Are you ready for a customs audit?

It has been more than a year since Executive Order (EO) No. 46 was issued which revived the post clearance audit (PCA) function of the Bureau of Customs (BoC). Finally, the implementing rules necessary for the BoC to resume audits have now been issued.
The BoC and the Department of Finance issued Customs Administrative Order (CAO) No. 01-2019. The CAO covers the conduct of the PCA and the implementation of the Prior Disclosure Program (PDP). News and details concerning the CAO were published on Jan. 16. The EO takes effect 30 days from the publication of the CAO which means it will start on Feb. 15.
The BoC Post Clearance Audit Group (PCAG) will be responsible for the PCA function.
It is important to note that the time given to respond to any demand letters, as well as to submit any additional documents, is very tight. There may not be sufficient time to completely and satisfactorily address significant audit findings. Having said that, importers are encouraged to closely monitor the receipt of the Audit Notification Letter (ANL) from the PCAG and ensure audit readiness.
The salient features of the CAO regarding the conduct of the PCA are as follows:

• Period to conduct PCA — In the absence of fraud, the BoC has three years from the date of final payment of duties and taxes or Customs Clearance to conduct a PCA and determine any deficiency duties, taxes, and other charges, including any fine or penalty, for which an importer may be liable.

• Selection criteria — Importers that will be subjected to a PCA will be selected based on any of, but not limited, to the following criteria:

– Relative magnitude of customs revenue to be generated from the firm;

– The rates of duties of the firm’s imports;

– The compliance track records of the firm;

– An assessment of the risk to revenue of the firm’s import activities;

– The compliance level of a trade sector; and

– Non-renewal of an Importer’s customs accreditation.

• PCA process — The PCA will be conducted through the following process:

• Profiling/Information Analysis — Risk profiling and analysis on the importers will be performed in order to identify importers who are to be subjected to a PCA;

• Issuance of the ANL — The letter containing the names of the authorized personnel to perform the audit will be issued by the BOC Commissioner. The ANL will be valid for 30 calendar days, subject to revalidation for another 30 days. This will be personally served to the importer via registered mail or through electronic notice.

• Preparation of the audit plan by PCAG

• Conduct of audit proper — The audit will start within 60 calendar days and should be completed within 120 days (per year of audit) from the date that the ANL is served. This may be deferred if the importer manifests an intention to avail of the PDP. Upon completion of the audit, the team will issue either a Final Audit Report (FAR) with a demand letter if there are findings of deficiency duties, taxes and other charges; or a Clean Report of Findings (CRF) if there are no findings, which shall be endorsed by the Assistant Commissioner, and approved and signed by the Commissioner;

• Service of demand letter for payment of deficiency — If the audit will result in findings of deficiency duties, taxes, and other charges, the demand letter will be served personally to the importer through registered mail or electronic notice. The importer will have to pay within 15 days from the receipt of the demand letter;

• The BoC will issue an acknowledgement letter stating that the audit is completed if the importer opts to pay the amount per the demand letter;

– The following remedies are available to importers who opt to contest the audit findings:

• Importer may file a request for reconsideration or reinvestigation with the Commissioner within 15 days from receipt of the demand letter. When requesting for reinvestigation, the importer has 30 days from the submission of the request to provide all relevant supporting documents.

• If the Commissioner denies a request for reconsideration or reinvestigation, the importer may appeal to the Court of Tax Appeals within 30 days from the receipt of the denial.

• Applicable penalties for failure to pay correct duties and taxes on imported goods determined through the conduct of PCA — Importers shall be penalized according to two degrees of culpability, subject to any available mitigating, aggravating or other extraordinary factors:

– Negligence — 125% of the revenue loss

Additionally, in case of inadvertent error amounting to simple negligence, a penalty of 25% will be applicable.

– Fraud — 600% of the revenue loss and/or imprisonment of not less than two years, but not more than eight years.

• Interest on deficiency duties, taxes and other charges plus fine & penalty — An interest of 20% per annum, counted from the date of final assessment, will be imposed on:

– PDP availment;

– Deficiency duties, taxes and other charges;

– Fine or penalty, if any.

Because of the short periods of time involved (i.e., 15 days from receipt of the demand letter to contest the deficiency assessment and 30 days to submit all supporting documents from filing of request for reinvestigation), early preparation for an audit is crucial. An importer needs to be “audit ready.” This can be done through self-assessment, or by conducting an internal review or a customs compliance review.
At this moment, importers should evaluate their importation practices and procedures to determine compliance with customs laws, rules, and regulations. Additionally, importers should identify risk areas and potential exposures so that these may be legally corrected prior to and/or during the customs audit. More importantly, importers should consider PDP, if practicable, to reduce the stiff penalties.
PDP refers to the program that authorizes the BoC Commissioner to accept prior disclosure of errors and omissions in goods declaration resulting in payment of deficiency duties and taxes. The PDP will be discussed in more detail in next week’s column.
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.