Post Clearance Audits: Are you prepared enough?

Hope for the best, prepare for the worst. Preparing for an upcoming customs audit is one way to minimize, if not to avoid, the risk of having deficiency assessments. The recent issuance of the Customs Administrative Order (CAO) No. 1-2019 marks the beginning of the audit season for importers.

As of Jan. 11, the Bureau of Customs (BoC) has issued 31 Audit Notification Letters (ANLs) on various importers. Some 29 ANLs have been served, and the audit proper of these companies have yet to commence. The BoC is committed to release more in the coming days.

The idea of receiving an ANL might cause companies stress, especially if they are not prepared for an audit. Hence, to avoid that stress, planning and preparation are important.

Under CAO No. 1-2019, importers are obliged to keep, at their principal place of business, all their records pertaining to the ordinary course of business within three years from the date of final payment of duties and taxes or customs clearance, whichever is later. Aside from importers, all parties engaged in Customs clearance and processing, as well as locators, are likewise required to keep records related to such Customs clearance and processing.

Non-compliance with this obligation may result in a 20% surcharge, suspension, or cancellation of the importer’s accreditation. The delivery or release of their subsequent imported articles may, likewise, be put on hold to answer for the fine and any revised assessment. In addition, importers are deemed to have waived their right to contest the results of the audit based on records kept by the BoC. Aside from these, imprisonment of not more than three to six years and a fine of P1 million may be imposed on those who fail to keep and maintain their records.

To avoid these penalties, importers should be ready before the audit team of the BoC visits their place of business armed with an Audit Notification Letter. As early as now, it is better for importers to evaluate, review, or make a self-assessment on their records and prepare a checklist of the required documents in case they are subject to a customs audit. These required documents are: (1) documentation on the entity organization and structure; (2) documentation on orders and purchases; (3) documentation on shipping, importation, exportation and transport; (4) documentation on manufacturing, stock and resale; (5) financial documents, such as financial statements and other accounting information; (6) charts and codes of accounts, general and subsidiary ledgers, general journal, accounting instruction manuals, and system and program documentation.

If, during the early evaluation or self-assessment, importers discover errors in their goods declaration due to a mistake or negligence, they may avail of the benefits of the Prior Disclosure Program (PDP). The PDP authorizes the BoC to accept prior disclosure by importers of errors and omissions in goods declaration, resulting in a deficiency in duties and taxes on past importations. It also includes disclosure of royalties and other proceeds of any subsequent resale, disposal, or use of the imported goods accruing directly or indirectly to the seller, or on any subsequent adjustment to the price paid or payable.

Any importer may avail of the PDP, except for those whose goods declarations are the subject of pending cases with other Customs offices, or covered by cases already filed and pending in courts, and those with fraudulent goods declarations. If availed of by the importer that has already received an ANL, the duly accomplished application form for prior disclosure stating the errors in goods declaration and tendering payment of the deficiency duties, taxes, and penalties must be filed within 90 calendar days from the receipt of ANL.

What is the significance of availing of the PDP?

Without availing of the PDP, an importer, if found to have incurred deficiencies in duties and taxes, shall be penalized depending on the existence of fraud and negligence. In case of negligence, the importer shall be penalized with a fine equivalent to 125% of the lost revenue. However, if the importer committed fraud, the penalty is as high as 600% of the lost revenue and imprisonment of not less than two years but not more than eight years.

On the other hand, the PDP, once availed of, removes the payment of the above penalties. If the PDP is availed of prior to the receipt of ANL, the importer shall only be liable for the deficiencies in duties and tax due, plus 20% legal interest per annum. If the same is availed after the receipt of the ANL, in addition to the deficiency in duties and taxes, the importers are, likewise, liable to 10% of the basic deficiency plus 20% legal interest. For penalties and other proceeds of any subsequent resale or disposal that have accrued to the seller, importers may pay only the deficiency in duties and taxes without penalties and interest, provided that the disclosure is made within 30 calendar days from the payment, accrual, or adjustment.

However, please note that availing of the PDP is not automatic. It is still subject to the verification and approval of the Post Clearance Audit Group. Failure to provide the necessary documentation, other material inaccuracies, mistakes and errors in the goods declaration, and the existence of fraud on the part of the importer may result in the disapproval of the application and the conduct of a formal and full audit.

With proper preparation, importers may confidently handle a future customs audit. The question now is this: can you confidently handle a customs audit?

Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.

Zhainey C. Apostol is an associate from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.

As published in BusinessWorld, dated 26 March 2019