Home » Across Borders » CAO 4: New Rules on Customs Valuation, Audit and Record Keeping

As we have mentioned time and again, the rules at the customs border have rapidly changed and the same continues to evolve. To implement these changes, the Bureau of Customs normally issues customs memorandum orders or circulars containing the new rules and procedures. Just very recently, customs issued Customs Administrative Order 4-2004.

Background of CAO 4-2004. RA 9135 was first passed in June 2001 and as a result, customs issued CAO 5-2001 to implement the same. In general, RA 9135 amended provisions of the Tariff and Customs Code of the Philippines (TCCP). Specifically, the law aligned the customs valuation rules with the WTO Valuation Agreement and provided the Post Entry Audit (PEA) system. The Philippines first implemented the new valuation rules in January 2000. In June of this year, the customs PEA Group finally issued audit notices to various importers.

With the ongoing audits of numerous companies, both domestic and multinational, numerous implementation issues were raised against RA 9135 and its implementing rules. For one, issues were raised on how the valuation rules were being implemented at the border. In relation to the ongoing audits, the auditees questioned the manner by which companies were selected and how the audits were being conducted. Questions were also raised on the basis of the computer-based risk management system for audit selection.

Lifting of the Moratorium on Customs Audit. About two months ago and as a result of various complaints including pressure from industry associations, the Finance Department issued a moratorium on the conduct of the customs audit. Part of the order was the review of existing policies, rules and guidelines of the PEA system towards enhancing and making the same more transparent and predictable for the trading community. As a result of such review, customs has now issued CAO 4-2004 dated November 8, 2004. Together with the issuance is the reported lifting by the Finance Department on the moratorium on ongoing customs audits.

Major Changes in the Rules. Among the many changes provided in CAO 4-2004 are as follows:

  1. Annual Registration of Importers now includes undertaking to keep records and allow the conduct of customs audit;
  2. Payment of duties on adjustments (e.g. Assist, Royalty and License Fees, Proceeds from Resale) to the declared price within 45 days from such payment/remittance;
  3. Copies of Import Entries automatically provided to PEA Group; and
  4. Streamlining of procedures for customs conduct of the audit including the provision for an audit manual.

In addition, several changes were made on existing rules relating to the various methods of customs valuation, the specific records to be kept, the operating procedures for valuing imported articles, the issuance of audit notices and the provision for penalties.

What to Expect. Given the above, what should the trading community expect from these new rules or from customs authorities? Importers should see tighter implementation of the valuation rules at the border. Declarations provided in the Supplemental Declaration of Value (SDV) should be under scrutiny. Assessment Notices may be issued on undervalued imported articles as well as on duty exposures for adjustments (e.g. royalty, license fee, management fee, assists, proceed from resale, year end adjustments) to be made on the declared price to customs. For some companies, audit notices will likely be issued to cover importations for the last 3 years or so. For those subject to audit already, the audit will simply resume.

Next Steps for Importers. How should importers, both auditees and those at high risk of audit, prepare for these changes? First, importers should verify the accuracy and completeness of what is being declared in both the Import Entry and the SDV. Importers should ensure that all duty payments are made through customs-authorized banks. In light of the newly implemented classification rules (i.e., AHTN), importers should review how goods are being classified by customs brokers as against what is being declared by suppliers in the export documents.

With regard to the dutiability of the adjustments to the declared price, companies should conduct a thorough study for possible exposures, taking into consideration the various expert opinions on valuation rules as well as rulings and case studies from the WTO and the more developed countries like the US and the EU.

This is important considering that duties on those adjustment are now required to be paid to customs within 45 days from the time those adjustments were incurred by the importer. To illustrate, a company will have to pay taxes and duties on “dutiable” royalty and license fees within 45 days from the time the same are remitted to an overseas supplier or affiliate.

Customs Compliance and Risk Assessment. Of course, an international best practice is the conduct of an internal Customs Risk and Compliance Assessment – a diagnostic and risk-management tool to assess and verify the compliance level and specific risk areas in the trading (export/import) operations of a company. The assessment should mimic how customs will conduct the audit and should identify financial exposures including possible duty-saving opportunities.

For companies that have already conducted their internal assessments, one clear benefit is that they now possess a reasonable assurance and comfort level that they are “audit ready” and that they do not have skeletons in their closet or if they had, that measures have been prepared to legitimately address the same.

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 agatonuvero@yahoo.com and agatonuvero@customstrade.asia 

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