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Changes to customs audit rules

by June 12, 2016 General

June 12, 2016 8:50 pm

On May 27, 2014, President Aquino signed into law Republic Act (RA) 10863 or the Customs Modernization and Tariff Act (CMTA), paving the way for sweeping changes in the way the Bureau of Customs (BoC) operates. The move was also seen as a way to promote transparency and efficiency in the BoC and elevate its systems and procedures to the level of global best practices.

The CMTA Law was crafted with the Revised Kyoto Convention (RKC) in mind. The RKC is also known as the International Convention on the Simplification and Harmonization of Customs Procedure, to which the Philippines is a signatory. The RKC provides for a comprehensive set of uniform principles for simple, effective, and predictable Customs procedures. Its aim is to address the needs of both modern day Customs administrations and the demands of international trade by providing a balance between the Customs functions of control and revenue collection and that of trade facilitation. The implementation of the RKC will provide international commerce with predictability and efficiency required by modern trade.

The upcoming changes include the alignment of the Philippines’ Customs Law with the standards and recommended practices of the RKC, thus harmonizing Philippine procedures with 140 Customs administrations, making it easier for traders, importers, and exporters to comply with border requirements.

The CMTA shall also introduce changes to customs audit rules. Under the CMTA, compliance verification shall be done through post clearance audit (PCA). PCA is a system that authorizes the conduct of audit examination, inspection, verification and investigation of transaction records of importers. Under the RKC, the post-clearance audit is defined as a measure “by which the Customs satisfy themselves as to the accuracy and authenticity of declarations through the examination of the relevant books, records, business systems and commercial data held by persons concerned.”

Post-clearance audit is a critical control methodology for Customs and other border regulatory authorities as it enables them to apply a multi-layered, risk-based control approach by moving from a strictly transaction-based control environment to a stronger audit-based administration.

Prior to the institution of this reform, the BoC conducted its examination through a post-entry audit (PEA). Under this system, the BoC performs a post-release (of goods) evaluation of relevant company practices and records to make a determination as to the integrity of the information submitted to Customs at the time of entry lodgment. It verifies the truthfulness of the customs value declaration, volume and tariff classification of imported products as against source documents and records to determine the customs compliance level of the importers.

It may be recalled that post-entry audit used to be done by the Post Entry Audit Group of the BoC, until it was dissolved and replaced by the Fiscal Intelligence Unit (FIU) of the Department of Finance (DOF). On February 5, 2014, the DOF issued Department Order (DO) 11-2014, prescribing the new general post-entry audit guidelines and procedures to be adopted by the FIU.

Some of the features of RA 10863 that will have significant impact on customs inspection and/or audit rules/practices are:
Document retention period

In DO-11-2014, the importation documents are required to be kept for a period of 10 years from the date of filing of the Import Entry Declaration. This is aligned with the 10-year requirement of the Bureau of Internal Revenue (BIR) for the preservation of books and accounting records. Under RA 10863, all importers are now required to keep all records pertaining to the ordinary course of business operations for a period of three years from the date of final payment of duties and taxes or customs clearance.

Record storage requirement

Under the Tariff and Customs Code of the Philippines (TCCP), as amended, documents such as company or entity structure, ordering and purchase documentation, shipping, importation, exportation, and transportation documentation, manufacturing, stock and resale documentation, bank documents, etc., are required to be kept by the importers. The new law now provides that the BoC shall keep a database of importer and broker profiles, which shall include a record of audit results and information such as Articles of Incorporation, company structure, key importations, privileges enjoyed, penalties and risk categories.

Rationalization of penalties

The new law rationalizes penalties by softening the fines for some violations. For failure to pay proper duties and taxes, the new law decreased the penalty from three degrees of culpability (i.e., negligence, gross negligence and fraud) to two degrees (i.e., negligence and fraud) subject to any mitigating, aggravating, or extraordinary factors that are clearly established by available evidence.

For a deficiency resulting from the guilty offender’s commission of negligence, the administrative fine under the old law was equivalent to not less than one-half but not more than two times the revenue loss in case of a negligence and a fine equivalent to not less than 2 ½ but not more than four times the revenue loss in the case of gross negligence.

This is much higher compared with the new law, which imposes a straightforward fine equivalent to 125 percent of the revenue loss for the offender’s negligence. Also, there is generally no substantial penalty imposed on an inadvertent error amounting to simple negligence.

As to the commission of fraud, the administrative fine of the guilty offender under the old law was equivalent to not less than five times but not more than eight times the revenue loss, whereas under the new law the fine is equivalent to six times the revenue loss and/or imprisonment of not less than two years, but not more than eight years.

Further, in the old law, the Commissioner of Customs has the authority to compromise the imposition of the fines under certain circumstances; there is no mention of such power of the BoC under the new law.

Limited audit scope

Under the new law, there is a narrower scope confined to the selection and audit of importers. In the current regime, the audit of importers is limited only when firms are selected by a computer-aided risk management system, the parameters of which are based on objective and quantifiable data. With the old law, the detection of errors in the import declaration and the firm’s voluntary request to be audited did not give rise to a post-clearance audit. This change will lead to a more objective process in selecting firms to be audited.

Broadened power

The power of the Commissioner of BoC has been broadened for the effective implementation of the post-clearance audit functions. Now, the Commissioner is authorized to obtain on a regular basis any relevant information from any person, office, or officer of national and local governments, government agencies and instrumentalities, including the Bangko Sentral ng Pilipinas (BSP) and government-owned and –controlled corporations (GOCCs). The Commissioner can also summon the person liable for duties and taxes, or any other person, to appear before the Commissioner and produce such books, papers, or other data, and to give testimony. Most importantly, the Commissioner can obtain information from banks or other financial institutions on commercial documents pertaining to specific payments relevant to import transaction, but not inquire into bank deposits of specific persons.
With the implementation of the post-clearance audit, the BoC may achieve a more effective and efficient examination approach and, hopefully, reduce if not eliminate completely corrupt practices and opportunities for extortion. Not only will this restore the public’s trust in the Bureau, it will also lead to increased revenue collection for the government.

The author is a Senior Manager with the Tax & Corporate Services division of Navarro Amper & Co., the local member firm of Deloitte Southeast Asia Ltd., a member firm of Deloitte Touche Tohmatsu Limited—comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.