THE Supreme Court’s decision in the Colgate-Palmolive Philippines Inc. (CPPI) vs Commissioner of Customs case offers importers a clearer framework for determining when royalties form part of the dutiable value of imported goods.
Affirming the Court of Tax Appeals (CTA) decision, the high court reiterated that the CTA’s findings and conclusions generally deserve great respect because of its tax and customs expertise. The Court also sustained the CTA’s application of three tests for including royalties in customs value: the relationship test, the payment test, and the condition test.
The payment test was straightforward. Colgate-Palmolive Philippines paid royalties to Colgate-Palmolive Company (CPC). For the relationship test, the high tribunal examined the memorandum of agreement and its addendum, and found that the royalties related to the goods being valued. The royalties were computed at 5 percent of CPPI’s net sales of licensed products, regardless of whether the products were imported or locally manufactured.
The Supreme Court also found the condition test satisfied. Under the agreement, CPC could terminate the license if CPPI failed to pay royalties. CPPI likewise failed to present sufficient evidence that it could purchase the imported goods from other sellers without paying the royalties. Based on the agreement and the evidence presented, the Court concluded that payment of the royalties was a condition of sale of the imported goods.
The decision should not, however, be read to mean that every royalty paid to a related foreign company is automatically dutiable.
Section 701(1)(e) of the Customs Modernization and Tariff Act requires royalties and license fees to be added to the price actually paid or payable only if they relate to the goods being valued and the buyer must pay them, directly or indirectly, as a condition of sale.
Arguably, the decision’s most important lesson for importers is evidentiary. Royalty agreements often cover several forms of intellectual property and services under a single payment formula. One royalty may compensate the licensor not only for trademarks or patents associated with imported goods, but also for manufacturing technology, technical assistance, know-how, processes, or other rights used in local operations. When these components are bundled together, an importer may struggle to establish which portion, if any, is properly attributable to the imported goods.
Importers should examine whether their agreements provide an objective and supportable method for separating royalties attributable to imported goods from payments for technology, know-how, or services that are not sufficiently connected with the goods being valued. Contractual labels alone will not establish the distinction.
The payment formula, accounting treatment, actual use of the intellectual property, and underlying commercial arrangements should be consistent with one another. This matters because any addition to transaction value must be based on objective and quantifiable data.
The identity and role of the seller also require careful documentation. A royalty paid to a licensor other than the seller may still fall within the statutory language covering direct or indirect payments.
The separate identities of the licensor and seller may nevertheless be relevant in determining whether the royalty is a condition of sale. An importer may be in a stronger position if it can show that it may buy the goods from other suppliers, including other companies in the same corporate group, without paying royalties to those sellers or making payment of the royalty a condition of the purchase.
Relevant evidence may include separate supply and licensing agreements, purchase orders and invoices that do not cross-reference the royalty arrangement, proof that the seller cannot withhold shipments because of unpaid royalties, purchases of comparable goods from unrelated suppliers, and correspondence showing that the supply and licensing relationships operate independently.
By contrast, common termination provisions, cross-default clauses, or evidence that the licensor controls whether the seller may supply the goods could support a finding that the royalty is a condition of sale.
The practical response is not simply to amend the contracts. Importers should review their license agreements, supply contracts, transfer-pricing policies, royalty computations, and actual purchasing practices together. Any restructuring should reflect commercial reality and be applied consistently.
Importers that identify possible historical underpayments should also consider whether the Bureau of Customs’ Prior Disclosure Program under Customs Administrative Order 01-2019 is available and appropriate. The consequences depend on the timing and circumstances of the disclosure, including whether an Audit Notification Letter has already been issued.
The rules also address disclosures involving royalties, subsequent proceeds, and later price adjustments. Because the available relief depends on compliance with prescribed periods and requirements, any proposed application should be evaluated promptly.
Ultimately, Colgate-Palmolive reminds importers that royalty exposure turns not on the title of an agreement, but on the relationship among the imported goods, the payment, and the sale. The best time to clarify that relationship and assemble the supporting evidence is before the Customs bureau asks.
Deodar Bautista is a Director with the Tax & Legal practice at Deloitte Philippines, a member firm of the Deloitte network. For comments or questions, email phcm@deloitte.com.
