Prior disclosure or a customs audit: Which is the wiser option?

SUITS THE C-SUITE By Lucil Q. Vicerra

Business World (01/28/2019 – p.S1/4)

(Second in a series)

As discussed in last week’s column, Customs Administrative Order (CAO) No. 01-2019 has been issued. The CAO covers the conduct of the post clearance audit (PCA) and implementation of the prior disclosure program (PDP). Considering the high penalties — ranging from 125% to 600% of the revenue loss — to be imposed during a customs audit, it is imperative for an importer to consider if it will be beneficial to avail of the PDP.

The PDP is a program based on international best customs practices. The PDP authorizes the BoC Commissioner to accept, as a potential mitigating factor, prior disclosure by importers of errors and omissions in goods declaration resulting in deficiency in duties and taxes on past importations.

PDP is an option given to importers who do not want to go through the trouble of a full audit. This would enable the importer to voluntarily disclose or report to the BoC any errors in goods declarations and in payment of duties, taxes and other charges with significantly lower penalties.

WHO QUALIFIES FOR THE PDP?

Any importer, whether issued with an Audit Notification Letter (ANL) or not, may avail of the PDP. The applicant needs to submit a duly accomplished form prescribed by the BoC for prior disclosure, stating the errors in goods declaration and tendering the payment of deficiency duties, taxes and penalties, if applicable.

However, it should be noted that the following are not qualified for the PDP:

– Goods declarations which are the subject of pending cases with any other Customs office;
– Those which are covered by cases already filed and pending in courts; and
– Those involving fraud.

BENEFITS OF THE PDP

An importer who has not yet received an ANL and applies for a PDP, will only be subject to payment of the deficiency duties and taxes plus 20% interest per year.

On the other hand, an importer who has already received an ANL but applies for a PDP, will be subject to payment of deficiency duties and taxes plus a reduced penalty of 10% of the basic deficiency and 20% interest per year. The importer has 90 calendar days from the receipt of the ANL to avail of the PDP option. A PDP application may be amended if there are any adjustments to the original application or new issues discovered that need to be disclosed. The amendment should be made within 30 days from the filing of the PDP application.

The above penalties are in lieu of the 125% and 600% penalty in case of negligence and fraud, respectively.

Importers may also avail of the PDP for the following without penalty and interest:

– Dutiable royalty payments;
– Other proceeds of any subsequent resale, disposal, or use of the imported goods that accrues directly or indirectly to the seller; or
– Any subsequent adjustment to the price paid or payable.

For the above, the PDP application should be filed within 30 calendar days from the date of payment or accrual of subsequent proceeds to the seller or from the date of the adjustment to the price paid or payable is made.

VERIFICATION AND PROCESSING OF PDP APPLICATIONS

The post clearance audit group (PCAG) will verify the completeness of the PDP application form, including payment and other supporting documents.

If the importer fails to provide the necessary documents, the PCAG may decline or disapprove the application.

If the PDP application is accepted, the PCAG will verify and process the application within a period of 90 calendar days from the submission of complete PDP documents.

As part of the process, the PCAG will verify the accuracy of the deficiency duties and tax computations. It will also determine if all errors have been disclosed. If there is a finding of fraud or other material inaccuracies, mistakes or errors in the goods declaration, the PCAG will recommend to the BoC Commissioner that a formal and full audit be conducted. This also holds in case of outright violations committed that are not the subject of the disclosure, but which have an adverse impact on government revenues.

APPLICATION OF TENDER OF PAYMENT

The BoC will accept tender of payment in all cases. This payment will be applied to the deficiencies in duties and taxes, including penalties, interest, fines, or surcharges as voluntarily disclosed, regardless of the approval or denial of the PDP application.

Importers who avail of the PDP may also want to request a waiver of penalties but CAO 1-2019 provides that any such request for a waiver of penalties, interest, fines, or surcharges, will be subject to the final approval of the Secretary of Finance.

THE PDP AS A WISER OPTION

The PDP should enable government to generate additional customs revenues with the least administrative cost to both parties.

Given the penalties that may be imposed during a customs audit, combined with the penalties for administrative and criminal offenses, we cannot overemphasize the importance of being prepared for a customs audit. It will be highly advantageous for importers to review and know their probable exposure and risk areas to a potential deficiency duty assessment. This will aid them in determining whether or not a PDP would be the road to take. In addition, importers who are aware of their exposure and risk areas, will be able to better implement corrective measures to strengthen their compliance with existing BoC rules and regulations.

So is the PDP the wiser option for an importer? It does seem that the PDP is still worth considering even as you compare this with the previous voluntary disclosure program of the BoC wherein no penalty and/or interest were imposed on voluntary disclosures. Given the resources involved in undergoing a full audit, the stiff penalties imposed, and other economic variables that affect business operations, availing of the PDP may eventually end up as a wise option and a smart business move.

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 authors and do not necessarily represent the views of SGV & Co.

Lucil Q. Vicerra is a Tax Principal for Indirect Tax Services — Global Trade & Customs at SGV & Co.