Every business aims to minimize disruption in its operations. For importers, effective and efficient supply chain management is vital to ensuring business performance targets are achieved. These enterprises heavily rely on the smooth and free flow of imported goods for use in their operations, be they for manufacturing or retail. As such, any risk of a freeze in movement or seizure of goods which may arise from the Bureau of Customs’ (BoC) exercise of police authority is potentially troublesome.

Early this year, the Department of Finance and Bureau of Customs (BoC) issued the implementing rules and regulations governing the post-clearance audit of importers. Under the rules, the BoC is duly authorized to conduct an audit of past import transactions going back three years to determine whether customs duties and taxes on imported goods have been properly paid, and to assess and/or collect deficiencies and penalties, if warranted.

In the wake of the promulgation of the Customs Modernization and Tariff Act (CMTA), the BoC’s powers to enforce customs laws and prevent smuggling are given more teeth through the issuance of Customs Administrative Order (CAO) No. 03-2019 governing customs jurisdiction and police authority. The BoC may exercise its police authority through seizure, require assistance and information from National Law Enforcement Agencies, enter properties, vessel or aircraft searches (including persons or goods conveyed therein), searches of persons arriving from overseas, and controlled delivery investigations. Among other ways and methods, the BoC can exercise its police authority through inspection and visits. This is a new power introduced by the CMTA following the repeal of the Tariff and Customs Code of the Philippines.

In a nutshell, the power to inspect and visit authorizes the BoC to demand evidence of payment of duties and taxes on imported goods openly offered for sale or kept in storage. For reasons of security, safety, and economy, the BoC may constitute the premises where the goods are at as a special customs area for the duration of the exercise of the power. During this period, the goods are deemed, for all intents and purposes, in customs custody; the owner of the goods will be unable to remove, sell, or dispose of such goods.

Failure to present or produce evidence of payment of duties and taxes within a period of 15 days may immediately result in seizure and forfeiture. Hence, it is critical for importers to immediately present proof of payment of duties and taxes (i.e., the BoC Official Receipt or the Statement of Settlement of Duties and Taxes); otherwise, the BoC may issue a Warrant of Seizure and Distraint.

The process of retrieving and producing proof of payment of duties and taxes within the prescribed period of 15 days may be relatively simple and easy if the imported goods are few. However, this process may be particularly challenging if the warehouse or site subjected to the BoC’s inspection stores significant volumes.

To exercise the power to inspect and visit, the BoC must be equipped with a Letter of Authority, which is a special authorization exclusively issued by the Commissioner of Customs. It is different from the BIR’s Letter of Authority, which authorizes it to conduct an examination of the taxpayers’ books of account and other accounting records for internal revenue taxes generally covering a period of one calendar or fiscal year, whichever may be applicable. It is also different from the BoC’s Audit Notification Letter which allows the BoC to conduct an audit of importations over the past three years, as mentioned.

Based on the regulations, customs authorities are being given wider discretion to exercise police authority. Mere suspicion of violation or reasonable cause based on profiling or derogatory information received may trigger the exercise of police authority, and there may be no apparent process to validate the causes triggering such exercise. Hence, on the part of businesses, awareness as to the extent of the BoC’s police authority is necessary to ensure that the exercise is impartial and in accordance with the law, as well as commonly accepted ethical practices.

Importers must be familiar with the rules to ensure their rights are properly protected. Once subjected to the BoC’s exercise of police authority, importers should be keen and vigilant to check whether the BoC has the proper authorization and is acting strictly within the bounds of its authority. The prescribed formalities should also be observed, such as the propriety of the signatory, and existence of a valid customs seal, among others. Failure to comply with the requirements and formalities may be explored as basis to question the BoC’s exercise of police authority.

Business owners and company leaders should therefore have a deeper awareness of their supply chain, procurement or import-export teams which may fall under the scrutiny of the BoC’s police authority. They should be trained to identify and flag such matters as urgent concerns, and at the minimum, be able to deliver timely responses and perform standard procedures, which, in the past, were often matters handled purely by counsel or legal teams.

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.

Alden Patrick C. Labaguis is a Tax Senior Director of SGV & Co.