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CAO 4: New Rules
on Customs Valuation, Audit and Record Keeping
As we have mentioned time and again, the rules at
the customs border have rapidly changed and the same
continues to evolve. To implement these changes, the
Bureau of Customs normally issues customs memorandum
orders or circulars containing the new rules and procedures.
Just very recently, customs issued Customs Administrative
Order 4-2004.
Background of CAO 4-2004. RA 9135 was first passed
in June 2001 and as a result, customs issued CAO 5-2001
to implement the same. In general, RA 9135 amended
provisions of the Tariff and Customs Code of the Philippines
(TCCP). Specifically, the law aligned the customs
valuation rules with the WTO Valuation Agreement and
provided the Post Entry Audit (PEA) system. The Philippines
first implemented the new valuation rules in January
2000. In June of this year, the customs PEA Group
finally issued audit notices to various importers.
With the ongoing audits of numerous companies, both
domestic and multinational, numerous implementation
issues were raised against RA 9135 and its implementing
rules. For one, issues were raised on how the valuation
rules were being implemented at the border. In relation
to the ongoing audits, the auditees questioned the
manner by which companies were selected and how the
audits were being conducted. Questions were also raised
on the basis of the computer-based risk management
system for audit selection.
Lifting of the Moratorium on Customs Audit. About
two months ago and as a result of various complaints
including pressure from industry associations, the
Finance Department issued a moratorium on the conduct
of the customs audit. Part of the order was the review
of existing policies, rules and guidelines of the
PEA system towards enhancing and making the same more
transparent and predictable for the trading community.
As a result of such review, customs has now issued
CAO 4-2004 dated November 8, 2004. Together with the
issuance is the reported lifting by the Finance Department
on the moratorium on ongoing customs audits.
Major Changes in the Rules. Among the many changes
provided in CAO 4-2004 are as follows:
a) Annual Registration of Importers now
includes undertaking to keep records and allow the
conduct of customs audit;
b) Payment of duties on adjustments (e.g. Assist,
Royalty and License Fees, Proceeds from Resale)
to the declared price within 45 days from such payment/remittance;
c) Copies of Import Entries automatically
provided to PEA Group; and
d) Streamlining of procedures for customs
conduct of the audit including the provision for
an audit manual.
In addition, several changes were made on existing
rules relating to the various methods of customs valuation,
the specific records to be kept, the operating procedures
for valuing imported articles, the issuance of audit
notices and the provision for penalties.
What to Expect. Given the above, what should the
trading community expect from these new rules or from
customs authorities? Importers should see tighter
implementation of the valuation rules at the border.
Declarations provided in the Supplemental Declaration
of Value (SDV) should be under scrutiny. Assessment
Notices may be issued on undervalued imported articles
as well as on duty exposures for adjustments (e.g.
royalty, license fee, management fee, assists, proceed
from resale, year end adjustments) to be made on the
declared price to customs. For some companies, audit
notices will likely be issued to cover importations
for the last 3 years or so. For those subject to audit
already, the audit will simply resume.
Next Steps for Importers. How should importers, both
auditees and those at high risk of audit, prepare
for these changes? First, importers should verify
the accuracy and completeness of what is being declared
in both the Import Entry and the SDV. Importers should
ensure that all duty payments are made through customs-authorized
banks. In light of the newly implemented classification
rules (i.e., AHTN), importers should review how goods
are being classified by customs brokers as against
what is being declared by suppliers in the export
documents.
With regard to the dutiability of the adjustments
to the declared price, companies should conduct a
thorough study for possible exposures, taking into
consideration the various expert opinions on valuation
rules as well as rulings and case studies from the
WTO and the more developed countries like the US and
the EU.
This is important considering that duties on those
adjustment are now required to be paid to customs
within 45 days from the time those adjustments were
incurred by the importer. To illustrate, a company
will have to pay taxes and duties on "dutiable"
royalty and license fees within 45 days from the time
the same are remitted to an overseas supplier or affiliate.
Customs Compliance and Risk Assessment. Of course,
an international best practice is the conduct of an
internal Customs Risk and Compliance Assessment -
a diagnostic and risk-management tool to assess and
verify the compliance level and specific risk areas
in the trading (export/import) operations of a company.
The assessment should mimic how customs will conduct
the audit and should identify financial exposures
including possible duty-saving opportunities.
For companies that have already conducted their internal
assessments, one clear benefit is that they now possess
a reasonable assurance and comfort level that they
are "audit ready" and that they do not have
skeletons in their closet or if they had, that measures
have been prepared to legitimately address the same.
The author is an international trade and customs
consultant, and a licensed customs broker. He is also
a regular lecturer on logistics, customs and international
commerce. Please contact aouvero@dlugms.com
or (632) 4050021 / 29 for your comments.
