Customs Demand Letters

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IN recent months, many importers have been receiving demand letters from the Liquidation and Billing Division (LBD) of the various ports for payment of additional assessments on previous importations. While customs has already been doing this for many years on the ground that importations are only Òfinally liquidated after three years from importation, recent events seem to indicate that more and more companies are receiving these demand letters. It is also not uncommon for customs to hold the release of pending shipments for non-payment of such additional assessments.

For many companies, the additional assessments involve nominal amounts arising from adjustments in the tax and duty calculation on the freight or insurance costs. For some importers, however, the assessments amount to millions of pesos arising from the rejection of the declared value and the subsequent use of a substitute value.

Nature of the Demand. While previous demand letters only provide additional assessments for clear and apparent errors or mistakes in the tax and duty calculation, some of the recently issued demand letters have been made on the ground that the declared value is unacceptable and that a substitute value is being applied. Also, many of these demand letters have been issued on Super Green Lane (SGL) members.

For importers clearing goods through the regular import declaration process, the question is whether LBD can reject the declared value when the present procedure is for customs to raise the valuation or classification issue during the actual import process and that in case of dispute, the issue may be elevated before the Valuation and Classification Review Committee (VCRC) in the port concerned. For SGL members, where the value and classification of the list of ‘importables is already pre-approved and where the VCRC process is not applicable, the question is whether the LBD may reject the declared value and impose a substitute value instead.

Another question is whether the LBD can automatically reject the value and classification of the importation without the benefit of notice and hearing (due hearing) or, in such cases when there is doubt as to the value and classification used upon first importation, whether the proper procedure should be for LBD to refer the matter to the PEA group for the conduct of a compliance audit.

Legal Basis. The Tariff and Customs Code (as amended by RA 9135) and existing customs rules provides that the liquidation of an import entry shall be deemed final and conclusive upon all parties after the expiration of three years from the date of the final payment of the duties due, except as follows:

  1. when fraud is committed;
  2. a payment under protest is filed;
  3. when the importation is selected for post entry audit within the three-year period; and
  4. the liquidation of the import entry is tentative (i.e., release under tentative liquidation)

Prior to RA 9135, the period for finality of liquidation was one year. Under present rules, customs may review the assessment made upon importation during the three-year period, either by way of review by the LBD of the port concerned or by way of a post-entry audit (PEA).

Liquidation and Customs Audit. While present customs rules and procedures do not clearly delineate the role and function of the LBD from the PEA group, the general understanding is that the LBD has jurisdiction only on clear and apparent errors or mistakes in the tax and duty calculation made on the import declaration resulting in the underpayment of duties and taxes. In cases where there is doubt as to the value declared or the tariff classification used, the matter should be properly raised through the existing dispute settlement mechanism (i.e., VCRC) if raised during the import declaration process or through the PEA system when the matter is discovered during the process of risk assessment and trade profiling of importers.

For SGL members, it is our position that LBD should only issue demand letters on clear and apparent errors or mistakes in the tax and duty calculation made and, when there is doubt as to the Òpre-approved value or classification, a review of the SGL accreditation may be made or a custom audit conducted.

Hold Order on Shipments. On the issue of whether customs may hold shipments for non-payment of additional assessments from the LBD or in case of a finding resulting from a customs audit, it is our position that customs may issue hold orders for pending shipments under certain conditions. In case of non-payment of demand letters issued by LBD, the hold order must be issued only by the District Collector after proper notice and hearing. In case of hold orders arising from the findings of the PEA group, the order must be part of the recommendations made by the auditors and finally approved by the Office of the Commissioner. As such, the common practice of the LBD holding shipments for non-payment of additional assessments made by way of the demand letters issued to importers has no legal basis under existing customs rules and regulations.

Ensuring Importer Compliance. A common but wrong impression of many importers is that the obligation to pay correct duties and taxes on imported goods is fulfilled once goods are cleared and released from customs custody. This is clearly far from the truth. There are many ways for customs to re-assess the tax and duty payments even after goods are released. At any time during the three-year period of liquidation (and beyond in some instances), customs may re-assess by way of re-liquidation of the LBD, through the conduct of a customs audit or in case of a fraud investigation.

The author is an international trade, indirect tax (customs) and supply chain expert. He is the Editorial Board Chairman of Asia Customs & Trade, an online portal on customs and trade developments affecting global trade and customs compliance in Asia. He was also Bureau of Customs Deputy Commissioner for Assessment and Operations Coordinating Group (2013-2016). For questions, please email at agatonuvero@yahoo.com and agatonuvero@customstrade.asia