AS previously written, more than 100 companies to date have been issued audit notices under the customs post entry audit (PEA) system. Some of the audits, which were first initiated in June 2004, have already been terminated and audit reports submitted to the Customs Commissioner for approval. Some of the audited companies have likewise volunteered to pay additional taxes and duties to avoid stiff fines and penalties. One company reportedly paid as much as P19 million in additional duties and taxes on royalty and license fee payments. Another paid P30 million in additional duties and taxes for the audit period covering two years of importation. Stiff Penalties under PEA. It should be remembered that fines under the post entry audit system ranges from a minimum of 50% of the underpayment in case of negligence to as much as 800% of the underpayment in case of fraud. The fines are imposed over and above the underpayment itself. To illustrate, a company that has been found to have underpaid its taxes and duties in the amount of P1 million shall be required to pay the underpayment. In addition, the company faces the risk of being penalized in the amount of P1 million to P8 million, depending on the existence of evidence indicating negligence or fraud. Voluntary Disclosure. In most developed countries, part of the customs audit system is a voluntary disclosure program where companies are able to pay additional taxes and duties on the imported articles prior to a customs audit in case of error or mistake. Under said program, only interest charges are collected for the delayed payments and no fines or penalties are imposed against the importer. The voluntary disclosure program, however, does not apply when the import transactions are coupled with fraud, in which case, the disclosure may be converted into a fraud investigation. Disclosure During an Audit. In the Philippines, there are no clear rules or programs providing for a voluntary disclosure prior to the issuance of an audit notice or even prior to the conduct of an audit. However, the implementing rules provide that a company may volunteer to pay additional taxes and duties even after the issuance of the audit notice but prior to the conduct of the audit proper. The voluntary disclosure, however, does not exempt the importer from the imposition of fines and penalties although the rules provide that in case of such voluntary disclosure, the imposable fines may be compromised. Specifically, paragraph C of Section VI (Administrative and Criminal Offenses) of Customs Administrative Order (CAO) No. 4-2004 provides as follows: “2. However, except in cases of fraud, the Commissioner of Customs may, pursuant to Section 2316 of the Customs Code and subject to the approval of the Secretary of Finance, exercise his power to compromise the imposition of the fine prescribed in Section VI.C when the importer makes a voluntary and full disclosure of the deficiency prior to the commencement of the audit on a date fixed by the Commissioner, provided that the compromise shall only be to the extent of the voluntary disclosure made.” What are the requirements then for a voluntary disclosure during a customs audit? First, the underpayment must be paid in full. Second, the disclosure must be made prior to the commencement of the audit proper. Third, there must be no fraud involved. Fourth, the fines and penalties sought to be compromised must be recommended by the Customs Commissioner and approved by the Secretary of Finance. From a practical perspective, another requirement is required of the importer, that is, the importer must have already conducted an internal compliance review to confirm and verify the existence of non-compliant import transactions and to quantify the financial exposures involved. Failing that, the importer may commit errors in what is being disclosed and may wrongly pay additional taxes and duties. To illustrate, a company may erroneously volunteer to pay additional taxes and duties on its royalty payments when, in fact, the payments are actually not dutiable (e.g. the royalty payments were paid on the right to distribute the imported article in the domestic market). Disclosure Prior to Audit. Unlike the voluntary disclosure programs in other countries, the Philippines does not have clear rules and guidelines for promoting trade compliance and specifically allowing companies to voluntarily disclose underpayments of taxes and duties prior to the issuance of audit notice. Is voluntary disclosure prior to an audit therefore allowed? If yes, what are the procedures and what customs office do we approach for disclosure? Do we approach the Collection District or the Post Entry Audit group? Will disclosure involve the re-liquidation of every import transaction / entry involved? While we recognize the fact that there are no clear guidelines for disclosure prior to an audit, our position is that it may be done under current rules and in fact, it has been done by some of the companies already. It must be noted that the liquidation of an import entry is deemed to be final and conclusive upon all parties (government and importer) after expiration of three years from date of final payment of duties. Within the said period, both government and importer may cause the re-liquidation of the import entry to reflect the correct assessment on the imported articles. This process may be done at the Collection District level although expert advice should be taken particularly when the disclosure involves legal interpretation or is very technical in nature.
A licensed customs broker, the writer is an international trade, indirect tax and customs consultant. He has a Certificate in Purchasing and Supply Management from International Trade Centre (UNCTAD/WTO) and is an accredited trainer of Ateneo Graduate School of Business. Please contact firstname.lastname@example.org for your comments or questions.