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Customs Update & Managing Post-Entry Audit

Customs Update & Managing Post-Entry Audit. By: Atty. Mark Anthony P. Tamayo, CPA Partner, Tax & Global Trade & Customs Services June 4, 2014. Transfer of Post Entry Audit Presentation Outline. Executive Order (EO) No. 155 Transfer of Post Entry Audit Functions from BOC-PEAG to DOF-FIU

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Customs Update & Managing Post-Entry Audit

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  1. Customs Update & Managing Post-Entry Audit By: Atty. Mark Anthony P. Tamayo, CPAPartner, Tax & Global Trade & Customs Services June 4, 2014

  2. Transfer of Post Entry AuditPresentation Outline • Executive Order (EO) No. 155 • Transfer of Post Entry Audit Functions from BOC-PEAG to DOF-FIU • DOF Department Order (DO) - 11-2014 • General guidelines to be followed by the FIU and importers • New rules vs. Old rules • Record keeping • Basic Audit Process • Summary of Changes • Best Practices Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  3. Transfer of Post Entry AuditIntroduction “Finance assumes customs audit”--- Manila Standard Today, February 10, 2014 “Customs’ post audit team abolished”--- Philippine Daily Inquirer, February 9, 2014 “New DOF unit takes over BOC’s post entry audit functions”--- The Philippine Star, January 1, 2014 “DOF releases post-entry audit rules to catch ‘big time’ smugglers”--- Manila Bulletin, February 9, 2014 Managing Customs Audit: A Workshop on Customs Laws and Updates March 25, 2014

