Revisiting Customs compliance: Changes in post-entry audit

To keep up with the changes of enhanced international trade and automated import-export procedures, Republic Act (R.A.) No. 10863 or the Customs Modernization and Tariff Act (CMTA) was signed into law on May 30, 2016. It took effect on June 16, 2016.

The CMTA was Drafted bearing in mind the provisions of the Revised Kyoto Convention (RKC), to which the Philippines is a signatory. The RKC or the International Convention on the Simplification and Harmonization of Customs Procedures is widely regarded as the blueprint for modern and efficient customs procedures. In the simplest terms, it is the international standard for making customs regulatory procedures as efficient as possible.

One key area significantly affected by the CMTA is how post-clearance audit (previously referred to as post-entry audit) is enforced. The first post-entry audit system was introduced in 2002 to facilitate trade and ensure proper application of the World Trade Organization (WTO) Valuation Agreement and other relevant regulations. Post-entry audit is defined as a post-release evaluation of relevant company practices and records to determine the integrity of information submitted to the Bureau of Customs (BoC) at the time of entry lodgment. The truthfulness and accuracy of the declared customs value, volume, and tariff classification of importations are verified and validated by the authorized BoC officers by examining the records kept by importers. 

Under the old law, the Post Entry Audit Group (PEAG) of the BoC was empowered to conduct compliance audits on the import, export and trading activities of importers, and to some extent, those of the customs brokers. In 2013, this function was transferred to the Department of Finance’s Fiscal Intelligence Unit (DoF-FIU) with the passage of Executive Order No. 155. With the effectivity of the CMTA, the power to conduct customs compliance audits was shifted back to the BoC.

The CMTA provides notable changes in post-clearance audits in the areas of record keeping, penalties, and audit selection.

Record keeping
The BoC has three years (previously lengthened to 10 years by the DoF) from the date of payment of the final duties and taxes to conduct the audit. Thus, importers are required to retain import transaction records for the same three years at their principal place of business. For this purpose, the term “importer” includes: (1) the importer of record or consignee, owner or declarant or a party who imports goods into the Philippines or withdraws such goods into the Philippine customs territory for consumption or warehousing, one who files a claim for refund or drawback; or one who transports/stores goods held under security; (2) an agent of any party described in Item 1; and (3) any person whose activities require the filing of goods declarations.

Since the import records are considered as the best evidence to prove the nature and value of the importer’s customs transactions, failure to keep them shall constitute a waiver of the right to contest an audit based on the records of the BoC.

Penalties
Under the old law, if the BoC finds the importer liable, in addition to the settlement of the unpaid duties and taxes determined after the audit, the importer shall also be subject to penalties such as fines (ranging from 50% to as much as 800% of the revenue loss), imprisonment (2 to 8 years), or both, depending on the degree of culpability for commission of negligence, gross negligence, or fraud.

With the passing of the CMTA, the penalties are now limited to only two degrees of culpability subject to mitigating and aggravating circumstances established by clear-cut evidence. For deficiency arising out of negligence, the new law imposes a fine equivalent to 125% of the BoC’s revenue loss, while those arising from fraud trigger a fine equivalent to six (6) times the revenue loss and/or imprisonment of 2 to 8 years.

Audit selection
The selection of importers for audit purposes will be done through a computer-aided risk management system where the importer’s relative magnitude of generated customs revenue, rates of duty and compliance track record are considered, among others. This approach is similar to the BoC’s previous audit selection where profiling is performed based on the activities of importers prior to the issuance of an Audit Notification Letter.

Ultimately, since new rules on post clearance audit will be implemented, importers will be interested in the possibility of availing themselves of a Voluntary Disclosure Program (VDP). Previously, if deficiency duties and taxes are found to be the result of plain error or innocent mistakes in the import entry, the importer may voluntarily disclose the errors or mistakes to the BoC thru the VDP. 

The VDP was adopted by the BoC under Customs Administrative Order No. 5-2007, as implemented by Customs Memorandum Order No. 18-2007, to provide a facility for importers to voluntarily disclose to PEAG any errors or mistakes in their Import Entry Revenue Declarations and pay the corresponding deficiency duties and taxes without the imposition of any penalties. Simply put, the mechanism offered amnesty to importers for inadvertences in their import transactions. In addition to getting a clean slate, the VDP afforded importers with “least priority status” for audit purposes, which means they would not be considered for audit selection for two (2) years from the time of their availment, subject to certain conditions. 

When the post-entry audit function was shifted to the DoF-FIU in 2013, there was uncertainty whether the VDP option was still available to importers. While the final provisions of the CMTA provides for saving and repealing clauses (i.e., all laws, rules and regulations, including customs memorandum circular and orders, that are not inconsistent with the provisions of the CMTA will remain valid unless otherwise repealed or amended), the availability of the VDP will only be made clear when the Implementing Rules and Regulation (IRR) of the CMTA are issued. 

I believe that the CMTA is a vital piece of legislation that will help the BoC achieve its vision of a modernized and efficient customs administration. We can only hope that the changes will make customs valuation and inspection procedures more transparent and predictable for all stakeholders involved.