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BIR Audit of VAT
on Importations
SINCE the middle of last year, the Bureau of Internal
Revenue (BIR) has been issuing letter notices to numerous
importers for VAT discrepan-cies based on the import
records furnished by the Bureau of Customs (BoC) to
BIR. In addition, numerous customs brokers, freight
forwarders and shipping lines have also been issued
said notices since last year.
For many companies, the letter notice for VAT assessment
is issued in addition to the regular BIR audit of
its financial records. For some, the letter notice
is in addition to ongoing audits from BIR and BoC
(under the post entry audit system).
BIR Assessment of VAT, interests and penalties.
A letter notice normally would provide the following
data based on a computerized matching of the BoC data
against BIR VAT returns:
1) Importation per BoC Data
2) Importation per VAT returns filed
3) Discrepancy in imported purchases
4) Percentage (%) of Discrepancy
Upon receipt of the letter notice, an importer is
given the opportunity to contest the findings and
submit evidence to disprove the same. If the importer
agrees with the findings, it will have to pay the
deficiency VAT on the importations plus the corresponding
interests and penalties within 15 days from receipt
of the letter.
Considering that VAT is computed differently in case
of imports, we have concerns as to how BIR will compute
the VAT discrepancy. For importations, the VAT is
normally computed against the landed cost, which is
based on a formula roughly equivalent to the sum of
the FOB value plus freight, insurance, duties and
other costs. Considering that duties are likewise
subject to VAT, the implication is that the input
VAT is really more than 10% of the transaction involved.
Risks to CBW operators, Indentors and Freight Forwarders.
For some companies, a concern is the fact that importations
are being made under its name and account even if
these are really for the benefit or use of another
company. In the case of CBW operators, it may be that
the operator is the importer-of-record even if the
ultimate user or beneficial owner is really a PEZA-located
or a BOI-registered company, which is not subject
to VAT. Some companies likewise allow itself to be
the importer-of-record even if it is merely an indentor
and the real buyer is another company located in the
Philippines. Some freight forwarders also allow themselves
to be importers-of-record as part of their integrated
services provided to global clients.
A major issue in such cases is that BIR normally
treats the importer-of-record as the owner of the
imported goods and as such, are required to submit
VAT returns covering such import sales. Obviously,
these companies do not declare those importations
in their VAT returns. However, these practices are
now the subject of numerous letter notices by the
BIR for discrepancies on their imported purchases
which accordingly should be subject to VAT and should
be part of inventory costs for income tax purposes.
Tax Treatment of DDP shipments. A quite difficult
situation likewise applies in case of shipments on
Delivered Duty Paid (DDP) Terms of Trade. Under DDP,
the supplier is responsible for the payment of taxes
and duties at the country of importation. In practice,
the freight forwarder advances the taxes and duties
in behalf of the supplier. However, while the import
taxes and duties are paid for by the supplier, such
payments are recorded by the Automated Customs Operating
System (ACOS) as payment made by the importer. Thus,
as indicated in the records of customs, such transactions
are for the account of the importer-of-record and
in which case, such transactions should be made part
of the VAT returns submitted to customs.
Considering that the payment is provided by the
supplier through the freight forwarder, some companies
do not record the VAT payment on the imported goods
as their own payment and consequently, does not include
such payment in the VAT return submitted to BIR. Obviously,
this has reportorial and tax implications for the
company/ importer-of-record.
What to Do. As a general rule, BIR will treat the
import transactions recorded by the computer records
of customs as transactions made under the name and
account of the importer-of-record and as such, the
importer must declare those transactions in its VAT
returns submitted to BIR periodically. Thus, when
BIR does computerized matching of the VAT returns
of the importer against import records provided by
customs, it will surely go after the importer in case
of discrepancy in the records of both customs and
BIR.
What happens now for those importing for and in
behalf of another party (e.g. CBWs freight forwarders,
indentors)? Are they required to file VAT returns
covering such importations? In case of goods released
on DDP Terms of Trade, is the importer likewise obliged
to include the VAT payment on those importations in
its VAT returns submitted to BIR?
For those uniquely situated (e.g. CBW operations,
DDP shipments), it will be to the best interest of
these companies to take proactive steps by way of
tax (duty and VAT) planning and risk assessment of
such logistics and trading practices. That way, these
companies are ready when faced with letter notices
issued by BIR for VAT discrepancies. Failing that,
companies ran the risk of being subject to additional
taxes plus interests and penalties for importations
actually made for and in behalf of another company.
The author is an international trade and customs
lawyer, and a licensed customs broker. He is also
a regular lecturer on inbound logistics, customs and
international commerce. Please contact aouvero@dlugms.com
or (632) 4050021 / 29 for your comments.
