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CAO 4: New Rules
on Customs Valuation, Audit and Record Keeping
As we have mentioned time and again, the rules at
the customs border have rapidly changed and the same
continues to evolve. To implement these changes, the
Bureau of Customs normally issues customs memorandum
orders or circulars containing the new rules and procedures.
Just very recently, customs issued Customs Administrative
Order 4-2004.
Background of CAO 4-2004. RA 9135 was first passed
in June 2001 and as a result, customs issued CAO 5-2001
to implement the same. In general, RA 9135 amended provisions
of the Tariff and Customs Code of the Philippines (TCCP).
Specifically, the law aligned the customs valuation
rules with the WTO Valuation Agreement and provided
the Post Entry Audit (PEA) system. The Philippines first
implemented the new valuation rules in January 2000.
In June of this year, the customs PEA Group finally
issued audit notices to various importers.
With the ongoing audits of numerous companies, both
domestic and multinational, numerous implementation
issues were raised against RA 9135 and its implementing
rules. For one, issues were raised on how the valuation
rules were being implemented at the border. In relation
to the ongoing audits, the auditees questioned the manner
by which companies were selected and how the audits
were being conducted. Questions were also raised on
the basis of the computer-based risk management system
for audit selection.
Lifting of the Moratorium on Customs Audit. About two
months ago and as a result of various complaints including
pressure from industry associations, the Finance Department
issued a moratorium on the conduct of the customs audit.
Part of the order was the review of existing policies,
rules and guidelines of the PEA system towards enhancing
and making the same more transparent and predictable
for the trading community. As a result of such review,
customs has now issued CAO 4-2004 dated November 8,
2004. Together with the issuance is the reported lifting
by the Finance Department on the moratorium on ongoing
customs audits.
Major Changes in the Rules. Among the many changes
provided in CAO 4-2004 are as follows:
a) Annual Registration of Importers now includes
undertaking to keep records and allow the conduct
of customs audit;
b) Payment of duties on adjustments (e.g. Assist,
Royalty and License Fees, Proceeds from Resale) to
the declared price within 45 days from such payment/remittance;
c) Copies of Import Entries automatically provided
to PEA Group; and
d) Streamlining of procedures for customs
conduct of the audit including the provision for an
audit manual.
In addition, several changes were made on existing
rules relating to the various methods of customs valuation,
the specific records to be kept, the operating procedures
for valuing imported articles, the issuance of audit
notices and the provision for penalties.
What to Expect. Given the above, what should the trading
community expect from these new rules or from customs
authorities? Importers should see tighter implementation
of the valuation rules at the border. Declarations provided
in the Supplemental Declaration of Value (SDV) should
be under scrutiny. Assessment Notices may be issued
on undervalued imported articles as well as on duty
exposures for adjustments (e.g. royalty, license fee,
management fee, assists, proceed from resale, year end
adjustments) to be made on the declared price to customs.
For some companies, audit notices will likely be issued
to cover importations for the last 3 years or so. For
those subject to audit already, the audit will simply
resume.
Next Steps for Importers. How should importers, both
auditees and those at high risk of audit, prepare for
these changes? First, importers should verify the accuracy
and completeness of what is being declared in both the
Import Entry and the SDV. Importers should ensure that
all duty payments are made through customs-authorized
banks. In light of the newly implemented classification
rules (i.e., AHTN), importers should review how goods
are being classified by customs brokers as against what
is being declared by suppliers in the export documents.
With regard to the dutiability of the adjustments to
the declared price, companies should conduct a thorough
study for possible exposures, taking into consideration
the various expert opinions on valuation rules as well
as rulings and case studies from the WTO and the more
developed countries like the US and the EU.
This is important considering that duties on those
adjustment are now required to be paid to customs within
45 days from the time those adjustments were incurred
by the importer. To illustrate, a company will have
to pay taxes and duties on "dutiable" royalty
and license fees within 45 days from the time the same
are remitted to an overseas supplier or affiliate.
Customs Compliance and Risk Assessment. Of course,
an international best practice is the conduct of an
internal Customs Risk and Compliance Assessment - a
diagnostic and risk-management tool to assess and verify
the compliance level and specific risk areas in the
trading (export/import) operations of a company. The
assessment should mimic how customs will conduct the
audit and should identify financial exposures including
possible duty-saving opportunities.
For companies that have already conducted their internal
assessments, one clear benefit is that they now possess
a reasonable assurance and comfort level that they are
"audit ready" and that they do not have skeletons
in their closet or if they had, that measures have been
prepared to legitimately address the same.
The author is an international trade and customs consultant,
and a licensed customs broker. He is also a regular
lecturer on logistics, customs and international commerce.
Please contact aouvero@dlugms.com
or (632) 4050021 / 29 for your comments.
