Written by Dennis Anthony P. Caronan, 31 May 2007
A company’s audited financial statements (AFS) is one of the most important document mandated by law to be submitted to concerned government agencies, i.e., the Bureau of Internal Revenue (BIR) and the Securities and Exchange Commission (SEC), on specific dates. For companies following the calendar year basis of reporting, the deadline for submission of the AFS with the BIR is not later than April 15 and for those under fiscal year basis, 15 days of the fourth month from end of the fiscal year. A copy of the BIR stamped AFS is submitted to the SEC 30 days thereafter. Prior to these deadlines, the preparation is accompanied by effort at looking into financial statements, mining through tax culpabilities and preparing support information – all necessary in anticipation for a possible Tax Audit compliance to be initiated by the BIR.
Unknown to many companies (specifically those in manufacturing and trading), there is another equally important reporting requirement which does not have an officially prescribed deadline but requires a similar attention of proactive preparation– and that is the Customs Post Entry Audit (PEA).
PEA is a post release evaluation of relevant company practices and records to assist the Bureau of Customs make judgment about the information supplied to them at the time of importation. Specifically, the PEA process verifies the truthfulness or accuracy of the declared customs value and tariff classification of all importations into the country.
Six years into its roll-out and implementation, it has been documented that there is a nascent rise of PEA activities. From a low of 55 Audit Notification Letters (ANLs) issued in 2006, 99 ANLs have been issued from January to April this year, reflecting a very sharp increase as compared to previous years. The increasing PEA effort, albeit considered bane by some in the private sector, must be welcomed positively as it adopts a very transparent system (e.g. WTO’s Transaction Value System) and reflects the Customs effort to embrace international customs practices.
In welcoming and preparing for an Audit though, importers must remember the initials “TP-ARR-FA-RK” (pronounced as TPARR FARK). It is an odd sounding acronym that details a sound approach in dealing with Customs during an Audit process:
Trade profile
Based on the implementing rules and guidelines on the audit process, we expect Customs to initiate the audit by first securing a "trade profile" of the company - nature of the business, background and organisational set up, volume and value of imports/exports, type and classification of products, trading arrangements, taxes (VAT and excise) and duties paid, history of customs issues, corporate officers and staff involved in the trading activities, availment of tariff privileges, etc. In preparation for possible customs audit, a company is therefore advised to prepare a trade profile kit containing most, if not all, of the above information.
Audit readiness of records
Once the Customs audit team gains a general understanding of the company's trading business, the auditors will now require the presentation of specific import documents and business records. Most companies have a policy of retaining company records for five years. Unfortunately, while companies are normally ready to present records in case of BIR audit, we expect companies to have problems submitting the specific information requirements in case of a custom audit. For one, customs will require a list of import documents with reference to import entry numbers. Unfortunately, many companies keep records based on an internal record system (e.g. SAP) without reference to import entry numbers. As such we expect delays in the companies' presentation of specific import records.
Focus areas
During the course of an audit, we expect customs to look into the following focus areas:
a. Customs Declaration Process
b. Customs Value Information
c. Customs Classification and Product Description
d. Inventory Control; Goods Quantity
e. Licencing, Marking and Rules of Origin
f. Tariff Preferences (e.g. AFTA-CEPT, AFMA)
g. CBW, BOI and PEZA operations.
Record keeping
Part of the risk assessment and system review in an audit is to check whether the company has an established system of keeping import records and business information as required by the PEA law. Does the system enable Customs to easily access records for audit purposes? Companies should note that the longer it takes to present the records, the more likely Customs will assume the existence of non-compliance issues. This can complicate the process resulting in Customs taking more time to conduct the audit.
In addition, we also expect Customs to check the inventory records of the company, including those used for manufacturing, to check on possible exception reports of over shipment. Sampling of specific products can be taken to verify the correctness of the product classification, description, licensing (import permits) and marking. In the course of the audit, customs will likely conduct an interview of the company's customs brokers and verify records of the customs brokers as against importer's records. In general, the extent of the audit will depend on the complexity of the trading transactions and the number of non-compliance issues of the specific company being audited.
In essence, the continuing rise of PEA effort must be embraced more openly as it promotes better compliance with the Customs system and transparency in the regulatory process on how audit is administered. With “TPARR FARK” as a proactive tool, an upcoming audit will be dealt upon by companies with ease and confidence.
