Executive summary

The Philippine Government recently issued Customs Administrative Order (CAO) No. 01-2019, which covers the conduct of the post clearance audit (PCA) by the Post Clearance Audit Group (PCAG) of the Bureau of Customs (BOC) and the implementation of the Prior Disclosure Program (PDP) pursuant to the related provisions of the Customs Modernization and Tariff Act (CMTA).

The CAO No. 01-2019 was approved by the Department of Finance (DO) on 9 January 2019 and shall be effective as of 15 February 2019.

Based on CAO No. 01-2019, the prescribed deadlines to respond to demand letters for deficiency taxes on importation and submit documents to contest the audit findings appear quite challenging for importers. Hence, importers should prepare for the PCA and closely monitor the receipt of the Audit Notification Letter (ANL).

This Alert summarizes the key features of CAO No. 01-2019.

Detailed discussion

Conduct of Post Clearance Audit

• Period to conduct PCA: In the absence of fraud, the BOC has three years from the date of final payment of duties and taxes or Customs Clearance, as the case may be, to conduct a PCA audit and determine any deficiency duties, taxes and other charges, including any fine or penalty, for which an importer may be liable.
• Selection criteria: Importers that will be subjected to PCA shall be selected based on any of, but not limited to, the following criteria:
  • Relative magnitude of customs revenue to be generated from the firm
  • The rates of duties of the firm’s imports
  • The compliance track record of the firm
  • An assessment of the risk to revenue of the firm’s import activities
  • The compliance level of a trade sector
  • Non-renewal of an Importer’s customs accreditation
• PCA process: the PCA shall be conducted through the following process:
  • Profiling/Information Analysis – Risk profiling and analysis on the importers shall be performed by PCAG to identify importers who shall be subjected to a PCA.
  • Issuance of the ANL – The ANL, which contains the names of the authorized personnel to perform the audit, shall be issued by the Commissioner. The ANL shall be valid for 30 calendar days subject to revalidation for another 30 days. This is served to the importer personally, by registered mail or through electronic notice.
  • Preparation of the audit plan.
  • Conduct of audit proper – The conduct of the audit should commence within 60 calendar days and should be completed within 120 days (per year of audit) from the service of the ANL. This may be deferred if the importer manifests his intention to avail of the PDP.

Upon completion of the audit, the team shall issue either a Final Audit Report (FAR) with demand letter if there are findings of deficiency duties, taxes and other charges, or a Clean Report of Findings (CRF), if there are no findings, which shall be endorsed by the Assistant Commissioner, and approved and signed by the Commissioner.

• Service of demand letter for payment of deficiency – If the audit results in findings of deficiency duties, taxes and other charges, the demand letter shall be served to the importer personally, through registered mail or electronic notice. Payment should be made by the importer within 15 days from the receipt of the demand letter.
• The BOC shall issue acknowledgement letter with a statement that the audit is completed if the importer opts to pay the amount per the demand letter.
• The following remedies are available to the importer if he wants to contest the audit findings:
  1. Importer may file a request for reconsideration or reinvestigation with the Commissioner within 15 days from receipt of the demand letter. In the case of a request for reinvestigation, the importer has 30 days from the submission of the request to submit all relevant supporting documents.
  2. If the request for reconsideration or reinvestigation is denied by the Commissioner, the importer may appeal to the Court of Tax Appeals within 30 days from the receipt of the denial.

• Applicable penalties for failure to pay correct duties and taxes on imported goods determined through the conduct of PCA. Importers shall be penalized according to two degrees of culpability below, subject to any available mitigating, aggravating or other extraordinary factors:
  • Negligence – 125% of the revenue loss

In the case of inadvertent error amounting to simple negligence, a penalty of 25% shall be applicable.

• Fraud – 600% of the revenue loss and/or imprisonment of not less than two years but not more than eight years.

Benefit of Prior Disclosure Program

• PDP refers to the program wherein the Commissioner is allowed to accept prior disclosure of errors and omissions in goods declaration resulting in a payment of deficiency duties and taxes.
• Goods declarations disqualified for PDP:
  • Those subject to pending cases with any other Customs office
  • Those which are covered by cases already filed and pending in courts
  • Those involving fraud
• Benefits of PDP
  • A PDP application filed by an importer who has not yet received an ANL shall be subject to payment of the deficiency duties and taxes plus 20% interest per annum.
  • A PDP application filed by an importer who received an ANL shall be subject to payment of deficiency duties and taxes plus a reduced penalty of 10% of the basic deficiency and 20% interest per annum. This should be availed of within 90 calendar days from the receipt of the ANL. The PDP application may be amended within 30 days from its filing.
  • A PDP application covering disclosures on royalties, other proceeds of any subsequent resale, disposal, or use of the imported goods that accrues directly or indirectly to the seller, or on any subsequent adjustment to the price paid or payable shall be free from interest and penalty if filed within 30 calendar days from the date of payment or accrual of subsequent proceeds to the seller or from date of the adjustment to the price paid or payable is made.
• Interest on deficiency duties, taxes and other charges plus fine and penalty. An interest of 20% per annum, counted from the date of the final assessment, shall be imposed on:
  • PDP availment
  • Deficiency duties, taxes and other charges
  • Fine or penalty, if any
• Record-keeping requirement – Importers, Customs Brokers and other parties engaged in the customs clearance, and Locators are required to keep all records pertaining to the ordinary course of business and importations of said parties at their principal place of business for a period of three years from the date of final payment of duties and taxes, or customs clearance, whichever is later, as the case may be.
• Applicable penalties for failure to keep records:
  • Suspension or cancellation of accreditation as importer or broker
  • Surcharge of 20% on the dutiable value of the goods which is the subject of the importation for which no records were kept and maintained
  • Hold delivery or release of any subsequent imported articles to answer for the fine and any revised assessment
  • Criminal prosecution punishable with imprisonment of not less than three years and one day but not more than six years, and/or a fine of Php1 million
  • Waiver of the right to contest the results of the audit based on records kept by the BOC.
• The CAO also provides for the applicable penalties for failure or refusal to give full and free access to records.
• Turn-over of records – The DOF Financial Analytics and Intelligence Unit is required to turn-over all files and documents including any pending PCA to the BOC-PCAG.

Given that the importer is only granted 15 days from receipt of the demand letter to contest the deficiency assessment and 30 days to submit all supporting documents from the filing of request for reinvestigation, early preparation, i.e., through the conduct of an internal review or a customs compliance review, it is crucial for an importer to become audit-ready.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Philippines (SGV & Co.), Makati City

• Lucil Q Vicerra | lucil.q.vicerra@ph.ey.com
• Stephanie V Nava | stephanie.v.nava@ph.ey.com
• Victor C De Dios | victor.c.de.dios@ph.ey.com

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