Home » Across Borders » 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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