The Supreme Court ruled that demurrage and detention fees collected by international shipping carriers are subject to the regular corporate income tax rate, not the preferential rate for Gross Philippine Billings (GPB). This decision clarifies the tax obligations of international shipping companies operating in the Philippines, confirming that these fees are considered income from the use of property or services within the country and therefore taxable under standard income tax rules.

Navigating the Seas of Taxation: Are Demurrage Fees Part of ‘Gross Philippine Billings’?

This case, Association of International Shipping Lines, Inc. vs. Secretary of Finance and Commissioner of Internal Revenue, arose from a dispute over Revenue Regulation (RR) 15-2013, which classified demurrage and detention fees as subject to regular income tax rather than the preferential rate applicable to Gross Philippine Billings (GPB). The Association of International Shipping Lines (AISL) argued that these fees should be considered part of GPB and thus subject to a lower tax rate. This dispute stemmed from differing interpretations of the National Internal Revenue Code (NIRC) and its amendments, specifically Republic Act (RA) 10378, which recognizes reciprocity in granting income tax exemptions to international carriers. The central legal question was whether RR 15-2013 validly interpreted the law by subjecting these fees to the regular corporate income tax rate.

The petitioners contended that the principle of res judicata should apply, referencing a previous court decision that had deemed similar fees as part of GPB. They argued that RA 10378 did not alter the treatment of these fees and that RR 15-2013 was issued without proper public hearing, making it invalid. The respondents, however, countered that the previous decision did not bind the Secretary of Finance and that RR 15-2013 merely clarified the scope of GPB without expanding the provisions of RA 10378.

The Supreme Court first addressed the issue of res judicata, which prevents a party from relitigating issues that have been conclusively decided by a court. The Court found that res judicata did not apply in this case due to a lack of identity of parties and subject matter. Specifically, the Secretary of Finance was not a party in the previous case, and the present case challenged the validity of RR 15-2013, an issuance distinct from the previous Revenue Memorandum Circular (RMC) 31-2008. The Court quoted Heirs of Marcelino Doronio v. Heirs of Fortunato Doronio to emphasize that judgments bind only the parties involved:

The judgment in such proceedings is conclusive only between the parties. Thus, respondents are not bound by the decision in Petition Case No. U-920 as they were not made parties in the said case.

Building on this, the Court then clarified the proper remedy for challenging RR 15-2013. While the petitioners filed a petition for declaratory relief, the Court noted that such a petition is inappropriate for questioning tax liabilities, citing Commonwealth Act (CA) 55. However, recognizing the significant impact of RR 15-2013 on the maritime industry and the long-pending nature of the case, the Court exercised its discretion to treat the petition as one for prohibition. This allowed the Court to address the substantive issues at hand, invoking the principle established in Diaz et at v. Secretary of Finance, et al.:

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 then turned to the validity of RR 15-2013, focusing on whether it correctly classified demurrage and detention fees as subject to the regular income tax rate. The Court analyzed Section 28(A)(I)(3a) of the NIRC, as amended by RA 10378, which defines Gross Philippine Billings (GPB) as “gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents.”

Applying the principle of expressio unios est exclusio alterius (the express mention of one thing excludes all others), the Court reasoned that since demurrage and detention fees are not derived from the transportation of passengers, cargo, or mail, they fall outside the scope of GPB. The Court emphasized that these fees are compensation for the use of property (vessels and containers) and thus constitute income subject to regular income tax. They underscored this point by quoting Black’s Law Dictionary:

Demurrage fee is the allowance or compensation due to the master or owners of a ship, by the freighter, for the time the vessel may have been detained beyond the time specified or implied in the contract of affreightment or the charter-party.

Furthermore, the Court addressed the procedural concerns raised by the petitioners regarding the lack of public hearing and filing with the U.P. Law Center. The Court held that RR 15-2013 is an interpretative regulation, designed to clarify existing statutory provisions. As such, it did not require a public hearing or registration with the U.P. Law Center for its effectivity, referencing ASTEC v. ERC:

Not all rules and regulations adopted by every government agency are to be filed with the UP Law Center. Interpretative regulations and those merely internal in nature are not required to be filed with the U.P. Law Center.

In summary, the Supreme Court upheld the validity of RR 15-2013, affirming that demurrage and detention fees collected by international shipping carriers are subject to the regular corporate income tax rate. This decision reinforces the principle that income derived from the use of property or services within the Philippines is taxable under standard income tax rules, even for international carriers. The ruling also clarifies the scope of GPB and underscores the authority of the Secretary of Finance to issue interpretative regulations.

FAQs

What was the key issue in this case?	The key issue was whether demurrage and detention fees collected by international shipping carriers should be taxed at the regular corporate income tax rate or the preferential rate for Gross Philippine Billings (GPB).
What are demurrage and detention fees?	Demurrage fees are charges for detaining a vessel beyond the agreed time. Detention fees are charges for holding onto a carrier’s container outside the port beyond the allotted free time.
What is Gross Philippine Billings (GPB)?	GPB refers to the gross revenue derived from the carriage of passengers, cargo, or mail originating from the Philippines up to the final destination, regardless of where the sale or payments occur.
Why did the petitioners argue that the fees should be taxed at the GPB rate?	The petitioners argued that these fees were incidental to the international shipping business and should be considered part of the revenue from transporting goods.
Why did the court rule that the fees should be taxed at the regular rate?	The court ruled that these fees are not directly derived from the transportation of passengers, cargo, or mail and are instead compensation for the use of property, thus falling outside the scope of GPB.
What is Revenue Regulation (RR) 15-2013?	RR 15-2013 is a regulation issued by the Secretary of Finance to implement Republic Act No. 10378, clarifying the tax treatment of international carriers.
What is res judicata and why didn’t it apply in this case?	Res judicata is a legal doctrine preventing the relitigation of issues already decided by a court. It didn’t apply because the parties and subject matter in this case differed from a previous case.
Why was the petition for declaratory relief treated as a petition for prohibition?	The court recognized the broad implications of the case and its importance to the public, allowing it to be treated as a petition for prohibition despite being initially filed as a petition for declaratory relief.
Is RR 15-2013 considered an interpretative rule?	Yes, the court determined that RR 15-2013 is an interpretative rule, clarifying existing statutory provisions and not requiring a public hearing or registration with the U.P. Law Center for its effectivity.

This ruling has significant implications for international shipping lines operating in the Philippines, clarifying the tax treatment of demurrage and detention fees. Companies must ensure they are compliant with the regular corporate income tax rate for these fees, understanding that they are considered separate from the revenue derived from the actual transportation of goods.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: ASSOCIATION OF INTERNATIONAL SHIPPING LINES, INC., VS. SECRETARY OF FINANCE, G.R. No. 222239, January 15, 2020