BEGINNING January of last year, the Bureau of Customs (BOC) has been aggressively implementing the Post Entry Audit (PEA) system. Since then, customs has issued more than a hundred audit notices to importers.
Under existing rules and regulations, customs can conduct audits on importations within 3 years. Importers are obliged to keep import records and related business information within that period. Failure to keep records or to provide access to the records can result in both administrative and criminal sanctions. In addition, the administrative fine for underpayment of duties and taxes can range from a minimum of 50% in case of simple negligence to a maximum of 800% in case of fraud.
It has been more than 4 years since the PEA system was first implemented. We have outlined below the common issues raised by customs auditors against importers.
Computation of Duty
The computation of the duties payable on an imported article can be summarized as follows:
Cost (FOB/FCA value) + Insurance + Freight = Dutiable Value (CIF/CIP value)
Dutiable Value (DV) x Duty Rate = Duties Payable (DP)
For many of the importers that have been audited, customs has been recalculating the dutiable value by adding the Terminal Handling Charges (THCs) paid to shipping lines. One company that was audited paid an additional duty of P3 million on THCs incurred over the audit period of 3 years.
Since almost all companies do not treat THCs as part of the freight cost, this will automatically be treated as a dutiable cost in case of an audit.
When calculating the amount of the landed cost for VAT purposes, the accepted formula is roughly as follows:
Dutiable Value + Duties Payable + Arrastre/Wharfage (Storage ) + Brokerage Fee + Bank Interest + Documentary Stamps + Import Processing Fee = Landed Cost
Landed Cost x 12% VAT = VAT Payable
The experience of most auditees is that customs auditors will recompute the VAT payable by comparing the actual arrastre and wharfage costs against the amount used in computing the landed cost.
Almost always, the amount of the arrastre and wharfage used when computing the landed cost is based on a default formula (CMO 28-95) and is always lower than actual arrastre and wharfage costs incurred. The use of the actual costs will always result in additional VAT payable, amounting to millions for many of the auditees.
It is not uncommon for many importers to commit errors when computing their taxes and duties. In addition, the present formula used by auditors for calculating duties (to include THCs) and VAT (to use actual costs) is questionable, to say the least.
When imposing penalties for the additional assessments imposed during the audit, the experience is that most auditees are automatically slapped with a penalty of at least 100%, even in some cases when the error committed is innocent and not negligent in nature.
To illustrate, one company was assessed additional duty (for THCs) and VAT (for arrastre and wharfage) in the total amount of P1.5 million and another P1.5 million in penalties.
Duties on Royalty Fees
For many multinational companies found to have paid royalty fees to affiliate companies, customs auditors will automatically treat these fees as additions to the dutiable value and hence, subject to the payment of additional duties and VAT. Many of these companies have been assessed with additional duties and taxes on royalty fees amounting to millions of pesos plus the minimum penalty of 100%.
Lack of Records
For companies that refuse to provide access to their import and accounting records, custom auditors normally assess additional taxes and duties computed at 20% of the landed cost of imports without records plus the additional 100% penalty.
To date, there are several cases filed in courts to prevent the implementation of audit findings.
The author is an international trade, indirect tax (customs) and supply chain expert. He is the Editorial Board Chairman of Asia Customs & Trade, an online portal on customs and trade developments affecting global trade and customs compliance in Asia. He was also Bureau of Customs Deputy Commissioner for Assessment and Operations Coordinating Group (2013-2016). For questions, please email at firstname.lastname@example.org and email@example.com