[201012.EN.SEA] Taxation Of Container Demurrage Fees

Goods exported to the Philippines are normally brought from other countries by international shipping carriers packed inside huge steel containers. These steel containers are also used by local shipping companies to move and transport goods domestically from one port to another port.

Imported goods are delivered to the importer/consignee in steel containers that the importer/consignee is required to return to the international shipping carrier within the agreed period. 

Often, the containers are returned past the deadline or in certain instances, because of the ingenuity of Filipinos, they are no longer returned but converted to purposes other than their original purpose as storage, i.e., some containers are used as temporary offices in construction sites, or apartments, or spray booths in auto-paint shops, or even restaurants.

To ensure the proper and timely return of the containers, international shipping carriers charge the importers/consignees demurrage fees for their failure to comply with their obligation. Because of the rampant violations of importers/consignees, imposition of demurrage fees by international shipping carries has become an industry practice. 

Consequent to this, is also the issue on the proper tax treatment of demurrage fees on the part of the international shipping carrier, i.e., whether the fees are considered part of gross Philippine billings of the international carrier and as such, are subject to the 2 1/2 gross Philippine billings (GPB)Tax.

The proper taxation of demurrage fees has become a hot issue within the shipping industry after the Court of Tax Appeals (CTA) issued an en banc decision in 2006 ruling that demurrage fees are considered ordinary income subject to the regular corporate income tax.

In this particular case, the international shipping carrier was assessed by the Bureau of Internal Revenue (BIR) for deficiency income tax on demurrage fees charged to importers/consignees. Apparently, the BIR considered the demurrage fees as ordinary income and not part of the gross Philippine billings of the international shipping carrier. Accordingly, the applicable tax was the 30% (formerly 35%) regular corporate income tax and not the 2 1/2 GPB tax.

The international carrier argued its income tax liability was limited to its gross Philippine billings or revenues from the outbound movement of cargoes, and therefore, other income such as demurrage fees that did not fall within the concept of gross Philippine billings were not subject to income tax - at all.

The CTA ruled in favor of the BIR and considered the demurrage fees as ordinary income and not part of gross Philippines billings, and as such, shall be taxed at 30% based on net income. 

The decision was premised on the following grounds:

1. International shipping carriers are classified as resident foreign corporations that are still within the general scope of the regular income tax rate;

2. Demurrage fees are considered income on the part of international shipping carriers; and

3. Demurrage fees are Philippine-sourced income.

Subsequently in 2008, the BIR issued Revenue Memorandum Circular (RMC) No. 31-2008 clarifying the various issues concerning common carriers by sea, and their agents relative to the transport of goods and passengers.

Adopting the 2006 CTA decision, the RMC clarified that demurrage fees are in the nature of rent for the use of property of the international carrier in the Philippines and therefore, not part of gross Philippines billings, which consist of revenues from the outbound movement of cargoes originating from the Philippines.

Accordingly, the fees shall not be subject to the 2 1/2 % GPB Tax but to the 30% regular corporate income tax and to value-added tax or percentage tax.

Notwithstanding the CTA decision and RMC No. 31-2008, other players in the industry still hold a contrary view on this issue. They argue that the Tax Code clearly subjects international shipping carriers to the 2 1/2 % GPB tax and not to the 30% regular corporate income tax. 

The reason being, international shipping carriers in the Philippines are principally engaged in the outbound shipment of goods originating from the Philippines, and do not in any manner undertake other businesses in the country.

While demurrage is not strictly freight charged to customers, the same is deemed incidental to the international carrier’s main activity of international carriage, and not derived from a separate business activity of leasing, which obviously is not part of the authorized activities of international shipping carriers.

Although the contrary position appears to be logical, it still remains a hanging issue in the absence of a clear jurisprudence clarifying the proper tax treatment of demurrage fees. Given the present situation, international shipping carriers may either comply with the mandate of RMC 31-2008 or treat the demurrage fees as part of their gross Philippine billings and subject it to the 2 1/2 5 GPB tax, and if assessed by the BIR, elevate the issue all the way up to the Supreme Court (SC) for final resolution.

It will be very interesting to note in the future how the SC will rule on this novel issue. I believe though, that since there is no provision in the Tax Code that clearly subjects the “other income” of international shipping carriers to a different tax rate, both the principal and the incidental/other income, e.g., demurrage fees, should be subject to the 2 1/2%GPB tax.

Source : SN-TR, 19.10.12.