When shipments are “cleared” at the border after payment of duties and taxes, importers often assume that the Bureau of Customs (BoC) will simply move on without double-checking the shipment. This assumption is inaccurate. The BoC can actually conduct an audit of past transactions, similar to the function of the Bureau of Internal Revenue (BIR). This exercise is the Post-Clearance Audit (PCA). It usually covers the last three years of importations and the PCA is undertaken to check the correctness of importers’ goods declarations, and the accuracy of their tax payments.
The BoC recently issued Customs Administrative Order (CAO) No. 1-2019, which sets new rules in the conduct of PCAs effective Feb. 15. The CAO and its related topics have been written about in the three previous Suits the C-Suites columns. We will now focus on the following:
• What exactly will the BoC look for?
• What are the common issues that importers should anticipate?
• How should importers deal with the common issues in a PCA?
After an Audit Notification Letter is issued, the first order of business is for the importer to submit various importation documents identified in a checklist. The most common documents required are those that pertain to shipping, importation, and transport. These are the Single Administrative Documents (SAD) or the actual goods declarations, commercial invoices from foreign suppliers, supply agreements, import licenses and permits (for regulated imports), bills of lading or airway bills, packing lists, freight and insurance documentation, and Certificates of Origin (if lower duty rates under Free Trade Agreements or FTA were used). The BoC can also require other documents such as Audited Financial Statements, filed tax returns, and schedules of importations for the period covered by the audit. The auditors also have the authority to visit the company for verification purposes.
In this documentation exercise, the BoC will assess if the importer complies with the obligation to keep importation records. Lack of or incomplete documentation could lead to penalties, including a surcharge of 20% of the value of the goods for which no records are kept or maintained. To overcome this issue, importers should gather importation documents and ensure that they are complete before the PCA begins.
The significance of proper record keeping bears repeating, because the BoC will identify the core common issues in an import transaction on the basis of the documents you present to them.
When an importer declares the value of imported goods at the border, it does so based on its own assessment. Hence, it becomes necessary during a PCA for the BoC to evaluate if the importer’s assessment is correct and compliant with existing valuation methods.
Valuation involves a wide range of sub-issues. Here are some of the most common ones:
• Proper declaration of value, in general — For transactions between a related foreign supplier and importer, the BOC will inquire if the price of the goods is arms-length; meaning, it was not influenced by the relationship between the parties. Similarly, for transactions between unrelated parties, the BoC can question the value declared by the importer based on existing reference values available in the BoC database, or elsewhere.
• Accurate declaration of the cost-insurance-freight (CIF) — The BOC counterchecks if the CIF per invoice, insurance, and freight documentations tally with the CIF declared in the SADs, applying the specific rules on the proper declaration of such items.
• Existence of additional payments to suppliers — Additional payments made after importation can form part of the dutiable value of the imported goods. These include items such as transfer price adjustments, dutiable royalty payments or license fees, and proceeds of subsequent resale of imported goods.
• Proper declaration of all other components of the dutiable value of imported goods — The BoC can likewise check if the importer properly included all adjustments to the price of imported goods, such as dutiable commissions, packing costs and charges, assists, interests, and transport costs, among others.
CLASSIFICATION OF GOODS
In all importations, the importer should be able to properly ‘classify’ goods under the applicable 8-digit tariff code, or Harmonized System (HS) code. Each unique code has a corresponding duty rate that applies to goods classified under such code. In a PCA, the BOC will check if the importer captured the correct classification and used the applicable rate when it paid the duties.
In case of doubt in the applicable classification, the BoC may ask the importer to establish proof of proper classification, such as details of the imported goods and tariff classification rulings obtained in the past. For importers who make use of lower duty rates available under existing FTAs, the BoC can perform a more detailed assessment. This involves a validation of compliance with the origin rules under the FTAs, as well as the availability of the supporting document called the Certificate of Origin (CO). If they fail to refute questions on origin or present COs, the importers may end up losing the privilege of using the lower duty rates.
WHERE THE IMPORTER ENJOYS DUTY AND TAX INCENTIVES
There is a common misconception that importers who enjoy exemption from paying duties and taxes (such as economic or freeport zone locators, or even importers through a bonded warehouse) are relieved from customs audits. In fact, the BoC remains strict in its audits of special importers, to verify if there are any duty and tax leakages in their activities.
Some of the common issues specific to importers with incentives are:
• Actual entitlement to incentives — The BoC checks if importers have proof of entitlement to the incentives such as their Certificates of Registration and Registration Agreements. Normally, there is a determination if the importations are within the limits of the registered activity.
• Domestic sales — Goods imported into an ecozone, freeport zone, or bonded warehouse are normally destined for export. In the case of domestic sales, the BoC would like to see if duties and taxes were paid on such sales.
• Proper liquidation of raw materials — The BoC asks importers to completely account for the raw materials imported free from duties and taxes. Failure to do so can trigger a deficiency assessment.
• Availability of records — In relation to the record keeping requirements, the BoC checks if there is proper entry documentation, particularly import permits for ecozone locators.
OTHER RELEVANT ISSUES
The BoC also typically raises other issues, such as the proper computation of duties (components of dutiable value and forex conversion) and VAT (components of landed cost), payment of excise tax for certain articles, among others.
Upon looking at values declared per SAD, AFS, VAT returns, and other relevant schedules, the BoC also identifies discrepancies for possible reconciliation. The importer is then required to reconcile discrepancies which could be a lengthy exercise. For failure to fully reconcile, issues may be raised such as incompleteness of records, underpayment of taxes, and in extreme circumstances, allegation of smuggling.
Needless to say, there are many other issues that the BoC may raise, depending on the circumstances of each audit. Now that PCAs are well on their way, the most prudent action for importers is to perform a self-assessment for an early detection of potential issues. When importers are “audit ready,” they will be able to better remedy or mitigate any consequences before a PCA commences.
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.
Victor C. De Dios and Josephine Grace R. Sandoval are Tax Principal for Indirect Tax (Customs and Global Trade) and Tax Manager, respectively, at SGV & Co.