Challenges of the new post-entry audit process

SUITS THE C-SUITE By Stephanie Vicente-Nava

Business World (09/01/2014 – p.S1/4)

AFTER enduring a complex accreditation process, importers and customs brokers now face tough rules on the post-entry audit of their import transactions.

As is evident from the name, a post-entry audit (PEA) is an examination conducted by the customs authorities after the goods have cleared customs and have been brought to the importer’s premises, to verify the accuracy of import declarations and tax and duty payments. Through the PEA, the customs officers examine — in detail and on site — the import transactions and records of an importer. In doing so, they may be able to access more data and information that could lead to additional assessments for customs duties and taxes.

The PEA was introduced in the Philippines under Republic Act No. 9135, which took effect on June 2, 2001 and was carried out by the Post-Entry Audit Group (PEAG) under the Bureau of Customs (BoC). Towards the end of 2013, the PEAG was dissolved and its functions were transferred to the Fiscal Intelligence Unit (FIU) of the Department of Finance (DoF), with a clear mandate to intensify the PEA of importers and increase the BoC’s revenues.

The DoF has issued two Department Orders (DOs) to guide the FIU in carrying out its PEA functions. The first is DO No. 11-2014, which prescribes guidelines on the selection of importers to be audited and the issuance of Audit Notification Letters. The second is DO No. 44-2014, which covers the guidelines for issuing the Post-Entry Audit Findings (PEAF), the Final Audit Report and Recommendation (FARR) and the Assessment/Collection Notice. This DO also provides for the options available to an importer to contest the PEAF.

Below are some of the challenges that importers and customs brokers may face during a PEA by the FIU:

NO RULES FOR EXIT CONFERENCE

Both DOs are silent on the requirement of, and procedure for, the Exit Conference which was an essential element of the process previously done by the PEAG.

During the PEAG regime, the importer would be invited by PEAG officers to attend an Exit Conference to discuss their audit findings and to give the importer an opportunity to explain his or her side before a formal assessment is issued. At this stage, the importer may request the PEAG for the factual and legal bases of the proposed findings and point out errors in the assessment. The importer may then submit additional documents and/or position papers to justify the cancellation of the assessment/s based on erroneous findings. For importers, the Exit Conference is considered a critical stage of the PEA process.

That DOs Nos. 11-2014 and 44-2014 are both silent on the Exit Conference leave importers to wonder if this was intentionally withdrawn from the PEA process. [Readers will recall that in Revenue Regulations (RR) No. 18-2013, the Bureau of Internal Revenue (BIR) removed the informal conference step from its assessment process. Prior to RR No. 18-2013, the taxpayer would be invited by the revenue officers to an informal conference to discuss their proposed assessment and give the taxpayer the chance to present his explanations before a formal assessment is issued.]

STRICTLY NO CONTACT POLICY

DO No. 44-2014 also prescribes a “no contact policy” between FIU officers and the importers after a PEAF has been issued. FIU officers are expressly prohibited from holding a conference with the importer or any of his or her representatives regarding any of the PEAF findings; otherwise they may be held administratively liable or subject to civil or criminal proceedings.

While it is essential to safeguard the integrity of the FIU and the PEA process, it is equally necessary for the importers to have reasonable access to the FIU for the purpose of understanding the context of the PEAF and submitting an appropriate reply. The importers have a right to obtain clarification on their assessments as part of the due-process system embodied in the Philippine Constitution.

Furthermore, for importers with global networks and complex business structures and supply chains, there are instances when documents alone cannot provide the whole picture and framework of their commercial transactions, which is necessary to properly determine the correct customs value and classification. For this purpose, interaction between the FIU and the importer may be more required.

SINGLE COMPREHENSIVE REPLY

A new rule introduced by the DO is the filing of a “single comprehensive reply” to the PEAF. Under this rule, an importer shall be allowed to file only one reply to the PEAF within a non-extendible period of 30 days counted from receiving the PEAF. The reply must be sworn under oath and supported by certified true copies of the documents relevant to the findings.

It appears that importers audited by the FIU are in a tighter predicament than those under investigation by the BIR. At the very least, the BIR allows the taxpayer a period of 30 days from receiving the Final Assessment Notice within to file a written protest, plus another 60 days (in the case of a request for reinvestigation) to file the supporting documents. Importers, on the other hand, should analyze and understand the PEAF, secure certified true copies of relevant documents and prepare a written reply to the PEAF all within 30 days only. This narrow window is cause for great concern among importers who normally do not keep and maintain certified true copies of their importation records.

Given this stringent assessment process, it makes good sense for importers to prepare for the PEA even before receiving an Audit Notification Letter. They should consider early on to conduct an internal compliance review of import transactions and records. This will help identify any potential risks for deficiency customs duties and to spot possible noncompliance with customs administrative requirements that need to be remedied before an actual post entry audit by the FIU takes place.

This article 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.

Stephanie Vicente-Nava is a Tax Senior Director of SGV & Co.