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ISPM 15: New Import/Export
Rules for Wood Packing
In addition to security measures being required
in international trade, a new issue for the trading
community is the growing complication of sanitary
and phytosanitary (SPS) measures being implemented
by member countries of the WTO. Specifically, a new
concern for the logistics and trading community is
the recent implementation of ISPM 15 by 14 countries
and EU, resulting in difficulties to exporters due
to varying implementing rules and regulations in each
country.
In the Philippines, the Department of Agriculture
(DA) has announced the partial implementation of ISPM
15 starting January 1, 2005 and its full implementation
by June 1, 2005. Specifically, the Philippines will
be requiring by January next year that all wood packing
and dunnage be treated (marking not yet required until
end of May 2005) for timber pests. The question is
whether the Philippine export industry is ready with
ISPM 15 systems being implemented by trading countries.
Similarly, are local importers fully aware of the
new requirements to be implemented next year?
Sanitary and Phytosanitary Measures (SPS). SPS is
the general term used by the global trading community
to refer to standards required for food safety and
plant and animal health. Part of the agreements under
the WTO is the Agreement on Sanitary and Phytosanitary
measures to be applied by member countries on traded
goods. Under the SPS Agreement, countries are allowed
to used SPS measures based on international standards,
guidelines and recommendations, to the extent necessary
to protect human, animal and plant life or health.
The measures should be based on science and must not
be arbitrary and discriminatory. In general, the measures
must not become obstacles to trade.
What is ISPM 15? "International Standards for
Phytosanitary Measures Publication No. 15: Guidelines
for Regulating Wood Packaging Material in International
Trade" (ISPM 15) was developed to address the
global spread of timber pests by regulating the movement
of timber packing and dunnage in international trade.
To illustrate on the negative impact of these pests
(e.g. Asian long-horn beetle), avenues of trees in
cities of Chicago and New York had to be felled to
control the spread of these pests. The pests have
not yet been eradicated and trees are still being
felled in those cities.
ISPM 15 describes phytosanitary measures to reduce
the risk of introduction and/or spread of quarantine
pests associated with solid timber packing material
(dunnage included). The United Nations Food &
Agriculture Organization (FAO) addresses plant quarantine
through the International Plant Protection Convention
(IPPC). The IPPC is an international treaty administered
by the FAO and implemented through the cooperation
of member governments. As for all other ISPMs, the
Secretariat to the IPPC coordinated the development
and preparation of ISPM 15 over a period of time through
an agreed and defined process of draft development
and country consultation. ISPMs are recognized as
the basis for phytosanitary measures applied by members
of the WTO under the SPS Agreement.
How is ISPM 15 in Practice? In practice all wood
packaging (pallets, crates, boxes etc.) made from
unprocessed raw wood and used in supporting, protecting
or carrying a commodity, must be heat treated or fumigated
in a specified manner and the packaging must be stamped
on at least two sides with the officially approved
mark verifying the treatment and incorporating the
registration number of the producer of the packaging.
Wood packaging refers to timber packing and dunnage
used as follows: (a) packing used to support, protect
or carry a commodity; (b) Dunnage used to secure or
support a commodity but does not remain associated
with the commodity; (c) packing includes dunnage,
pallets, crating, packing blocks, drums, cases, load
boards, pallet collars and skids; and (d) Packing
constructed of any number of materials including timber
(or wood).
ISPM 15 will not apply to packing material made
exclusively from manufactured processed wood products
such as plywood, chipboard, fiberboard, oriented-strand
board (OSB) and medium density fiberboard (MDF). These
are products that are a composite of wood constructed
using glue, heat and pressure, or any combination
thereof.
ISPM 15 Mark or Stamp. In order to indicate that
wood packaging has been subjected to an approved measure,
the packing and dunnage must bear the stamp or mark
below:
An ISPM 15 compliant stamp must include: (a) The International
Plant Protection Convention (IPPC) symbol; (b) The
ISO two letter country code "XX" (followed
by a unique number "000" assigned by the
National Plant Protection Organization (NPPO) to the
producer of the timber packing. "YY" indicates
the ISPM 15 approved treatment applied to the timber
packing material or dunnage.
Preparing for ISPM 15. Considering that many countries
have now implemented ISPM 15 under varying implementing
regulations and with many more to implement the measures
in the next 2 years, the trading and transport community
must be well aware of the increased costs for the
treatment of packaging materials and must ensure compliance
with the different national measures being imple-mented
in those countries, the Philippines included.
The author is an international trade and customs
lawyer, and a licensed customs broker. He is also
a lecturer on customs and international commerce.
Please contact aouvero@dlugms.com or (632) 4050021
/ 29 for your comments.