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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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ISPM 15: New Import/Export
Rules for Wood Packing
In addition to security measures being required in
international trade, a new issue for the trading community
is the growing complication of sanitary and phytosanitary
(SPS) measures being implemented by member countries
of the WTO. Specifically, a new concern for the logistics
and trading community is the recent implementation of
ISPM 15 by 14 countries and EU, resulting in difficulties
to exporters due to varying implementing rules and regulations
in each country.
In the Philippines, the Department of Agriculture
(DA) has announced the partial implementation of ISPM
15 starting January 1, 2005 and its full implementation
by June 1, 2005. Specifically, the Philippines will
be requiring by January next year that all wood packing
and dunnage be treated (marking not yet required until
end of May 2005) for timber pests. The question is whether
the Philippine export industry is ready with ISPM 15
systems being implemented by trading countries. Similarly,
are local importers fully aware of the new requirements
to be implemented next year?
Sanitary and Phytosanitary Measures (SPS). SPS is
the general term used by the global trading community
to refer to standards required for food safety and plant
and animal health. Part of the agreements under the
WTO is the Agreement on Sanitary and Phytosanitary measures
to be applied by member countries on traded goods. Under
the SPS Agreement, countries are allowed to used SPS
measures based on international standards, guidelines
and recommendations, to the extent necessary to protect
human, animal and plant life or health. The measures
should be based on science and must not be arbitrary
and discriminatory. In general, the measures must not
become obstacles to trade.
What is ISPM 15? "International Standards for
Phytosanitary Measures Publication No. 15: Guidelines
for Regulating Wood Packaging Material in International
Trade" (ISPM 15) was developed to address the global
spread of timber pests by regulating the movement of
timber packing and dunnage in international trade. To
illustrate on the negative impact of these pests (e.g.
Asian long-horn beetle), avenues of trees in cities
of Chicago and New York had to be felled to control
the spread of these pests. The pests have not yet been
eradicated and trees are still being felled in those
cities.
ISPM 15 describes phytosanitary measures to reduce
the risk of introduction and/or spread of quarantine
pests associated with solid timber packing material
(dunnage included). The United Nations Food & Agriculture
Organization (FAO) addresses plant quarantine through
the International Plant Protection Convention (IPPC).
The IPPC is an international treaty administered by
the FAO and implemented through the cooperation of member
governments. As for all other ISPMs, the Secretariat
to the IPPC coordinated the development and preparation
of ISPM 15 over a period of time through an agreed and
defined process of draft development and country consultation.
ISPMs are recognized as the basis for phytosanitary
measures applied by members of the WTO under the SPS
Agreement.
How is ISPM 15 in Practice? In practice all wood packaging
(pallets, crates, boxes etc.) made from unprocessed
raw wood and used in supporting, protecting or carrying
a commodity, must be heat treated or fumigated in a
specified manner and the packaging must be stamped on
at least two sides with the officially approved mark
verifying the treatment and incorporating the registration
number of the producer of the packaging. Wood packaging
refers to timber packing and dunnage used as follows:
(a) packing used to support, protect or carry a commodity;
(b) Dunnage used to secure or support a commodity but
does not remain associated with the commodity; (c) packing
includes dunnage, pallets, crating, packing blocks,
drums, cases, load boards, pallet collars and skids;
and (d) Packing constructed of any number of materials
including timber (or wood).
ISPM 15 will not apply to packing material made exclusively
from manufactured processed wood products such as plywood,
chipboard, fiberboard, oriented-strand board (OSB) and
medium density fiberboard (MDF). These are products
that are a composite of wood constructed using glue,
heat and pressure, or any combination thereof.
ISPM 15 Mark or Stamp. In order to indicate that wood
packaging has been subjected to an approved measure,
the packing and dunnage must bear the stamp or mark
below:
An ISPM 15 compliant stamp must include: (a) The International
Plant Protection Convention (IPPC) symbol; (b) The ISO
two letter country code "XX" (followed by
a unique number "000" assigned by the National
Plant Protection Organization (NPPO) to the producer
of the timber packing. "YY" indicates the
ISPM 15 approved treatment applied to the timber packing
material or dunnage.
Preparing for ISPM 15. Considering that many countries
have now implemented ISPM 15 under varying implementing
regulations and with many more to implement the measures
in the next 2 years, the trading and transport community
must be well aware of the increased costs for the treatment
of packaging materials and must ensure compliance with
the different national measures being imple-mented in
those countries, the Philippines included.
The author is an international trade and customs lawyer,
and a licensed customs broker. He is also a lecturer
on customs and international commerce. Please contact
aouvero@dlugms.com or (632) 4050021 / 29 for your comments.
