Our previous article discussed the expanded powers of the Bureau of Customs Post Clearance Audit Group (PCAG). This article will discuss how importers and customs brokers can promote trade compliance and prepare for customs audit.
Compliance Issues. In the conduct of an audit, customs will principally verify whether taxes and duties have been properly paid on importations and whether tariff preferences or exemptions are validly availed. Customs auditors will specifically look at the following:
- availability of import records and financial/bankrecords to support the declarations to customs and the payments made to suppliers;
- VAT payments to customs as against VAT declarations to the Bureau of Internal Revenue;
- inventory costs of importations verified against declarations to BIR;
- value declarations against actual remittances to suppliers;
- tariff classification and duty rates of importations;
- quantity discrepancies between declared customs volumes against inventory records;
- eligibility to avail of tariff preference, duty drawbacks and tariff exemptions;
- liquidation of Customs Bonded Warehouse (CBW) materials;
- payment of correct duties and taxes on materials procured from the Philippine Economic Zone Authority and other Free Zones (e.g. Clark and Subic) entities; and
- availability of permits and licenses on regulated importations.
Internal Control and Record Keeping. In addition to the above concerns, customs will look at the “audit readiness” of the company in terms of record keeping. Under the Customs Modernization and Tariff Act, importers and customs brokers are obliged to keep records within 3 years from date of importation and failure to keep records or refusal to give customs access to these records may result in penalties to the importer or customs broker.
The records required to be kept do not only refer to import documents but also to other business records (financial, inventory and other information) related to the correct and accurate assessment of the duties and taxes payable on the imported article. Customs can also verify bank records in relation to the payments made to overseas suppliers.
As a profiling technique, customs may verify the duty and tax payments of an importer against the input VAT declaration made to BIR, with focus on the discrepancy between the customs data of importation against the data of importation in the VAT return filed. Customs will also look at the internal company controls and procedures to assess the level of risks in the company’s trading transactions.
Tax and Duty Calculation. The proper assessment of duties and taxes on an imported article is dependent on several factors as follows:
- transaction value (price paid or payable) and quantity (inventory)
- freight and insurance costs
- duty rate based on proper classification/tariff heading
- marking duty, safeguard or dumping duty
- duty and tax exemption or preference
Customs audit will involve a review of the tax and duty calculation of a sample set of import transactions. For many companies, errors and mistakes in the calculation in any of the above factors are commonly committed due to the volume of import transaction and due to negligence in the preparation of the import declarations. These errors and mistakes in the calculation may result in a finding of underpayment.
Marking Duty and Tariff Privileges. In addition to the regular taxes (VAT and excise) and duties due on an imported article, many imported articles are subject to additional duties such as marking duties (if improperly marked), or dumping and safeguard duties. Non-payment of such duties upon importation may be uncovered during the conduct of the field audit.
In the case of companies importing articles with lower duty rates under existing free trade agreements (e.g. ASEAN Trade in Goods Agreement or ASEAN-China Free Trade Area) or in case of duty free articles entered into PEZA or free trade zones, customs auditors may verify if an importer has improperly claimed such duty preference and privilege. Interestingly, customs jurisdictions from other ASEAN countries have recently conducted audits on the special preferences granted on Philippines exports. Likewise, Philippine customs has in one instance reviewed the claim for such duty preference on importations from another ASEAN country.
How Do You Prepare? Companies must first ensure that import records are kept within 3 years from importation. Additionally, companies must ensure that financial and accounting records for value declarations to customs are not only available but also readily accessible to customs.
Secondly, companies must internally conduct regular compliance reviews to ensure that import transactions are compliant with trade and customs rules and regulations. Compliance may be a problem for many companies for reasons such as: (1) companies look at customs operations more from a logistics perspective rather than from an indirect tax compliance concern; (2) customs operations are normally outsourced to logistics companies which are mostly not concerned with compliance; and (3) companies do not have internal knowledge and competence for ensuring customs and trade compliance.
The author is an international trade, indirect tax (customs) and supply chain practitioner. He is the Editorial Board Chairman of Asia Customs and Trade, an online portal on customs and trade developments affecting global trade and customs compliance in Asia. For questions, please email him at firstname.lastname@example.org (www.customstrade.asia).