Home » Across Borders » CAO 8-2003: Selection of companies for customs audit
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Customs Auditors. In a previous article on the Post Entry Audit (PEA) system, we mentioned that the Bureau of Customs (BoC) advertised in major newspapers a list of 65 vacancies under the Post Entry Audit (PEA) group. After conducting qualifying examinations and interviews, the BoC has now appointed the members of the PEA group and is now conducting trainings for said auditors.

New Customs Issuance. A few weeks back, the BoC issued Customs Administrative Order (CAO) No. 8-2003 dated October 10, 2003 and entitled “Selection Criteria for Post Entry Audit”. This new issuance now provides the criteria and procedures for the selection of importers to be subjected to customs audit based on a risk management approach. In addition, this supports previous issuance such as Executive Order No. 160 (Creating the Post Entry Audit Group in the Bureau of Customs) and Customs Memorandum Order No. 11-2003 (Policies, Rules, Regulations and Procedures in the Selection and Appointment of Personnel to the Post Entry Audit Group).

A customs audit will normally involve the examination, inspection, verification and investigation of the document flow, financial flow, goods inventory and business processes relating to the imported articles. The areas for audit may involve, among others, record keeping, reported (and unreported) value, classification, quantity and tariff preferences (e.g. AFTA Form D, AFMA, etc.). CAO 8-2003 specifically provides that the audit of importers shall be based on a “computer-aided risk management system” and shall include the audit of their customs brokers. The audit of customs brokers shall be for the purpose of validating the audit of the importer and to fill in information gaps discovered in the course of the audit.

Selection Process of Auditees. Section 3 of CAO 8-2003 states that a company shall be selected based on, among others, the following criteria:

  1. Relative magnitude of revenue;
  2. The rates of duties of the imports;
  3. The compliance track record of the firm; and
  4. An assessment of the risk to revenue of the firm’s import activities.

The choice of companies for customs audit shall come from:

  1. The recommendation of the PEA Group;
  2. An analysis of the results of the interim audit and examination of selected entries prior to final liquidation;
  3. Importers who volunteer to be audited under the Voluntary Compliance Program;
  4. Companies with errors detected in their import declarations;
  5. A random sample of SGL accredited members; and
  6. The Recommendation of District Collectors as a result of a VCRC review.

Criteria for Audit Priority. Once companies have been pre-selected for possible audit, the PEA group shall rank the selected companies in terms of priority using the following criteria:

  1. Importer and Industry classification;
  2. Attributes of import shipments (e.g. nature of the commodity, classification, valuation, country of origin, tariff preferences, quota, etc.);
  3. Volume of Imports and Revenue Impact;
  4. Track record of importer; and
  5. Importer’s relationship with suppliers (e.g. related party transactions).

Voluntary Compliance Program. While companies may be selected for audit based on the above procedures and criteria, an importer has the option to volunteer for customs audit. Under the Voluntary Compliance Program, the following importers may volunteer for audit:

  1. Importers who volunteered for audit to qualify for the Super Green Lane (SGL) program and other trade facilitation programs; and
  2. Companies who volunteer for audit upon approval of the Commissioner.

Need for Compliance Self-Assessment. In the last three years, we have seen significant changes in the customs rules governing the importation of goods (e.g. the Transactional Value method and the PEA system). The myriad and complex government regulations now governing imports and exports, commonly referred to as “customs laws”, has forced many companies with significant trading transactions to create customs compliance units within the company. The main function of this unit is to ensure compliance with relevant customs and trade laws, and to conduct regular compliance assessments of customs operations. The purpose of the assessment is to prepare the company for possible customs audit. Specifically, the compliance assessment should be able to: (a) identify and assess areas of non-compliance; (b) quantify possible financial exposures and penalties; (c) identify solutions and remedies to prevent or minimize the exposures and penalties; and (d) identify possible duty and tax savings opportunities.

In the Philippines, we have seen a few companies conduct internal compliance assessments of their trading operations. One compliance self-assessment resulted in the identification and quantification of the financial exposures of the company. To avoid possible fines and other penalties, the company voluntarily disclosed and paid additional taxes and duties. The disclosure was proactively made prior to the conduct of a customs audit and even prior to receipt of any audit notice.

The author is an international trade and customs specialist, and a licensed customs broker. He is also a partner of the law firm of David Leabres Uvero Gaticales Sto. Tomas. For your comments, he may be contacted at agaton.uvero@wtiphils.com or at (632) 4002145 / 4050021.

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