“Revisiting the voluntary disclosure program” by Lucille Quisay Vicerra (August 16, 2010)

SUITS THE C-SUITE By Lucil Quisay Vicerra
Business World (08/16/2010)

In recent weeks, there has been much news on the stepping up of tax collections by the Department of Finance through its revenue-generating agencies.

The Bureau of Customs (BoC), in particular, is expected to rise to this challenge and find ways to improve its collection efforts to reach its P280.7-billion target for 2010.

It has been almost a decade since the BoC was first granted its post-entry audit power to examine and audit the books and import records of companies and their brokers. A close scrutiny of these books has resulted in assessments that forced many importers to pay (in addition to the basic duties and taxes due) penalties that range from a low of 50% to as high as 800% of the government revenue loss, depending on the degree of culpability. This is a penalty structure that is like no other in our tax system.

Companies and importers that have paid such huge amounts may have been unaware that there is actually an available relief — the Voluntary Disclosure Program (VDP). Introduced by the Customs bureau in 2007, there are only 191 importers to date who have actually availed of the program. Revisiting the VDP may help encourage more importers to consider its benefits.

What is VDP?

In an effort to generate additional revenue to meet its collection target in 2007, the BoC issued Customs Administrative Order (CAO) No. 5-2007 on May 27, 2007 allowing importers to voluntarily correct — under certain conditions and without fine or penalty — erroneous, inaccurate, or insufficient information declared to the BoC arising from sheer mistake, inadvertence or negligence.

Customs Memorandum Order (CMO) No. 18-2007, issued on July 6, 2007, provided the implementing guidelines for VDP.

Aside from the waiver of penalties, qualified importers under the program are also accorded “least priority status” in the audit selection for future importations. This means the importer may not be considered for examination for the next two years from the date of application. To be eligible for “least priority status,” however, duties and taxes to be collected from any single disclosure shall be at least P1 million. Notably, the P1-million threshold is not a requisite for VDP enrollment.

The BoC’s approval hinges on the company’s ability to demonstrate that it has established preventive measures to avoid recurrence of mistakes or errors. The VDP applicant must submit to a customs compliance program specifically designed to address the sources of the errors or mistakes in the entry declarations. The program also aims to improve the level of competence of its personnel in charge of import and clearance transactions.

Procedural requirements and qualifications

As a rule, importers may avail of the VDP prior to the receipt of an Audit Notification Letter (ANL), or upon receipt of the ANL, but prior to the scheduled date of field audit.

Importers who want to enroll in the VDP must file a verified application with the Post Entry Audit Group (PEAG), which must contain the details of the transactions, including the import entry numbers and types of articles imported.

The application will also need to disclose the nature of the error or mistake resulting in any underpayment of duties and taxes. These may include undeclared adjustments to the price actually paid or payable, such as assists, royalty or license fees, proceeds from subsequent resale; errors in tariff classification and duty rates used and/or undue availment of preferential duty rates or regimes.

The application for disclosure should also include the tender of payment for the duty and tax deficiency, and other supporting documents and information relating to the disclosure.

All applications shall be processed and evaluated by the designated officer of PEAG who will determine if the application is valid and, thereafter, conduct a verification of the disclosure.

Interested VDP participants must ensure that disclosures are complete to enjoy full relief from penalties. Otherwise, the graduated rules on penalties could be applied to transactions that were not voluntarily disclosed.

Furthermore, when fraud or bad faith in non-disclosure is established, the VDP application will be denied and an enforced audit will be conducted. Self-assessed payments tendered by the importer and received by the BoC at the time of application shall be applied against the deficiency in duties and taxes as disclosed.

All importers and import transactions may qualify under the VDP, except those (1) covered by a final assessment issued by the commissioner of Customs or subject of pending ruling requests with any customs office; (2) covered by cases already filed and pending in courts; (3) currently being audited pursuant to an ANL; or (4) found to be fraudulent.

CMO No. 18-2007 provides the detailed guidelines on documentation, processing, evaluation and disposition of applications for voluntary disclosure.

With the BoC under constant pressure to perform better and meet its collection goals, regular importers should expect the bureau to step up its drive to curb revenue leakages.

Importers are thus advised to carefully review the tariffs and duties due on their scheduled imports. If imports have been made, it would prudent to review the company’s possible exposure and risks to a potential deficiency duty assessment and adopt corrective measures to strengthen its compliance with existing BoC rules and regulations.

VDP is a wise option to minimize duty and tax exposure on importations. After all, a chance to do away with paying more and saving your cash is always a smart business move.

(As of publication, Lucil Q. Vicerra is a Tax Principal of SGV & Co.)

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.