IN our previous article, we mentioned that the Post Entry Audit (PEA) Group of the Bureau of Customs (BoC) has already issued numerous Audit Notifica-tion Letters (ANLs) addressed to major importers in various industries (e.g. garments and textile, automotive, pharmaceutical, food, steel, consumer goods and other major importing industries) and that audit proper is already ongoing for several of the companies.
Trade Profile of the Company. Based on the implementing rules and guidelines on the audit process and consistent with international best practices, we expect customs to initiate the audit by first securing a “trade profile” of the company – nature of the business, background and organizational set up, volume and value of imports/exports, type and classification of products, trading arrangements, taxes (VAT and excise) and duties paid, history of customs issues, corporate officers and staff involved in the trading activities, availment of tariff privileges, etc. In preparation for possible customs audit, a company is therefore advised to prepare a trade profile kit containing most, if not all, of the above information.
Audit Readiness of Records. Once the customs audit team gains a general understanding of the company’s trading business, the auditors will now require the presentation of specific import documents and business records. Most companies have a policy of retaining company records for 5 years. Unfortunately, while companies are normally ready to present records in case of BIR audit, we expect companies to have problems submitting the specific information requirements in case of a custom audit. For one, customs will require a list of import documents with reference to import entry numbers. Unfortunately, most companies keep records based on an internal record system (e.g. SAP) without reference to import entry numbers. We expect delays in the companies’ presentation of specific import records.
Second, customs will require numerous business records from the company such as inventory records, exception reports, subsidiary ledgers, trial balance, etc., in the course of audit. Most of these records will certainly be financial records. Considering that financial records are more designed for tax compliance and internal company audit, we again expect companies having a hard time providing the specific financial data required by customs.
Focus Areas for Audit. During the course of the audit proper, we expect customs to conduct the audit on the following focus areas:
- Internal Control and Customs Declaration Process
- Record Keeping
- Customs Value Information
- Customs Classification and Product Description
- Inventory Control; Goods Quantity
- Licensing, Marking and Rules of Origin
- Tariff Preferences (e.g. AFTA-CEPT, AFMA)
- CBW, BOI and PEZA operations.
Internal Control and Customs Declaration Process. Part of the audit will be a review of existing policies or procedures on how imports are declared to customs. The main concern here is whether the importer exercises “reasonable care” in the customs declaration process and whether there are controls and procedures within the company to ensure the completeness and accuracy of what was declared. Is there an internal company system to verify what the customs broker is doing? Is there a level of comfort as to the accuracy and completeness of what is being submitted to customs by the customs broker, in both the import entry and the supplemental declaration of value (SDV)? Are there existing company policies in the documentation and import declaration process flow?
Record Keeping. Part of the risk assessment and system review in an audit is to check whether the company has an established system of keeping import records and business information as required by the customs audit law. Does the system enable customs to easily access records for audit purposes? Companies should note that the longer it takes to present the records, the more likely customs will assume the existence of non-compliance issues. This can complicate the process resulting in customs taking more time to conduct the audit.
Customs Value Information. Customs will first check on the appropriate method of valuation used for declaring to customs, with focus on the verification of actual payment against what is declared. Additional issue will be the verification of actual VAT payments to customs as against what was declared to BIR as input VAT. Customs will also focus on any additional financial outflow to suppliers and affiliate companies (e.g. retroactive price increase, management fees, technical assistance fees, royalty and license fees, quality assurance charges and R&D costs) to check on whether the same may be treated as possible additions to the dutiable value.
Other Audit Issues. The auditors will check the inventory records of the company, including those used for manufacturing, to check on possible exception reports of over shipment. Sampling of specific products can be taken to verify the correctness of the product classification, description, licensing (import permits) and marking. A review of the availment of special tariff privileges granted under the tariff code and special laws (AFTA CEPT, AFMA) can be made by the audit group. In the course of the audit, customs will likely conduct an interview of the company’s customs brokers and verify records of the customs brokers as against importer’s records. In general, the extent of the audit will depend on the complexity of the trading transactions and the number of non-compliance issues of the specific company being audited.
An international trade and customs consultant and licensed customs broker, the author is a Fellow at WTI.PH and a Partner of DLUGMS Law Office. Please contact firstname.lastname@example.org or (632) 4050021 / 29 for your comments.