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Managing Your Customs
Issues (3)
Our first article for this series discussed the various
customs administrative procedures applicable in (a)
abandonment proceedings, (b) valuation and classification
disputes, and (c) protest and payment under protest.
A succeeding article touched on the procedures for filing
the protest as well as other administrative remedies
(e.g. seizures and forfeiture proceedings, Alert Order,
Hold Order and Warrant of Seizure and Detention). This
last article on this series will focus on the procedures
in WSD cases and appeal procedures under the Post Entry
Audit system.
Procedures in WSD Cases. As previously written, a
WSD is issued by the District Collector upon determination
of probable cause of violation of customs laws, rules
and procedures. Subject to the approval of the Commissioner
and except when there is prima facie evidence of fraud,
an importer may generally secure the release of the
seized goods upon posting of a cash bond.
In the alternative and subject to the same conditions
for posting a cash bond, an importer may settle the
case by payment of fine while the case is pending or
in case of forfeiture, by redemption of forfeited property.
As provided in Section 2307, TCCP, the fine shall be
determined by the District Collector which shall be
from 20% to 80% of the landed cost. In case of redemption,
the redemption price shall be based on the domestic
market value. An issue for many importers is that under
CAO 4-94, the fine has been pegged at 60%. In practice
however, the discretion to decide the amount of fine
remains with the District Collector subject to the approval
of the Customs Commissioner.
As provided in the rules, the formal hearing for seizure
proceedings shall be scheduled within 15 days from the
issuance of the WSD. Thereafter, the importer is given
a written notice and opportunity to defend itself. The
District Collector shall render the decision within
30 days from the termination of the hearing.
Appeal Procedure in WSD cases. In case the decision
of the District Collector is unfavorable, the importer
may file a written Notice of Appeal to the District
Collector, copy furnished the Commissioner, within 15
days from receipt of the decision. The case shall then
be endorsed to the Commissioner for review. In case
the Commissioner decides favorably for the importer,
the case shall be subject to automatic review by the
Secretary of Finance. In case the Commissioner affirms
the adverse decision of the District Collector, the
decision will be final and the importer may file a Petition
for Review with the Court of Tax Appeals (CTA).
When a case is decided in favor of an importer, the
decision shall be subject to automatic review by the
Commissioner. If the decision of the District Collector
is affirmed by the Commissioner, the importer may proceed
to file a Petition for Review with the CTA.
Appeal in Post Entry Audit (PEA) Cases. The appeal
process provided in CMO 1-2002 refers to instances where
the importer/customs broker questions the adverse findings
in the Final Audit Report and Recommendation (FARR)
in case of a Post Entry Audit (PEA). CMO 1-2002 generally
provides for the procedure for determining the administrative
liability and imposition of fines as recommended in
the FARR after the conduct of a customs compliance audit.
In case of adverse findings after the conduct of the
audit, the PEA Group shall file the necessary administrative
complaint before the Commissioner. The complaint shall
then be forwarded to the Legal Service for hearing and
decision. During the hearing, the importer shall be
given written notice and shall be allowed to defend
itself against the allegation in the complaint. Instead
of formal hearings, the importer may opt to just submit
memoranda and other written documents and after which,
the case may be submitted for resolution. Once a resolution
is made by the Legal Service and approved by the Commissioner,
the importer may file a Petition for Review with the
CTA within 30 days from receipt of the decision in case
of adverse findings.
Effective Management of Customs Issues. During the
numerous occasions that we have handled customs administrative
cases, we have been able to observe a common thread
in all the cases. Among these observations are as follows:
a) Importers are generally not aware of the
implications of what is being declared to customs.
That being the case, importers tends to be haphazard
with their import documentation.
b) Customs broker staff are generally not prepared
to handle highly technical customs issues. A lot of
times, cases arose due to the misreading of the gravity
or complexity of the issues involving a particular
shipment. On many occasions, we have seen how this
lack of technical competence resulted in the seizure
of the shipment.
c) Administrative cases are costly and can
takes years before they are resolved. For example,
WSD cases normally take at least 3 months before resolution.
Abandonment cases can be resolved in a shorter period.
VCRC cases take at least 3 months on average. Refund
cases and payments under protest should take at least
6 months before resolution. Some refund cases, the
ones endorsed to the Budget Department, can take years.
By and large, customs issues can result in administrative
cases against the shipment and the importer. If not
properly managed, this can further result in the seizure
of goods and the filing of an administrative and/or
criminal complaint against the importer. Being knowledgeable
in customs rules should therefore minimize the risks
involved in importations and consequently, prevent unnecessary
costs and expense.
The author is an international trade and customs lawyer,
and a licensed customs broker. He is also a lecturer
on customs and international commerce. Please contact
aouvero@dlugms.com
or (632) 4050021 / 29 for your comments.
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Borders Archives : 2004 Q4
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