Changes under the Customs Modernization and Tariff Act: An Overview

SUITS THE C-SUITE By Mark Anthony P. Tamayo

Business World (06/20/2016 – p.S1/4)

(Third of 5 parts)

In last week’s article, we discussed some of the changes introduced under the new Customs Modernization and Tariff Act (CMTA), particularly the new threshold value of those considered as small value importations, the rules on relief consignments, and personal and household effects (including appliances and durables) brought in by returning residents and Overseas Filipino Workers (OFWs).

In addition to the above, the CMTA also provides the following changes:


The CMTA upholds the hierarchical application of the six methods of valuation of imported goods, with Method 1 or the Transaction Value (TV) of the imported goods being the primary method. The TV is basically the “price paid or payable” for the goods when sold for export to the Philippines, subject to certain adjustments such as selling commissions and brokerage fees, cost of containers, cost of packing, assists, royalties and license fees, cost of transport and insurance, among others.

Under the rules, one of the limitations on the application of the TV method is that, in cases of a related party transaction, the price between the importer and its related foreign supplier should not be influenced by such a relationship. The CMTA states that in order to prove the absence of such influence, the importer must be able to demonstrate that the declared value closely approximates one of the following “test values” occurring at or about the same time:

· The TV in sales to unrelated buyers of identical or similar goods for export to the same country of importation;
· The customs value of identical or similar goods as determined using the Deductive Value Method; and
· The customs value of identical or similar goods as determined using the Computed Value Method.

Aside from the application of test values, the WTO agreement also recognizes the “circumstances of sale analysis” as a remedy in proving the absence of such influence. This remedy, which is likewise embodied under Customs Administrative Order (CAO) No. 4-2004 and Customs Memorandum Order (CMO) No. 16-2010, involves showing the arm’s length nature of the transaction by proving that the price was:

· Settled in accordance with normal pricing practices of the industry;
· Settled in a manner consistent with sales to unrelated buyers;
· Adequate to ensure recovery of all costs plus a profit equivalent to the firm’s overall profit realized over a representative period of time in sales of goods of the same class or kind.

Failure to establish either of the above proofs may result in the declared TV to be rejected for purposes of customs appraisement and the price will be determined using other methods of valuation in their sequential order.


The CMTA has increased the surcharge penalty for misdeclaration, misclassification and undervaluation of imported goods.

There is misdeclaration when the discrepancy pertains to quantity, quality, description, weight, or measurement of the imported goods.

Misclassification, on the other hand, exists when insufficient or wrong description of the goods or use of wrong tariff heading was declared resulting in a discrepancy.

Undervaluation is present when:

· The declared value fails to disclose in full the price actually paid or payable or any dutiable adjustment to the price; or
· When an incorrect valuation method is used; or
· The valuation rules are not properly observed.

Any misdeclaration, misclassification or undervaluation of imported goods resulting in a discrepancy (in duty and tax to be paid) between what is legally determined upon assessment and what is declared will be subject to a fixed surcharge rate of 250% of the duty and tax due (previously, 100% to 200% of the duty due).

Surcharge, however, will not be imposed when:

· The discrepancy in duty is less than 10%; or
· The importer’s declared value and/or tariff heading/classification:
· Relied on an official government ruling; or
· Is rejected in a formal customs dispute settlement process involving difficult or highly technical questions relating to the application of customs valuation rules and/or tariff classifications.

If the misdeclaration, misclassification or undervaluation is intentional or fraudulent (such as when a false or altered document is submitted or when false statements or information are knowingly made), a 500% surcharge (of the duty and tax due) will be imposed on the importer and to those who willfully participated in the fraudulent act. The imported goods will be subject to seizure regardless of the amount of the discrepancy.

The CMTA likewise adopts the previous rule under the TCCP, as amended, on the existence of a prima facie evidence of fraud if the discrepancy (in duty and tax to be paid) amounts to more than 30%.


The CMTA provides stiffer penalties for smuggling (which can either be outright or technical) which has been defined as the fraudulent act of importing any goods into the Philippines, or the act of assisting in receiving, concealing, buying, selling, disposing or transporting such goods, with full knowledge that the same has been fraudulently imported. It likewise includes the exportation of goods in any manner contrary to law.

Outright smuggling refers to the act of importing goods into the country without complete customs-prescribed importation documents, or without being cleared by customs or other regulatory government agencies. In this case, imported goods are not registered at all with the BoC or other government agencies.

Technical smuggling, on the other hand, refers to the act of importing goods into the country by means of a fraudulent, falsified or erroneous declaration of the goods as to its nature, kind, quality, quantity or weight. In other words, technical smuggling takes place through undervaluation, misclassification or underdeclaration of the goods shipped.

The difference between outright smuggling and technical smuggling lies in the use or non-use of legal trade channels when bringing the goods into the country. Outright smuggling bypasses the usual and normal procedure and process of clearing the cargo at the BoC, while technical smuggling involves fraudulent acts during the processing and releasing of the goods. In both instances, however, the ultimate objective is to evade the payment of the prescribed taxes, duties and other charges.

The penalty is imprisonment or a fine which ranges from Php 25,000 to Php 50,0000,000 depending on the value (up to Php 200,000,000) of the goods unlawfully imported, including duties and taxes. If the value (or aggregate value) exceeds Php 200,000,000, the same shall be deemed as a heinous crime punishable with a penalty of reclusion perpetua (imprisonment of 20 years and 1 day to 40 years) and a fine of not less than Php 50,000,000.

Each act of unlawful importation or exportation shall be deemed a separate offense.

In the fourth part of this article, we will discuss other changes introduced under the CMTA, particularly the new rules relating to abandonment, period of storage in a Customs Bonded Warehouse, advance customs rulings, post clearance audit, record keeping requirements and penalties.

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 necessary represent the views of SGV & Co.

Mark Anthony P. Tamayo is a Partner of SGV & Co. and currently the Indirect Tax Country Leader and Head of the Global Trade & Customs practice of the firm.