Customs Update & Managing Post-Entry Audit

Page 1 A member firm of Ernst & Young Global Limited

CUSTOMS UPDATE & MANAGING POST-ENTRY AUDIT By: Atty. Mark Anthony P. Tamayo, CPAPartner, Tax & Global Trade & Customs Services

June 4, 2014

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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

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Transfer of Post Entry AuditIntroduction


March 25, 2014

“Finance assumes customs audit”--- Manila Standard Today, February 10, 2014

“DOF releases post-entry audit rules to catch ‘big time’ smugglers”--- Manila Bulletin, February 9, 2014

“New DOF unit takes over BOC’s post entry audit functions”--- The Philippine Star, January 1, 2014

“Customs’ post audit team abolished”--- Philippine Daily Inquirer, February 9, 2014

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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.


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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:


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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

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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.


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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).

► TheDOF is 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).


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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.


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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)

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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.


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► 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.


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February 2014

February 2024

Period to keep records

10 years

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► 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).


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February 2014

February 2021

Period to keep records

February 2011

3 years + 7 years

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Required Documents* Importers

Brokers

(a) Company or entity structure Yes -(b) Ordering and purchase documentation Yes -(c) Shipping, importation, exportation and transportation documentation

Yes Yes (c1 to c13)

(d) Manufacturing, stock and resale documentation

Yes -

(e) Bank documents, financial statements and other accounting information

Yes -

(f) Charts and codes of accounts, ledgers, financial statements, accounting instruction manuals, and systems and program documentation

Yes -

(g) If applicable, papers, books, registers, discs, films, tapes, sound tracks, and other devices or things where items (a) to (f) are recorded or stored

Yes Yes(c1 to c13)

* 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.

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► 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


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► 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).


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Basic Audit Process


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Profiling Pre-audit conference Exit Conference

PREPARATORY

STAGE

PRE-AUDITSTAGE

AUDITSTAGE

FINALSTAGE

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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


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► 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


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► 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.


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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


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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.


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Issuance of ANLs


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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

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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.


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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).


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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


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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.


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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)


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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])


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Audit Proper or “Field Audit”Focus on Computation of Duties and Taxes


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DUTIESCost 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 xConversion rate x x x (CAO No. 14-02)Dutiable Value in Pesos x x xDuty Rate (based on classification) x x x (Section 104 TCCP, as amended) Customs Duty x x x

VATDutiable Value x x x

Customs Duty x x xExcise tax, if any x x xAdd: Other Charges

Bank Charges (1/8 of 1%) x x xBrokerage 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 xVAT rate 12%VAT x x x

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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


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Common IssuesCustoms Duties (Valuation Issues)


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Issues Sub-Issues BasisCorrect Valuation Method

Method 1-TV of the GoodsMethod 2-TV of Identical GoodsMethod 3-TV of Similar GoodsMethod 4-Deductive ValueMethod 5-Computed ValueMethod 6-Fallback Value

Section 201 of TCCP, as amended

Cost Accuracy of the “price actually paid or payable”

Section 201 of TCCP, as amended

Existence of relationship between the parties (which may have influenced the price)Price adjustments / Fluctuation of pricesParallel importationsTriangular shipmentsInterest payments for imported goods

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Issues Sub-Issues BasisOther Dutiable Charges

Commissions and brokerage fees (except buying commissions)

CMO 16-10

Cost of containers CMO 16-10

Cost of packing, whether for labor or materials CMO 16-10

Assists CMO 16-10

Royalties and license fees CMO 16-10

Proceeds of subsequent resale CMO 16-10

Cost of transportation (i.e., freight, ex-works) CMO 22-07

Loading, unloading and handling charges associated with the transport (i.e., terminal handling charges)

CMO 16-10

Cost of Insurance CMO 22-07

Forex Rate

Use of the correct forex rate issued by the BSP (i.e., applicable Friday rate)

CAO 14-02

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April 8, 2014

Issues BasisApplicable tariff classification Section 104 of the

TCCP, as amended(subject to applicability of FTAs or special laws)

Applicable duty rate- Use of regular MFN rates - Use of preferential rates under a FTA- Use of special rates under special laws

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Common IssuesVAT on Importation (Landed Cost Issues)


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Issues Sub-Issues BasisLanded cost

Dutiable value CMO 16-10Customs duties VariousExcise tax Title VI of NIRCBank charges (1/8 of 1%)Brokerage fee CAO 1-01Wharfage CMO 26-95 and

CMO 32-09Arrastre CAO 26-95Documentary customs stamps CAO 2-01 and

Section 188 of NIRC

Import Processing Fee (IPF) CAO 2-01

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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).


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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.


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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.”


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April 8, 2014

Foreign Suppliers

Locators in other PEZA

zones

PEZA locator-importer

Other Locators within PEZA

zone

For EXPORT

For EXPORT

For EXPORT

For Local Sales

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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.


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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.


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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).


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Failure to pay Proper duties and taxes

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

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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).


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Basic Audit ProcessApplicable Rules


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PREPARATORY

STAGE

PRE-AUDITSTAGE

AUDITSTAGE

FINALSTAGE

Covered by DO No. 011-2014

Not covered by DO No. 011-2014, and may be the subject of Compliance Audit

Guidelines

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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

UpdatesApril 8, 2014

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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.


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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).


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Voluntary Disclosure ProgramPeriod to Avail


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PREPARATORY

STAGE

PRE-AUDITSTAGE

AUDITSTAGE

FINALSTAGE

Avail of the VDP

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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.


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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.


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► 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

Best Practices

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NAME / POSITION CONTACT DETAILSMark Anthony P. TamayoPartner

Tel No. 894-8391Email: [email protected]

Stephanie G. Vicente-NavaSenior Director

Victor C. De DiosDirector



SGV Contact Details

mailto:[email protected]



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Thank you!


April 8, 2014

Customs Update & Managing Post-Entry Audit

Documents

new customs audit

audit xxxperform

audit reportsdevelop

customs post audit team

postentry audit functions

audit work plan

audit selection parameters

customs laws