These are my comments to the issues we discussed earlier:

Issue 1. Whether using the AFS alone, custom duties on royalty fees can be assessed
outright?

No. While it is disclosed in the AFS such as in page 40, Note 31 (sample AFS for 2018
attached) the amount of landed cost for the year, cost of goods imported is not separately
presented in arriving the cost of purchases as presented in page 34, note 20. Royalty fees
may be separately presented in note 21, page 34 also; however since the cost of importation
(upon arrival) is not separately presented, we can argue as you say that the amount royalty
fees is already included in the landed cost disclosed in Note 31 which is also tally with the
schedule of importation (SLI). Thus, AFS alone is an insufficient evidence for the BOC to
conclude that there are uncollected custom duties on royalty fees. These presentation are
the same in 2015 and 2016 and even during the time of Mr. Aguilar (sample 2012 AFS is
attached herewith). The only drawback is if they will require any other proof of payment of
custom duties on royalties such as import declarations and IERD which obviously we
cannot provide.

Issue 2. Whether all the royalty fees presented in the AFS are subject to custom
duties?

No. Portion of the royalty fees are unrelated to the foreign brands/goods imported by
Suyen. These fees are usually payments to talent agencies, artists, professionals, and
others, both local and foreign. Following is our recon:

Issue 3. Whether the royalty fees as computed above should be subject to custom
duties or can be challenged legally?

In my opinion, Yes. In order for a royalty payment to be dutiable, there are three (3)
important tests that should all be present:

• They are related to the goods being valued (Relationship Test);

• Paid by the buyer, directly or indirectly, to the seller (Payment Test); and
• The payment is a condition for the sale of imported goods (Condition Test).

Relationship Test
In applying this test, there must be a careful examination of what exactly the royalty
is being paid for. Hence, there is a need to analyze the relationship between the
royalty payments and the imported goods. The most essential point in assessing
this relationship is whether the importer could have purchased the tangible goods
without the purchase of the intangible rights. If there is no connection, then the two
should be considered unrelated and thus, not part of the transaction value.
Payment Test

The payment test determines whether the royalty fees were directly or indirectly
paid by the buyer to the seller. This is relevant because adjustments to the
transaction value due to royalty payments are made to the extent that they are
actually paid or payable to the supplier. Hence, in order to be dutiable, the
requirement that the royalties must be paid directly or indirectly to the seller
presupposes that such payment ultimately redounded to the benefit of the seller.
Without such benefit, any royalty payment should not be considered as part of the
transaction value, and therefore, not dutiable.

Notably, when a buyer makes a payment to a party related to the seller, there
arises a presumption that the payments are part of the price actually paid or
payable to the seller. Such presumption may, however, be overturned through the
presentation of contrary evidence.

Condition Test

Generally, the clause that “the buyer must pay (the royalty) as a condition of sale”
can most appropriately be interpreted to refer to the separability or inseparability of
the purchase of the imported goods from the payment of the royalty for the rights.
This factor of separability may depend on, among others, technological facts,
methods of doing business, or the terms of the contract between the parties. The
mere fact that the payment of the royalty is a term of the contract between the
parties does not mean that payment of the royalty is a condition of the sale if the
buyer genuinely had a choice whether to take the goods with or without the rights.
Thus, the question is whether the purchase could have been made without the
royalty.

Out of the three (3), we can challenge the Relationship Test and Condition Test by
carefully reviewing the related license/franchise/royalty agreements or even by
advising our client to revise them with the help of their principals so that at least
one test will fail. If one test failed, no duty should be imposed to the royalty
payments. Ms. Edith will give me copies of the agreements of the above-
mentioned brands tomorrow.
Legal Basis:

Section 201 of the TCCP governs the rule on customs valuation, the relevant
portion of which states:

SEC. 201. Basis of Dutiable Value. - (A) Method One. -

Transaction Value. - The dutiable value of an imported
article subject to an ad valorem rate of duty shall be the
transaction value, which shall be the price actually paid or
payable for the goods when sold for export to the
Philippines, adjusted by adding: (1) The following to the
extent that they are incurred by the buyer but are not
included in the price actually paid or payable for the
imported goods: XXX XXX XXX (e) The amount of royalties
and license fees related to the goods being valued that the
buyer must pay, either directly or indirectly, as a condition
of sale of the goods to the buyer;

Further, CAO No. 4-2004,54 amending CAO No. 5-2001,55 implementing the above Section
201 of the TCCP provides as follows:

SEC. II. DUTIABLE VALUE

XXX XXX XXX

B. Method 1 -The Transaction Value

1. The dutiable value of an imported article shall be the

Transaction Value which is the price actually paid or payable for
the goods when sold for import to the Philippines adjusted in
accordance with the provisions of Section II.B.3 of this Order,
and subject to the conditions specified in Section II.B.2 herein.

XXX XXX XXX

3. In determining the Transaction Value, the following

adjustments shall be added to the price actually paid or payable
for the imported goods being valued if such value has not been
included in the price actually paid or payable: XXX XXX XXX e.
Royalties and license fees related to the goods being valued;

XXX XXX XXX

 Based on the foregoing, the dutiable value of an imported article shall be the transaction
value, which is the price actually paid or payable for the goods when sold for import in the
Philippines. The transaction value of the imported goods includes royalties and license fees when:
(1) they are related to the goods being valued (Relationship Test); (2) paid by the buyer, directly or
indirectly, to the seller (Payment Test); and (3) the payment is a condition for the sale of the goods
(Condition Test). All tests must be satisfied separately and the absence of one will result in the
non-dutiability of royalties.1

Anent the relationship test, it is essential that there must be some connection between
the royalties paid and the imported goods being valued. 2

Under the condition test, the question is whether CPPI could have made the importation
without payment of royalty. Simply put, royalties which are separable from the purchase of the
imported goods are not dutiable.3

Thus, royalties are dutiable only if, among others, they relate to the goods being valued.
Thus, if the royalty is not related to the goods being subjected to customs duties, it is illogical to
subject the same to duties and taxes under Section 201 of the TCCP. 4

1
Colgate-Palmolive Phi v. CIR, CTA EB No. 1471 (CTA Case No. 7806), 4 January 2018.
2
Id.
3
Id.
4
Id.