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Republic Act No. 9135, which established the customs Post Entry Audit (PEA) system, took effect in June 2001.

Yet, there seems to be very little felt need among Philippine importers and customs brokers to prepare themselves for the eventuality of being audited by customs any time soon. And for the pro-active ones, a general cloud of uncertainty looms as to what actually to expect from the audit exercise and how to best ensure that business entities would stand up to customs compliance standards, and mitigate effects of exposure, if there is any.

For the last two and a half years, customs has been laying down the groundwork for the full implementation of the PEA law. The infrastructures needed to put up the PEA system, such as the PEA organization, budget provisioning, recruitment and training, and the like, required time-consuming executive and administrative actions from higher authorities. As it stands, all the major preparations for a working PEA group (PEAG) have been substantially completed only very recently.

To be specific, an Executive Order creating a 60-man PEAG was issued late in 2002; an Assistant Commissioner and two customs directors to manage the PEAG were appointed last year; and PEAG officers and staff were hired about December last year whose extensive profiling and audit skills training has been on-going.

Apparently, the “delay” in the full implementation of the law has given the import community a false sense of security in the manner business is being conducted at customs. Little do they realize that any time soon, the strong impact of the record-keeping requirement of the law and the field audit itself will finally be felt by the affected sector given the current developments in PEA.

Based on international best customs practices, the better way of coping with the new obligations created by the PEA law is for import firms to do a self-assessment review as to their level of compliance with customs laws, rules, and regulations. This activity is known as customs compliance review (CCR). For many importers among the Transaction-Value-User economies, the CCR, as part of tax planning, is fast becoming a necessary component of corporate strategizing activities involving cross-border trade.

It is no longer uncommon for big importers to include CCR-based duty planning in their over-all tax program for a given period of business operation. Importers are not normally equipped to do CCA on their own. Unless they have in their employ a technical staff that is well versed on the new customs valuation system and the intricacies of PEA, they would normally outsource the program to experts in the field, usually retired customs men.

But what is CCR? In essence, CCR is a program or a process whereby certain activities of a client in relation to imports (whether for local consumption or for manufacturing for export) and exports, as well as local sourcing of imported goods, are being reviewed to determine their level of compliance with customs laws on valuation, tariff classification, origin, marking, warehousing, and other similar or applicable customs concerns or issues.

The review process would likewise evaluate the customs audit readiness of the client in terms of its record-keeping system, as well as identify process gaps in its import clearance system. This is done through a work plan customarily patterned after the standard processes of customs audit. So in a sense, the CCA is an audit dry run in anticipation of the kind of customs issues to which the audited company is vulnerable.

The work plan would define the steps to be undertaken to ensure a comprehensive coverage of the review and be able to complete it within a reasonable timeline. The review program, on the other hand, would include identification of specific errors in entry declarations or risk areas involving specific customs issues to which the client’s system of doing and clearing of imports is exposed.

Example: Goods involving royalty payments or other form of rebates under such expense nomenclature as management fee, distribution rights fee, post importation adjustments, and the like, which are not properly communicated to import traffic may run the risk of being reassessed and penalized for failure to declare the same in the covering import entry.

Improper or incomplete description of imported articles may lead to erroneous tariff classification, which may again open the client to the risk of its goods being reclassified with corresponding penalties for such error. A separate but equally stiff set of penalties, both pecuniary and criminal, is imposable against importers and customs brokers for failure to keep certain import and business records and for failure to grant customs free access to these records.

To obliterate or mitigate a client’s exposure to such risk, the review program would assess the existing management information system dealing with such import data as ordering or invoicing system, price structuring, negotiations, import entry declaration, import payments, inventory and distribution, and the like. This is to determine whether such information system is sufficient to enable the firm to provide customs with complete and accurate records as may be required during any customs audit.

Corollary to the management information system review is the study of the existing corporate organization to find out the person(s) or office(s), if any, that are responsible for the storage and retrieval of the company’s import and customs-related data, and those in charge of assuring quality in the information declared or given to customs at the time of entry lodgment or during any customs audit. This would enable the client to reconfigure its business organization, if need be, to make sure that appropriate responsibility centers are clearly delineated and established.

It is also likely that in the course of the review, the program would be able to stumble upon duty saving opportunities for the client. This may occur in cases where errors in the tariff headings declared led the company to pay more than what should have been paid. Or, through an unwitting failure to unbundle costs in the declared invoices which otherwise would have been deductible as not being dutiable. Example: Installation costs that are integrated but not defined or broken down in the import invoice. As a post importation expense, installation costs in the country of importation are not dutiable.

At the tail end of the review program would be a set of recommendations to, among others, rectify any errors found, or legally mitigate the effects thereof; improve on the information system and make it compliant with the record keeping requirements of PEA; define responsibility centers within the corporate organization that would provide quality assurance on information declared and given to customs; and make use of the opportunities to validly cost down duty expenses.

We have shown above that the CCA is necessary within the context of preparing the company for customs audit. But is it costly? Well, it only takes to compare how much internal revenue the company pays and how much budget it allocates for its tax compliance office (the office may be department-size for quite a number of big firms), excluding external auditors, with how much it contributes to customs in terms of taxes and duties for its imports, and how much corporate fund, if any (chances are, there are no funds for customs compliance as there is not even an office existing within the corporate organization for that purpose!), is reserved for the management of the company’s customs issues.

Some big importers are even surprised that they pay a lot more to customs than to the Bureau of Internal Revenue in terms of duties and taxes, yet they do not spend a single centavo to manage the potentially bigger exposure.

The author is an international trade and customs consultant. He is also a partner of the law firm of David Leabres Uvero Gaticales Mosquera Samson. For your comments, he may be contacted at alex.gaticales@wtiphils.com or at (632) 4002145 / 4050021.

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