Customs Audit of PEZA Enterprises

By Stephanie G. Vicente-Nava

First Published in Business World (9/24/ 2012)

Entities registered with the Philippine Economic Zone Authority (PEZA) enjoy tax and duty-free importation of raw materials, capital equipment, machineries and spare parts into the Ecozone, pursuant to Republic Act 7916, as amended, also known as the Special Economic Zone Act of 1995 or the PEZA Law. RA 7916 aims to encourage economic growth through the development of special economic zones.

While PEZA entities may be exempt from paying duties and taxes on its qualified importations, they are still required to fully declare their importations with the Bureau of Customs (BoC), just like regular importers without duty and tax incentives. Any false statement made in their customs declaration may result in stiff penalties.

Recently, there has been a spike in the number of BoC post-entry audits (compliance audits) of PEZA- registered entities, including importers enjoying duty and tax incentives.

This enforced compliance audit is the mechanism used by the BoC to determine any short payments of duties and taxes on articles imported into the Philippines. This procedure also enables the BoC to check compliance with existing customs rules and regulations. Typically, deficiency duties and taxes are assessed (and collected) due to errors in tariff classification and valuation of imported articles. In addition, the BoC also generates revenues by imposing penalties on importers who fail to comply with existing record-keeping requirements mandated by customs laws and regulations.

For PEZA entities, the main focus of the compliance audit is the verification of their compliance with relevant importation rules and regulations as a condition for the tax and duty-free incentive on importations.

The most common issue encountered by PEZA-registered entities is compliance with the import record-keeping requirements. Under Section IV (A)(1) of Customs Administrative Order No. 04-04, importers, including Ecozone enterprises, are required to keep and maintain all records of importation for three years from the date of filing of the import entry. These basic records (e.g., Import Entry and Internal Revenue Declaration or its equivalent, Supplemental Declaration of Valuation, commercial invoice / consignment notes, ocean bill of lading or airway bill, packing lists, among others) are required to be kept in the principal place of business of the company.

Failure to keep the above records may be subject to:

1. Administrative fine of 20% of the invoice value of the importations for which no records were kept and maintained;
2. Hold delivery or release of subsequent imported articles; and
3. Criminal prosecution.

In particular, PEZA-registered entities are required to secure PEZA permits for imported articles intended to be brought into the Ecozone, which should be obtained prior to their importation to the Philippines. PEZA requires an import permit to monitor and verify that import shipments of PEZA-registered entities are directly related to their registered activity and included in the list of approved items for tax and duty-free importation.

For the same reason, the BoC considers the PEZA import permit as a necessary document which must always be kept and maintained by PEZA entities. Otherwise, failure to present such document during compliance audit may give rise to deficiency duties and taxes. In other words, the BoC may disregard the exemption and treat their importations without such permits as subject to duties and taxes. This is in addition to a possible imposition of a 20% ad valorem penalty for failure to keep or secure such document.

Other documents related to the transactions of a PEZA entity may also be requested during post-entry audit, such as:

1. The Export Declaration Form and Export Tally (PEZA Form No. 8104) for its exportation of finished products;
2. The Contract of Sale and Farm-in (PEZA Form 8105), Farm-out (PEZA Form 8106) and Intra-Zone Transfer (PEZA Form 8112) for its PEZA-to-PEZA sales;
3. Proof of payment of taxes and duties and the Certificate of Scrap Buyer’s Registration for its scrap sales; and
4. PEZA Letter of Authority and the corresponding invoices covering the importation or procurement of goods to be disposed of for the sale or disposition of capital equipment.

Another common issue raised during the BoC audit of PEZA entities is the availment of the tax and duty-free incentive for shipments which are unrelated to the entity’s registered activity. In such cases, the BoC’s position is that these importations should be subject to duties and taxes since the same are not covered by the incentive provided by law.

The same is true with respect to the failure of an Ecozone entity to account for shortages in goods imported on a tax and duty-free basis. Under the PEZA Law, such failure constitutes prima facie proof that such goods were illegally sent out of the restricted areas of the Ecozone and into the customs territory. In such cases, the importation of such goods shall be treated by the BoC as regular importations subject to duties and taxes.

On the other hand, overages which are presumed to be introduced illegally into the restricted areas of the Ecozones may be confiscated with a fine of 20% to 80% of the landed cost of the forfeited property under Section 2307 of the Tariff and Customs Code of the Philippines. Additional fines ranging from 50% to 200% of the value of the goods which cannot be accounted for may be imposed under the PEZA Implementing Rules and Regulations.

In view of the BoC’s intensified audit of PEZA importers, it pays for companies to be “audit ready.” One way of enhancing compliance and ensuring that import transactions meet customs requirements is through performing a customs compliance review (CCR). A CCR is a diagnostic evaluation of the importer’s practices and procedures, compliance with documentation, reportorial, registration and other administrative requirements which aim to identify possible risk areas and potential exposures for deficiency duties and taxes. This way, an Ecozone-registered importer may avoid an assessment for deficiency duties, taxes and penalties upon post-entry audit and continuously enjoy full tax incentives.

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.