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Managing Your Customs
Issues (3)
Our first article for this series discussed the
various customs administrative procedures applicable
in (a) abandonment proceedings, (b) valuation and
classification disputes, and (c) protest and payment
under protest. A succeeding article touched on the
procedures for filing the protest as well as other
administrative remedies (e.g. seizures and forfeiture
proceedings, Alert Order, Hold Order and Warrant of
Seizure and Detention). This last article on this
series will focus on the procedures in WSD cases and
appeal procedures under the Post Entry Audit system.
Procedures in WSD Cases. As previously written,
a WSD is issued by the District Collector upon determination
of probable cause of violation of customs laws, rules
and procedures. Subject to the approval of the Commissioner
and except when there is prima facie evidence of fraud,
an importer may generally secure the release of the
seized goods upon posting of a cash bond.
In the alternative and subject to the same conditions
for posting a cash bond, an importer may settle the
case by payment of fine while the case is pending
or in case of forfeiture, by redemption of forfeited
property. As provided in Section 2307, TCCP, the fine
shall be determined by the District Collector which
shall be from 20% to 80% of the landed cost. In case
of redemption, the redemption price shall be based
on the domestic market value. An issue for many importers
is that under CAO 4-94, the fine has been pegged at
60%. In practice however, the discretion to decide
the amount of fine remains with the District Collector
subject to the approval of the Customs Commissioner.
As provided in the rules, the formal hearing for
seizure proceedings shall be scheduled within 15 days
from the issuance of the WSD. Thereafter, the importer
is given a written notice and opportunity to defend
itself. The District Collector shall render the decision
within 30 days from the termination of the hearing.
Appeal Procedure in WSD cases. In case the decision
of the District Collector is unfavorable, the importer
may file a written Notice of Appeal to the District
Collector, copy furnished the Commissioner, within
15 days from receipt of the decision. The case shall
then be endorsed to the Commissioner for review. In
case the Commissioner decides favorably for the importer,
the case shall be subject to automatic review by the
Secretary of Finance. In case the Commissioner affirms
the adverse decision of the District Collector, the
decision will be final and the importer may file a
Petition for Review with the Court of Tax Appeals
(CTA).
When a case is decided in favor of an importer,
the decision shall be subject to automatic review
by the Commissioner. If the decision of the District
Collector is affirmed by the Commissioner, the importer
may proceed to file a Petition for Review with the
CTA.
Appeal in Post Entry Audit (PEA) Cases. The appeal
process provided in CMO 1-2002 refers to instances
where the importer/customs broker questions the adverse
findings in the Final Audit Report and Recommendation
(FARR) in case of a Post Entry Audit (PEA). CMO 1-2002
generally provides for the procedure for determining
the administrative liability and imposition of fines
as recommended in the FARR after the conduct of a
customs compliance audit.
In case of adverse findings after the conduct of
the audit, the PEA Group shall file the necessary
administrative complaint before the Commissioner.
The complaint shall then be forwarded to the Legal
Service for hearing and decision. During the hearing,
the importer shall be given written notice and shall
be allowed to defend itself against the allegation
in the complaint. Instead of formal hearings, the
importer may opt to just submit memoranda and other
written documents and after which, the case may be
submitted for resolution. Once a resolution is made
by the Legal Service and approved by the Commissioner,
the importer may file a Petition for Review with the
CTA within 30 days from receipt of the decision in
case of adverse findings.
Effective Management of Customs Issues. During the
numerous occasions that we have handled customs administrative
cases, we have been able to observe a common thread
in all the cases. Among these observations are as
follows:
a) Importers are generally not aware of
the implications of what is being declared to customs.
That being the case, importers tends to be haphazard
with their import documentation.
b) Customs broker staff are generally not
prepared to handle highly technical customs issues.
A lot of times, cases arose due to the misreading
of the gravity or complexity of the issues involving
a particular shipment. On many occasions, we have
seen how this lack of technical competence resulted
in the seizure of the shipment.
c) Administrative cases are costly and can
takes years before they are resolved. For example,
WSD cases normally take at least 3 months before
resolution. Abandonment cases can be resolved in
a shorter period. VCRC cases take at least 3 months
on average. Refund cases and payments under protest
should take at least 6 months before resolution.
Some refund cases, the ones endorsed to the Budget
Department, can take years.
By and large, customs issues can result in administrative
cases against the shipment and the importer. If not
properly managed, this can further result in the seizure
of goods and the filing of an administrative and/or
criminal complaint against the importer. Being knowledgeable
in customs rules should therefore minimize the risks
involved in importations and consequently, prevent
unnecessary costs and expense.
The author is an international trade and customs
lawyer, and a licensed customs broker. He is also
a lecturer on customs and international commerce.
Please contact aouvero@dlugms.com
or (632) 4050021 / 29 for your comments.
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Borders Archives : 2004 Q4
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