SINCE last year, the Bureau of Customs (BOC) has been issuing new rules on the computation of duties and taxes. Rather than clarifying the basis of duty and Value Added Tax (VAT), the issuances seem to have resulted in confusion among the trading sector and the dilution of the very concept of the Transaction Value (TV) system and the VAT system.
It should be clarified here that the TV system is used only for computing the duty payable and is not applicable for purposes of computing the VAT. The VAT regime is governed by specific provisions of the Internal Revenue Code and the regulations issued by BOC to implement the VAT on importations.
Basis of Duty
Under the TV system, the dutiable base is equivalent to the transaction value of the imported article which should reflect all of the following costs:
- Commissions and brokerage fees (except buying commissions)
- Cost of containers and cost of packing, whether for labor or materials
- Assist, or the value of goods and services provided to the supplier free of charge
- Amount of royalties and license fees related to the imported goods
- Any amount from the subsequent resale in the domestic market remitted to the supplier, whether directly or indirectly
- Cost of transport, including loading, unloading and handling charges, from the port of exportation to the Philippine port of entry
- Cost of Insurance
Many of the costs mentioned are normally included in the price of the imported article while some (e.g. assist and royalties) are not reflected in the invoice. Based on commercial practices, the dutiable base is roughly equivalent to the CIF or CIP value of the importation as reflected in the commercial invoice.
Basis of VAT Under the Internal Revenue Code, importations are generally subject to VAT. The VAT payments on importations are treated as input credit on the VAT due on the subsequent resale of the imported article. Based on existing rules, customs computes the ‘vatable’ base by adding the following:
- Dutiable Value and Duty payable
- Bank Charges (in case of L/C shipments)
- Arrastre and Wharfage (storage in case of shipments via air)
- Customs Brokerage Fee
- Documentary Stamps and Import Processing Fee
Customs Miscalculations and Malpractices
Instead of correcting the inconsistent implementation of the TV and VAT systems, recent customs issuances have further added to the wrong practices in the calculation of the duties and taxes due on imported articles. We are outlining below some of these miscalculations and malpractices.
- NAIA customs applies the ‘whichever is higher’ rule (IATA rates versus Actual Freight) when computing the dutiable freight. This practice is in fact expressly prohibited under Section 201 of the Tariff and Customs Code.
- NAIA customs also requires importers to break down the CIP invoice value to reflect separate items for insurance and freight. When the freight cost presented is lower than the IATA rate, NAIA will adjust the freight cost resulting in a dutiable value that is much higher than the CIP value original reflected in the invoice. This practice has now resulted in a theoretical and arbitrary system for computing the dutiable base. This has also become a playground for unscrupulous importers and customs officials.
- CMO 17-2007 now expressly prohibits importers of bulk cargo (e.g. oil, grains, steel, etc) from paying duties and taxes on the actual quantity of the goods. Instead, the issuance requires the importer to pay based on the quantity provided in the commercial documents, regardless of the actual quantity that arrived after verification by third-party surveyors.
- Under CMO 22-2007, customs provides a benchmark for verifying the dutiable insurance. In practice, the benchmark has become the rule, regardless of the actual insurance costs incurred by the seller or the buyer.
- As part of the liquidation or post entry verification process, customs is now collecting additional duties on Terminal Handling Charges (as part of the dutiable freight) and additional VAT on the difference between the actual expense and the declared amounts for arrastre, wharfage or storage when computing the ‘vatable’ base. The additional duties and VAT are being implemented without amending existing rules and regulations on the calculation of duty and VAT.
- Finally, the liquidation and billing divisions of the various ports have now empowered themselves to review and reject the value declaration on importations, without the benefit of the post entry audit and without using the VCRC mechanism.
The author is an international trade consultant, and a licensed customs broker. He is a lecturer on logistics, indirect tax and customs, and a lecturer of Ateneo and BayanTrade on International Supply Chain Management. Please contact email@example.com for your comments.