Taxwise Or Otherwise

THE Association of the Southeast Asian Nations (ASEAN) celebrated a milestone on Aug. 8 with its 50th anniversary, with the Philippines as the chairman and host of the celebration.

ASEAN was established to accelerate economic growth, social progress and cultural development and cooperation among Southeast Asian nations, among others. Currently, its 10 member countries are Thailand, Indonesia, Singapore, Malaysia, Brunei Darussalam, Cambodia, Lao People’s Democratic Republic, Myanmar, Vietnam and the Philippines.

One of the goals of ASEAN is to expand the trading opportunities of its member states. However, importation can be costly for some registered importers in the region if the goods or articles sought for import are charged high duties. As a means to expand and enhance trade, several Free Trade Agreements (FTA) granting preferential tariff rates were signed to give importers of member states the opportunity to reduce their import costs.

In general, all articles imported from any foreign country into the Philippines shall be subject to duty and value added tax (VAT) upon importation, computed based on two factors: (1) the dutiable value of the imported goods; and (2) classification of the imported goods.

For the dutiable value of the imported goods, the Bureau of Customs (BoC) primarily uses the “transaction value” or the price agreed upon by the seller and the buyer as reflected in the commercial documents, with certain additions or adjustments as provided under the Tariff and Customs Code of the Philippines (TCCP), now known as the Customs Modernization and Tariff Act (CMTA). Once the dutiable value is determined, the applicable customs duty rate will be applied to that value to arrive at the duties payable. Under the ASEAN Harmonized Tariff Nomenclature found under Section 1611 of the CMTA (previously Section 104 of the TCCP), the applicable duty rates may range from 0% to 40% depending on the classification of each good. The customs duties computed will form part of the landed cost of the imported good on which the 12% VAT will be imposed.

While certain duty reductions and/or exemptions are extended to Philippine importers who are registered with investment promotion agencies such as the Philippine Economic Zone Authority and the Board of Investments, many Philippine importers fail to take advantage of other available duty-saving mechanisms such as the FTA preferential tariff rates simply because they are unaware that these concessions exist.

The Philippines is a signatory to the ASEAN Trade in Goods Agreement (previously referred to as the ASEAN Free Trade Area Common Effective Preferential Tariff Scheme) along with the other ASEAN member states. In addition, as part of the ASEAN, the Philippines has existing FTAs with China (ASEAN-China), South Korea (ASEAN-Korea), Japan (ASEAN-Japan Comprehensive Economic Partnership), Australia and New Zealand (ASEAN-Australia and New Zealand), and India (ASEAN-India). It is interesting to note that as of June 2017, total imports of the Philippines hit $7.06 billion and a large percentage of these were sourced from China, Japan, South Korea and Thailand — countries with which the Philippines has existing FTAs.

To avail of the preferential tariff treatment under these existing FTAs, the imported goods must comply with the conditions set forth under the Rules of Origin (ROO) of each FTA. ROOs are a set of criteria used to determine the country where the goods originated in international trade. It is crucial as it serves to prevent non-members of a free-trade area from taking advantage of the preferential tariff rates granted by/to individual member countries. In the simplest terms, the ROO will determine the eligibility of a product to receive concessions or a preferential tariff treatment by establishing that the goods actually originated from an FTA member state.

In general, imported goods are either wholly obtained or produced from the FTA member state or have undergone substantial transformation. Substantial transformation of goods/products may be determined on the basis of any value added, or change in tariff classification or process rule. Different standards are provided under the ROO across the different FTAs in terms of the labor input/component of manufactured goods. Generally, however, existing ROO of the FTAs of the Philippines provide that if goods underwent substantial transformation, such goods manufactured from the exporting country are considered originating from that country if at least 40% free-on-board value of its content (i.e., materials, parts, components) originated from that FTA member state.

The challenge is that in today’s global economy, manufacturers generally source the raw materials and components of their articles/goods from around the world. Thus, it may be difficult to determine the product’s country of origin for purposes of availing of the preferential tariff treatment. As such, a claim for lower duty rates under existing FTAs must be duly substantiated by a corresponding Certificate of Origin (CO) issued by the counterpart Customs Authority of the exporting country. From a Philippine importer’s point of view, the CO should be requested from the exporting company and must accompany the imports upon shipment.

As with any regular importation, the BoC has three years from the date of payment of the final duties and taxes to conduct an audit. Since the importation records are considered the best evidence to prove the nature and value of the importer’s customs transactions, importers availing of preferential tariff treatments should keep a copy of their COs in addition to other importation records required to be retained under the CMTA. Failure to keep these could result in possible customs duties and VAT deficiencies as well as penalties for non-compliance under the Post Clearance Audit procedures of the BoC (as discussed in my article “Revisiting Customs Compliance: Changes in Post-entry Audit” dated July 7, 2016 under this same column).

Companies sourcing goods from ASEAN countries should start revisiting benefits available under the existing FTAs to identify which duty-saving scheme may improve their competitive advantage. In doing so, they will also help ASEAN achieve its objective of collaborating more effectively for greater trade expansion within the region.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.

Toni Rose L. Capistrano-Flojo is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network. Readers may call +63 (2) 845-2728 local 2136 or e-mail the author at for questions or feedback.