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Navigating Customs audit and prior disclosure

After more than three years from the time the Bureau of Customs (BoC) resumed the conduct of customs audits, many importers stepped forward and voluntarily paid deficiency duties and taxes by availing of the Prior Disclosure Program (PDP).

Based on international best customs practices, the PDP authorizes the BoC Commissioner to accept, as a potential mitigating factor, the prior disclosure by importers of errors and omissions in goods declaration that resulted in the deficiency in duties and taxes on past imports. It is both a compliance and revenue measure aimed to generate additional revenue with the least administrative cost both to government and importers. The PDP also helps importers avoid a full customs audit and the steep penalty in case of deficiency duty and tax findings in the course of an audit.

In availing of the PDP, the bigger question is — is it worth the potential risk of being exposed to closer scrutiny? We break down our observations to assist importers in navigating their customs audits and in deciding whether to avail of the PDP or not.

WHAT IS THE STATUS OF THE BOC POST CLEARANCE AUDIT?Since January 2019, the BoC has issued almost a thousand Audit Notification Letters (ANLs) to conduct audits on importers, covering companies from various industries and groups such as oil and gas, automotive, pharmaceutical, consumer, and those in the Super Green Lane category, etc. Based on information from the BoC website as of June 2022, the BoC Post Clearance Audit Group (PCAG) has collected about P600 million from audit findings and P5 billion from PDP applications filed by importers, whether under audit or not. Based on these figures alone, around 90% of the PCAG’s collection came from PDP applications.

It appears that there were several companies under audit who availed of the PDP. Moreover, there were also companies who, even without an ongoing audit, availed of the PDP. This goes to show that importers who are not under audit may come forward at any time and volunteer to pay their deficiency duties and/or taxes to show good faith and commitment to comply with the customs laws and its rules and regulations.   

WHO MAY FILE AND WHEN TO FILE A PDP?Importers who are not undergoing an audit may file a PDP at any time. Those undergoing audit should file the PDP within 90 days from the receipt of the ANL as provided under Customs Administrative Order (CAO) 1-2019. In this case, the PDP application may be amended within 30 days from the filing of the initial PDP.

Some of the common issues covered by the PDP applications filed include dutiable royalties, upward transfer pricing adjustments, error in value declared, excise tax on sweetened beverages, industry specific issues, among others.

Moreover, importers may avail of the PDP for the following reasons without penalty and interest: dutiable royalty payments; other proceeds of any subsequent resale, disposal, or use of the imported goods that accrue directly or indirectly to the seller; or any subsequent adjustment to the price paid or payable. For these, the PDP application should be filed within 30 calendar days from the date of payment or accrual of subsequent proceeds to the seller or from the date of the adjustment to the price paid or payable is made.

PENALTIES TO BE PAID FOR AVAILING OF PDP AND HOW TO AVOID OR MINIMIZE THEMWhile the PDP provides for a facility to pay deficiency duties and taxes, the same is subject to penalty and/or interest depending on whether the importer is under audit or not. If the importer is under audit, the availment of the PDP with the 90-day period is subject to a 10% penalty and 20% interest per year.

On the other hand, an importer who is not under audit will only be subject to 20% interest per year. Since the penalty and/or interest may be significant, importers availing of the PDP normally request for its waiver pursuant to the power of the BoC Commissioner to compromise any administrative case arising under the Customs Modernization and Tariff Act (CMTA) involving the imposition of fines and surcharges, including those arising from the conduct of a post clearance audit. The BoC Commissioner’s power to compromise, however, is subject to the approval of the Secretary of Finance.

Since there is no specific guidance on the parameters or requirements for the approval of PDP applications with request for waiver of penalty and/or interest, the PCAG has to consider on a case-to-case basis the PDP applications that they will endorse to the Commissioner and ultimately to the Secretary of Finance for approval. We understand that for PDP applications of importers without an audit and which are found to be complete and accurate, the same are being approved by PCAG and endorsed to the Commissioner for approval.

Meanwhile, PDP applications of importers with an audit which are also found to be complete and accurate will be subject to evaluation by PCAG. These applications may or may not be endorsed for approval depending on the issues applied for PDP and the relevant facts and circumstances.

To ensure the approval of PDP applications, the same should be filed on time and should include a full disclosure of the relevant issues. Moreover, the same should comply with the documentary requirements provided under CAO 1-2019. If importers fail to comply with these, the PDP application may be denied.

THE BEST TIME TO AVAIL OF THE PDPGiven the greater certainty in the approval of the PDP filed by importers not undergoing an audit, it seems more prudent to avail of the PDP while the company is not yet under audit. Though some importers think that availing of the PDP when they are not yet under audit may expose them to additional risks and potential liabilities, it seems this is not the case based on previously filed applications.

We are not aware of an importer who is not under audit and availed of PDP who was subsequently subjected to a full-blown customs audit. It appears that the BoC recognizes the good faith of the voluntary payment made given that there is no on-going audit that may possibly result in deficiency findings.

PROACTIVITY IS THE KEYIt is prudent for importers to review their customs practices and procedures without waiting for an ANL. Upon determination of the actual exposure, importers may consider availing of the PDP considering that the benefits far outweigh the risks, if any. The filing of PDP without awaiting an ANL may potentially save importers from the customs audit for a certain period. This may also help importers avoid the hassle of going through a three-year audit, saving time, effort, steep penalties and interest.

This will also enable importers to contribute to the collection efforts of government while complying with customs laws and regulations. Moreover, importers who are aware of their exposure and risk areas can better implement corrective measures to strengthen compliance with existing customs rules and regulations.

To encourage more importers to avail of the PDP, the BoC and the DoF should continue to exert their best efforts in expediting the processing of filed PDP applications. In the end, success in any initiative will undoubtedly be achieved when all stakeholders work together.    

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.

Lucil Q. Vicerra is a Tax Principal for Indirect Tax Services – Global Trade & Customs and Yzrael Edwin V. Pineda is a Tax Senior Director, respectively, of SGV & Co.

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