m po r te d go o ds w i ll be
s u bj e c t to s e iz u re re ga rd le s s o f t h e a mo u nt o f t he dis c re pa nc y.

T he C M TA li ke w is e a do p ts t he pr e v io us r ule u n de r t he T C C P , a s
a me n de d , o n th e e x is te nc e o f a p ri ma f a c ie e v i de nc e o f f r a ud if
t he d is c re pa nc y ( i n d u ty a n d ta x to be pa i d) a mo u nt s to mo re
t ha n 3 0 %.