IN the last couple of months, we have been conducting executive briefings on current developments on the Post Entry Audit (PEA) system of the Bureau of Customs (BoC).
We have also been conducting in-house briefings and consultations for many multinational firms and big companies in regards to the PEA system and how it will likely impact on activities at the customs border. Of late, we have been conducting customs compliance reviews for several of these multinational corporations.
Current State of Play.
In all these briefings and consultations, we have noted the following observations:
- The BoC has not been very active in educating the import sector on the status of the PEA system. Specifically, the BoC has not provided clear guidelines and direction as how they will conduct the audit, or how they will select prospective auditees.
- Most companies are not well aware of the importance and possible impact on their trading operations in case of a customs audit. What is sad is that most of these companies will feel the impact only when they have already been selected for audit.
- Due to the lack of understanding of trade and customs rules, trading firms are not prepared to handle a customs compliance audit. In all likelihood, they will have to hire customs consultants to assist them during the course of the audit.
- Since customs management is generally outsourced to customs brokers, most companies do not exactly know their level of compliance or the extent of their financial exposures in case of an audit.
Profiling of Prospective Auditees.
Since late last year, the Customs Post Entry Audit Group (PEAG) has been preparing for the full implementation of the audit system. In the last couple of months, the PEAG has been profiling prospective auditees and accordingly, has prepared a short list of companies for issuance of Audit Notification Letters (ANLs).
Our understanding is that ANLs will be issued in the coming weeks. Based on previous customs issuances, the issuance of the ANL will be based on any of the following criteria:
- Revenue Impact (Top 1000 Importers);
- Previous Record of non-compliance or errors in the import declarations;
- High Duty Rates/High Risk Industries; and
- Random Sampling.
Management of Customs Operation.
Most companies, if not all, outsource their customs management and necessarily, their customs compliance, to customs brokers. Unfortunately, this practice has resulted in rampant unscrupulous practices most of which remain undetected by customs. As an example, it is common practice for many importers and/or customs brokers to release goods at NAIA through the “por kilo” system.
Under this system, shipments are released from customs based on a forged invoice with a very low value resulting in lower taxes and duties. In some cases, the importer, unaware of the practice, reimburses the customs broker for taxes and duties allegedly paid upon presentation of fake customs invoices.
Since last year, however, some of these practices have been uncovered after importers were audited by the Bureau of Internal Revenue (BIR) based on their VAT declarations. In most of these BIR investigations, the importers have had to pay additional VAT on their importation. What is worse is that these importers will likely pay additional duties in case of an audit or fraud investigation to be conducted by the BoC in the near future.
The point here is that many importers do not have existing controls to better manage their import operations. In simple words, these importers do not exactly know whether their tax and duty payments are properly collected by the BoC or whether their import declarations to customs are correct and complete as required by law.
Errors in Import Declarations.
In many of the big companies that we have consulted, it is quite normal to see errors in their declarations to customs for two main reasons:
- the volume of transactions, and
- the lack of technical expertise in both the company’s import staff and the customs broker.
Previously, such errors were of less risk given the fact the import entries were considered finally liquidated after one year from date of filing. In other words and except when there is fraud, the assessment of taxes and duties is deemed final and customs will not likely review such assessment after the lapse of such period.
Under the PEA system however, the finality of liquidation of entry is effective only after the lapse of the three-year period. Thus, when errors in declarations are repeated within this period, importers faces a high risk of incurring huge financial exposures.
Royalty and License Fee.
Most multinational companies pay royalty, license fees, technical assistance fees, management assistance fees and other fees to their parent company or to an affiliate. As a general rule, royalty and license fees are dutiable unless they can be shown to be not related to the imported goods and not made as a condition of the export sale.
Similarly, technical and/or management assistance fees may be considered subsequent proceeds or additional payments and thus dutiable when such fees are not well documented or substantiated.
In addition to the above issues, there are many other audit issues that are intrinsic to the specific nature of the trading transaction. In general, a company that is engaged in trading, manufacturing and bonded warehouse operation will likely have more audit issues than a company that simply trades in finished goods.
For many importers, however, the foremost question is what exactly are their audit issues and how will they address the same when they are subjected to customs audit.
The author is an international trade and customs consultant, and a licensed customs broker. He is also a partner of The Law Firm of David Leabres Uvero Gaticales Mosquera Samson. For your comments, he may be contacted at firstname.lastname@example.org or at (632) 4002145 / 4050021.