Customary Customs Audit Issues

By Stephanie G. Vicente-Nava

First Published in Business World (8/6/2012)

The Bureau of Customs (BoC) has been implementing the Post Entry Audit System for several years now to determine, among others, the truthfulness and accuracy of declared customs value, volume and tariff classification of imported goods. A BoC post entry audit starts upon the issuance of an Audit Notification Letter (ANL), duly signed by the Commissioner of Customs (CoC), authorizing the Post Entry Audit Group (PEAG) to conduct a compliance audit of an importer’s activities.

During the audit proper, the PEAG focuses on whether an importer used the appropriate customs valuation method; declared the correct dutiable customs values and country of origin of goods; applied properly the special or preferential tariff rates; and complied with record-keeping requirements under customs laws and regulations. Importers are required to provide the PEAG with documents such as import entries, supplier invoices, bills of lading or airway bills and other relevant import documents for examination. The most common issues that arise include the following:

Valuation

Under Section 201 of the Tariff and Customs Code (TCCP), the primary method for determining the dutiable value of imported goods is the Transaction Value (TV), which is defined as the “price paid or payable” for the goods when sold for export to the Philippines plus “certain adjustments.” These adjustments may be in the form of royalties, commissions, costs of transport, and the like — which usually trigger the questions. In the case of royalties, for example, any payment must hurdle the tests of dutiability before they can be considered a proper adjustment. That is, royalties are dutiable only when they are: (1) related to the imported goods, (2) paid to the supplier, either directly or indirectly, and (3) as a condition of the importation.

Similarly, interest payments with respect to the supply of the imported goods may also be considered dutiable, if presumed part of the price paid or payable. Although there are no established Philippine rules on the dutiability of interest payments, the customs laws of other jurisdictions, which prescribe tests to exclude interest payments from the price paid or payable, may be applied. Notably, existing US cases provide that in order for interest charges to be excluded from the price, the interest charges must be identified separately from the price and must be made pursuant to a financing arrangement in writing. The tests basically aim to set apart the interest payments from the price paid or payable.

For in-land freight, particularly in an Ex-works (EXW) transaction, it is the duty of the purchaser to receive the goods at the place of manufacture. Consequently, the purchaser defrays the cost of inland freight from the place of manufacture to the port of shipment. Thus, in an EXW transaction, such inland freight, if not included in the freight disclosed in the Import Entry and Internal Revenue Declaration (IEIRD), should be reported under “other dutiable charges.”

However, some importers either fail to include inland freight charges in the computation of duties, while others include mere estimates of the inland freight charges based on the invoice value of the goods. The practice of estimating inland freight charges, when the actual inland freight charges are not readily available upon receipt of the goods, may pose a risk for the importer if there is a significant underestimation of inland freight charges.

Tariff classification

Another common issue concerns the proper tariff classification of goods, which is the basis for the duty rate of the imported goods. The tariff classification is generally determined by the description of the goods in the export documents provided by the supplier. Subject to review by the importer, the customs broker determines the proper tariff classification if it is not indicated on the documents. There are instances, however, when the description of the goods (especially in cases where the description is general) may fall under two or more tariff classifications with different duty rates. An error or mistake in classifying goods may trigger an assessment for deficiency customs duties and taxes.

Record Keeping

For customs purposes, importers are required to keep at their principal place of business, for a period of three years from the filing of the import entry, all the records of their importations and/or books of accounts, business and/or computer systems and all other customs commercial data. These records can be in whatever form, including payment records relevant when verifying the accuracy of the dutiable value declared by importers or customs brokers in the import entry. Failure to keep the required import documents is subject to the following penalties:

1) Administrative fine of 20% ad valorem on the imported articles for which no records were kept;
2) Hold delivery or release of subsequent imported articles to answer for the fine and any deficiency assessment, and;
(3) Criminal prosecution punishable with a fine of not less than P100,000 but not more than P200,000 and/or imprisonment of not less than two years and one day but not more than six years.

Moreover, an importer who denies the PEAG full and free access to such required records shall be subject to heavy fines and penalties.

Certainly, there are many other issues that may be encountered by importers during a BoC post entry audit. But what is important, if not essential, is for such issues to be detected internally before the PEAG conducts a field audit. In such a case, remedial measures can be undertaken to prudently and legally avoid costly assessments and penalties. For example, importers who voluntarily disclose plain errors and innocent mistakes in the import entry declarations can pay the correct duties and taxes, without fines or penalties, through the Voluntary Disclosure Program (VDP) of the Customs bureau.

A BoC post-entry audit may be stressful and costly, especially if poor compliance practices are not addressed immediately. Hence, it is always advisable to perform a customs compliance review on documentation, reportorial and other administrative requirements and identify possible risk areas and potential exposure to deficiency duties and taxes.

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

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.