  4. Transfer of Post Entry Audit FunctionsFIU as the new customs audit per EO No. 155 • Executive Order (EO) No. 155 • Official Title: Amending EO No. 160 (s. 2013) and for Other Purposes • Signed by the President on December 18, 2013 • Took effect upon publication in Manila Bulletin on December 28, 2013 • Essence: The post-entry audit functions, which were previously exercised by the BOC’s Post Entry Audit Group (PEAG), were transferred to the DOF’s FIU. Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  5. What is the nature of the post entry audit functions transferred to FIU? • Under Section 1 of EO No. 155, the following functions of the PEAG per EO No. 160, and other tasks inherent or incidental thereto, were transferred to the FIU: • Trade Information and Risk Analysis Office (TIRAO): • Set the framework and benchmarks for compliance measurements of industry groups • Direct the development of a computer-aided risk management system (xxx). • Implement the computer-aided risk management system to develop audit selection parameters based on objective and quantifiable data • Establish and recommend audit targets to the Commissioner of Customs • Set policies and guidelines relating to the audit (xxx) • Perform other related functions • Compliance Assessment Office (CAO): • Formulate audit work plan for approved audit targets • Conduct audit examination, inspection, verification or investigation in accordance with the set policies, guidelines, manuals and standard operating procedures. • Prepare and submit audit reports • Develop and implement a customs compliance program • Perform other related functions Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  6. FIU audit preparations • In accordance with the winding-up of PEAG functions under Section 2 of EO No. 155, and the Transitory Provisions of DO No. 011-2014: • The PEAG was ordered to submit an inventory of ongoing audits and pending VDP application to the FIU. • There is an ongoing physical turnover of dockets to FIU. • The audit of all pending cases will be continued by the FIU • The FIU formed a new set of examiners (around 48), who are currently undergoing customs audit trainings. Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  7. FIU audit preparations • The DOF issued DO No. 011-2014, or the general guidelines to be followed by the FIU and importers. • Signed on February 5, 2014 • Took effect on February 28, 2014 (or after 15 days from its publication in Manila Standard Today last February 13, 2014). • TheDOFis also preparing a separate set of compliance audit guidelines that will strictly govern the conduct of audit examination (Section 11 of DO No. 11-2014). Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  8. FIU audit proceduresThe way to look at the new rules vs. old rules • Based on Section 20 of DO No. 011-2014, “all order, memoranda, circulars or other issuances or parts thereof which are inconsistent with this DO are hereby deemed repealed and/or modified accordingly”. VS. • Old PEAG rules: • CAO No. 04-2004 or the PEAG Audit Guidelines • CAO No. 5-2007 and CMO No. 18-2007 or the Rules on Voluntary Disclosure Program • Other pertinent issuances • New FIU rules: • DO No. 011-2014 • Separate set of Compliance Audit Guidelines (to be issued by the FIU) Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  9. DO No. 11-2014Record Keeping • All importers are required to keep importation records at their principal place of business for a period of ten (10) years from the date of filing of the import entry. • “Importer” shall include: (1) Importer of record/consignee, (2) Beneficial owner (3) Agent of the persons effecting the importation (4) Any other person who knowingly causes the goods to be imported. • There is a similar 10-year requirement to keep records on handling customs brokers. Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  10. DO No. 11-2014Record Keeping • Since the 10-year period to keep records is prejudicial to the importer, it should be applied prospectively. • Hence, for importations made in February 2014, the records should be kept until February 2024. February 2014 February 2024 10 years Period to keep records Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  11. DO No. 11-2014Record Keeping • Under a more aggressive application, the DO No. 011-2014 can be interpreted to apply to importations made in February 2011 (which should not yet be disposed, and be kept for an additional 7 years). February 2011 February 2014 February 2021 + 7 years 3 years Period to keep records Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  12. DO No. 11-2014Record Keeping * To the extent relevant for the verification of the accuracy of the transaction value declared and for collecting the proper duties and taxes on imports. Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  13. DO No. 11-2014Record Keeping • Penalties for failure to keep records (Section 13): (a) Imposition of administrative fine equivalent to 20% ad valorem on the articles for which no records were kept; (b) Cancellation of accreditation privileges; (c) Criminal prosecution punishable with a fine of Php100,000 to Php 200,000 and/or imprisonment of 2 years and 1 day to 6 years Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  14. DO No. 11-2014Record Keeping • Penalties for failure and/or refusal to give full and free access to records: Same as (a), (b), and (c) for failure to keep records (d) Punishment for contempt, for contumacy or refusal from the proper court having criminal jurisdiction (in relation to Section 12) (e) Re-assessment of the importations subject to audit applying the correct valuation method based on available data, the declared transaction value being presumed inaccurate (in relation to Section 12). Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  15. Basic Audit Process PRE-AUDIT STAGE PREPARATORY STAGE AUDIT STAGE FINAL STAGE Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  16. ProfilingWho shall be audited Under Section 4 of DO No. 011-2014: • Importers selected by a computer-aided risk management system (based on importer profiling factors): • Relative magnitude of customs revenue from the importer • Rates of duties of the importer’s imports • Compliance track record of the importer • Assessment of the risk to revenue of importer’s import activities Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  17. ProfilingWho shall be audited • When errors in the import declaration are detected • Importers who voluntary request to be audited, subject to the approval of the Commissioner of Customs, upon recommendation of the FIU • Brokers, to validate audits of their import clients and/or fill in information gaps revealed during an audit of their importer clients Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  18. ProfilingWho shall be audited • As in the past, the audits can cover importers from various industries. • Even PEZA, SBMA, CDC and other importers enjoying duty and tax incentives are subject to audit. • Basically, all importers may be audited. Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  19. Issuance of ANLs What is an Audit Notification Letter (ANL)? • It is the equivalent of the BIR’s Letter of Authority (LOA) or Letter Notice (LN) • Signed by the BOC Commissioner • Authorizes the conduct of audit (i.e., 3 years from the date of final payment/settlement of duties) • Defines the specific period covered by the audit Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  20. Issuance of ANLs Procedure for Issuance of ANLs • If the FIU determines that there is basis to conduct an audit, it shall inform the BOC Commissioner in writing. • Within 15 days from receipt of notice from FIU, the BOC Commissioner shall issue an ANL to the concerned importer and the broker. • According to the standard ANL form, the ANL shall be served within 30 days from date of issuance. Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  21. Issuance of ANLs The FIU notice and the ANL shall state the following: • The names of the members of the audit team • Date, time and venue of pre-audit conference • Date of commencement of audit proper Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  22. Submission of Documents • Based on the standard ANL form, the ANL shall be accompanied by the following: • A list of documents for compliance audit; and • A General Customs Questionnaire (to be accomplished). • These documents are required to be submitted to the FIU prior to the Pre-Audit Conference. Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  23. Issuance of ANLs • The documents to be submitted shall be certified by the importer and/or broker as true copies(Section 9). • The FIU may require the submission of additional documents, as may be necessary (Section 10). Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  24. Pre-Audit Conference • DO No. 011-2014 is silent as to the details of the conduct of the Pre-Audit Conference. • Based on previous PEAG practices, the audit team and the auditee meet during the Pre-Audit Conference to discuss the following: • Purpose and scope of audit • Audit timetable • Records to be retrieved/reviewed • Working space requirements • Company systems Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  25. Audit Proper or “Field Audit” • DO No. 011-2014 is silent as to the details of the conduct of the Audit Proper. • Based on previous PEAG practices, there is no definite timetable for the audit proper. The review heavily depends on the nature and complexity of the issues raised. Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  26. Audit Proper or “Field Audit”Audit Procedures Previously Adopted by the PEAG 1. Random sampling of importations (based on high value shipments, duty rates or duties and taxes paid) or full audit (all importations), as may be deemed necessary. For this purpose, the examiner may refer to either: • MISTG data; and/or • Submitted schedule of importations 2. Raising of default issues, such as: • Royalties and license fees; • Various payments by importer to supplier; • Other possible issues (such as record keeping) Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  27. Audit Proper or “Field Audit”Audit Procedures Previously Adopted by the PEAG 3. Preparation of issues and initial findings 4. Requiring importer-auditee to submit explanations and supporting documents 5. Cancellation of the issues (if explained/supported) or Reiteration of issues (during audit or at the Exit Conference stage, preparatory to issuance of a Final Assessment Report and Recommendation [FARR]) Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  28. Audit Proper or “Field Audit”Focus on Computation of Duties and Taxes DUTIES Cost x x x (Sec. 201 TCCP, as amended) Insurance x x x (CMO No. 22-07) Freight x x x (CMO No. 22-07) Other Dutiable Charges x x x (CMO No. 16-10) Dutiable Value in Foreign Currency x x x Conversion rate x x x (CAO No. 14-02) Dutiable Value in Pesos x x x Duty Rate (based on classification) x x x (Section 104 TCCP, as amended) Customs Dutyx x x VAT Dutiable Value x x x Customs Duty x x x Excise tax, if any x x x Add: Other Charges Bank Charges (1/8 of 1%) x x x Brokerage fee x x x (CAO No. 01-01) Wharfage x x x (CAO No. 26-95/CMO No. 32-09) Arrastre x x x (CAO No. 26-95) Customs stamps x x x (CAO No. 02-01 & Sec 188 NIRC) Import Entry Processing fee x x x (CAO No. 02-01) VAT Base x x x VAT rate 12% VATx x x Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  29. Common IssuesCategories of Issues • For customs duties: • Valuation issues • Classification issues • For VAT on importation: • Correctness of landed cost (VAT base) • Other issues • Industry specific issues (i.e., issues of auditees with incentives) • Record keeping • Reconciliation of Discrepancies Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  30. Common IssuesCustoms Duties (Valuation Issues) Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  31. Common IssuesCustoms Duties (Valuation Issues) Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  32. Common IssuesCustoms Duties (Valuation Issues) Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  33. Common IssuesVAT on Importation (Landed Cost Issues) Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  34. Common IssuesOther issues – Record Keeping • All importers are required to keep complete copies of import documents for a period of 10 years from the date of filing of import entry (DOF Department Order No. 011-2014). Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  35. Common Issues during Post Entry AuditOther issues – Reconciliation • The reconciliation exercise may involve: • MISTG records vs. Schedule of Importations. • MISTG records vs. VAT returns. • Schedule of importations vs. GL or Audited FS. Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  36. Common Issues during Post Entry AuditOther issues – Industry Specific (PEZA) As a rule, importations by PEZA locators are not subject to customs laws, rules and regulations. Section 1, Rule XV of the IRR of RA No. 7916: “Raw materials, supplies and articles brought into the ECOZONE and used in the processing and manufacturing activities of PEZA locators, whether directly or indirectly related in such activity, shall not be subject to customs and internal revenue laws and regulations nor to local tax ordinances.” Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  37. Common Issues during Post Entry AuditOther issues – Industry Specific (PEZA) Foreign Suppliers Locators in other PEZA zones For EXPORT Other Locators within PEZA zone For EXPORT PEZA locator- importer For EXPORT For Local Sales Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  38. Common Issues during Post Entry AuditOther issues – Industry Specific (PEZA) The audit team may check if: • PEZA company has secured the BIR ICC and BOC accreditation as importer • Importations are covered by Import Permits, etc. • Imported goods actually reach ECOZONE (Swing importations) • Imported goods are used in Registered Activities • Imported raw materials are actually exported (vis-à-vis sales to customs territory) • Scrap sales • Liquidation is properly made (shortage/overage) • Procedures and documentation requirements are duly complied with under PEZA rules. Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  39. Exit Conference • DO No. 011-2014 is silent as to the details of the conduct of the Exit Conference. • Based on previous PEAG practices: • The audit team shall meet with the auditee during Exit Conference to discuss the audit findings. • The auditee is given the chance to comment, file position papers and submit supporting documents to challenge the audit findings. Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  40. Exit Conference In case of failure to pay proper customs duties and taxes on importation, the importer shall be subject to administrative penalties(Section 15 of DO No. 011-2014). • Fines and penalties depending on the degree of culpability • Negligence ½ to 2 times the revenue loss • Gross Negligence 2½ to 4 times the revenue loss • Fraud  5 to 8 times the revenue loss •  Criminal prosecution Failure to pay Proper duties and taxes Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  41. Issuance of FARR • DO No. 011-2014 is silent as to the details of the procedure for issuance of the Final Audit Report and Recommendation (FARR). • Based on previous PEAG practices: • The audit team prepares and submits a FARR to the BOC Commissioner. • Upon approval of the FARR, the auditee will be issued a Management Letter in the form of a Demand Letter (stating the amount of deficiency duties and taxes, inclusive of penalties). Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  42. Basic Audit ProcessApplicable Rules PRE-AUDIT STAGE PREPARATORY STAGE AUDIT STAGE FINAL STAGE Covered by DO No. 011-2014 Not covered by DO No. 011-2014, and may be the subject of Compliance Audit Guidelines Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  43. Authority to Compromise Penalties • DO No. 011-2014 retains the BOC Commissioner’s authority to compromise penalties for failure to pay proper customs duties and taxes. • The compromise is subject to approval of the Secretary of Finance. • It does not cover cases of fraud and other cases specified by law. • It applies when the importer makes a voluntary and full disclosure prior to the commencement of the audit stated in the ANL. (Based on Section 2316 of the TCCP, as amended, CAO No. 4-04, and the VDP rules per CAO No. 5-2007 and CMO No. 18-2007). Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  44. Voluntary Disclosure ProgramOverview • It is a remedy offered by the BOC to erring importers (under CAO No. 5-2007 and CMO No. 18-2007). • It allows importers to voluntarily correct any erroneous, inaccurate or insufficient information declared to the BOC at the time of entry of the goods. • Errors covered are due to sheer mistake, inadvertence or negligence. Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  45. Voluntary Disclosure ProgramBenefits • VDP is not time bound. • Waiver of the penalties imposable for deficiency duties and taxes. • Grant of “Least Priority” status in audit selection process for the succeeding 2 years from date of filing (subject to certain conditions). Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  46. Voluntary Disclosure ProgramPeriod to Avail PREPARATORY STAGE PRE-AUDIT STAGE AUDIT STAGE FINAL STAGE Avail of the VDP Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  47. Summary • The post-entry audit functions are now exercised by the FIU, no longer by the PEAG. • The period to keep records is now 10 years from date of filing of the import entry. • Failure to keep records or give full/free access to records may now result in cancellation of accreditation privileges. Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  48. Summary • DO No. 011-2014 covers the procedures on Profiling and Issuance of ANLs/Submission of documents. • DO No. 011-2014 is silent as to Pre-Audit Conference, Audit Proper, Exit Conference and Issuance of FARR. • The previous PEAG rules (which are not inconsistent) may apply • Subject to issuance of separate Compliance Audit Guidelines • DO No. 011-2014 retains the BOC Commissioner’s authority to compromise penalties for failure to pay proper customs duties and taxes. Managing Customs Audit: A Workshop on Customs Laws and Updates April 8, 2014

  49. Best Practices • Strict compliance with customs and tax laws, rules and regulations • Pre-importation valuation and classification review • Secure BOC ruling • Secure Tariff Classification ruling • Customs Broker management • Customs Compliance Review • Customs Manual

  50. SGV Contact Details

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