In May 2001, Congress passed into law RA 9135 establishing the customs post entry audit (PEA) system. To implement the PEA system, the Secretary of Finance issued Customs Administrative Order No. 5-2001 which took effect in December of the same year.
Under the law, customs is empowered to conduct a post entry audit of imports within three years from date of importation. Operationally, audit by customs means that the importer so selected is obliged to open its import and business records as specified in the legislation and implementing regulation to customs auditors for purposes of verifying the veracity of the information declared in its corresponding import entries covered by the audit period.
To effectively carry out an audit, importers and customs brokers are required by law to keep certain import and business records within three years from date of importation. They are likewise dutibound to provide authorized customs officers free access to these records.
Adverse audit findings may result in very stiff penalties depending on the degree of negligence (lack of due diligence) attending the discrepancies uncovered. When fraud is found present, the auditee is subject to a separate investigation and may further be liable to criminal prosecution aside form the penalty of not more than eight times the revenue loss.
For simple negligence, the maximum prescribed penalty, in addition to settlement of the unpaid duties and taxes, is two times said unpaid duties and taxes. For gross negligence, the highest penalty imposable is four times the unpaid duties and taxes, exclusive of the unpaid amount of duties and taxes, which shall also be collected.
In addition, the law provides severe sanctions, both pecuniary and penal, for failure to keep the required import and business records within the prescribed period, or for refusal to grant customs auditors access to such records.
There is no gainsaying the fact that the post entry audit law impacts greatly on the way importers and other entities will be doing business with customs. Corporate officials should also be aware that violations of the post entry audit law make them susceptible to civil and even criminal prosecution. There are at least three things any responsible corporate official should consider to ensure compliance with the new law.
First, to determine as to what office(s) or who within the corporate organization should be responsible for (1) the storage and retrieval of pertinent records and information customs needs when conducting the audit; and for (2) providing customs with the correct information when the same is required during audit or at any time for that matter. The storage and retrieval system refers to an organized way of keeping these records whether manually or electronically.
Audited companies may have these records but if they are not systematically kept, there is the danger of misplacing or mislocating them. A disorganized record-keeping system does not sit well with the due diligence requirement in assessing the importer’s level of customs compliance. Worse, if required documents cannot be presented within reasonable time, it may result in an audit finding that otherwise would not have been adverse.
Providing customs with the correct information means being able to integrate or relate to each other usually scattered data pertaining to the firm’s import processes to enable customs to see them more clearly, and thus help stave off incorrect or inaccurate audit findings. To illustrate, the company’s import traffic office or its equivalent unit may not be aware that the importer is paying separately a royalty for goods the company imports. The finance department knows it and so with the legal office, which handles the royalty agreement. But finance and legal may not be properly advised that the import traffic needs such information for purposes of the declaration of the transaction value of the imported goods in the import entry.
Absent such information, or if the traffic unit itself is just as unaware or is not resourceful enough to complete its import entry data by asking around so to speak, chances are the royalty payment, assuming it is dutiable, will not be included in the price paid or payable declared in the said entry. If these importations are being effected regularly over time, one can just imagine the extent of liability the company is being exposed to for failing to provide customs with the correct information on royalties.
All told, the firm may have to reconfigure its corporate organization to make room for an office or a person or persons that will handle this new customs requirement.
Second, to capacitate the responsible officers in the organization with sufficient knowledge and information on customs assessment, particularly the nuances of the new customs valuation system, otherwise known as the transaction value method, as well as the salient provisions of the post entry audit system. This means through proper training, they should familiarize themselves with the rules on tariff classification, origin, licensing, conditions and elements of transaction value, and the like, to ensure complete and accurate declaration of the same in the import entry.
This also includes acquainting themselves with the specific responsibilities set by law on importers with respect to record keeping and accessing these records, and the audit process itself, including administrative and judicial remedies available to the auditee.
Third, importers may have to do a self-assessment as to their level of customs compliance as a preventive step against potential exposure to penalties for probable errors made in entry declarations or in any information officially provided to customs.
Errors in compliance should promptly be rectified while deficiencies or gaps in systems and processes should be immediately closed to prevent further damage or to lessen the level of unnecessary risk to penalties. Under the law, there are ways by which liabilities may validly be minimized if timely detected. Self-assessment may also include exploring duty-saving areas and duty-planning activities.
Customs is doing a paradigm shift in the exercise of its power of control over imports. This is occasioned largely by the shift in customs valuation adopted as part of the country’s commitment to the World Trade Organization (WTO) Agreement on Customs Valuation.
Customs will now have to do verifications more in an audit mode. This means customs will increasingly loosen up its border control activities for greater trade facilitation. The law, however, imposes on importers a new set of obligations, with heavy penalties for non-compliance, to ensure that government’s interest is in turn amply protected.
The author is an international trade and customs specialist. He is also a partner of the law firm of David Leabres Uvero Gaticales Sto. Tomas. For your comments, he may be contacted at firstname.lastname@example.org or at (632) 4002145 / 4050021.