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COURSE SUBJECT : CUSTOM POST CLEARANCE AUDIT FRAUD

COURSE DESCRIPTION :

This course subject provides insights and knowledge on post clearance

audit functions of the Bureau found in Section 1000 to 1006, Title X
and other provisions of Republic Act No 10863, otherwise known as
the Customs Modernization and Tariff Act (CMTA).

COURSE OBJECTIVES:

At the end of the course, the learners would be able to:

1. Understand the principles, purposes and methodology of the post
clearance audit system, recordkeeping requirement and the period
covered by the conduct of audit
2. Identify recordkeeping, document retention and other legal
obligations
3. Understand customs control from the border to the back-end of
cargo clearance process under a regime of informed compliance

COURSE OUTLINE:

I. Republic Act (RA) 10863 – An Act Modernizing the Customs & Tariff
Administration (Title X, Section 1000 – 1006)
II. Customs Administrative Order (CAO) 01-2019 – Post Clearance
Audit & Prior Disclosure Program
III. Customs Administrative Order (CAO) 5-2001 – Implementing RA
9135: An Act Amending Certain Provisions of Presidential Decree
No 1464, otherwise known as the Tariff and Customs Code of the
Philippines, as amended (Customs Code), and for other purposes.
Implementing the WTO Valuation System and Recordkeeping and
post entry audit system in order to facilitate importation and to
protect government revenue.
IV. Customs Administrative Order (CAO) 4-2004 – Amendment to CAO
5-2001
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V. Executive No. (EO) 46 s2017 – Reviving the Post Clearance Audit

Function of BOC and Institutionalizing the Functions of Financial
Analytics and Intelligence Unit of the Department of Finance
VI. Executive No. (EO) 160 s2003 – Creating the Post Entry Audit Group
in the BOC
VII. Customs Memorandum Order (CMO) 1-2002 – Procedure in the
Determination of Administrative Liability and the Imposition of
Administrative Fines
VIII. Customs Memorandum Order (CMO) 2-2002 – Recordkeeping and
Post Entry Audit Guidelines
IX. Customs Administrative Order (CAO) 5-2007 – Voluntary Disclosure
Program of the BOC
X. Customs Memorandum Order (CMO) 18-2007 – Rules and
Regulations Implementing the Customs Voluntary Disclosure
Program pursuant to CAO 5-2007
XI. Customs Memorandum Order (CMO) 16-2010 – Rules and
Regulations to Implement CAO 4-2004 (Dutiable Value)
XII. Customs Memorandum Order (CMO) 11-2014 – Revised Guidelines
for Registration of Importers and Customs Brokers with the BOC
pursuant to DOF Order No 33-2014
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I. Republic Act (RA) 10863 – An Act Modernizing the Customs & Tariff
Administration (Title X, Section 1000 – 1006)

SEC. 1000. Audit and Examination of Records. – Within three (3) years
from the date of final payment of duties and taxes or customs clearance, as
the case may be, the Bureau may conduct an audit examination, inspection,
verification, and investigation of records pertaining to any goods declaration,
which shall include statements, declarations, documents, and electronically
generated or machine readable data, for the purpose of ascertaining the
correctness of the goods declaration and determining the liability of the
importer for duties, taxes and other charges, including any fine or penalty, to
ensure compliance with this Act.

SEC. 1001. Scope of the Audit. – The audit of importers shall be conducted
when firms are selected by a computer-aided risk management system, the
parameters of which are to be based on objective and quantifiable data,
subject to the approval of the Secretary of Finance upon recommendation of
the Commissioner. The criteria for selecting firms to be audited shall include:

a. Relative magnitude of customs revenue to be generated from the firm

b. The rates of duties of the firm's imports
c. The compliance track records of the firm; and
d. An assessment of the risk to revenue of the firm's import activities.

SEC. 1002. Access to Records. – Any authorized officer of the Bureau shall
be given by the importer and customs broker full and free access to the
premises where the records are kept, to conduct audit examination,
inspection, verification, and investigation of those records relevant to such
investigation or inquiry.

A copy of any document certified by or on behalf of the importer is

admissible in evidence in all courts as if it were the original copy.

A customs officer is not entitled to enter the premises under this section
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unless, before so doing, the officer produces to the person occupying or

apparently in charge of the premises written evidence of the fact of
being duly authorized. The person occupying or apparently in charge of
the premises entered by an officer shall provide the officer with all
reasonable facilities and assistance for the effective exercise of the
officer's authority under this section.

Unless otherwise provided herein or in other provisions of law, the

Bureau may, in case of disobedience, invoke the aid of the proper
regional trial court within whose jurisdiction the matter falls. The court
may punish contumacy or refusal as contempt. In addition, the fact that
the importer or customs broker denies the authorized customs officer
full and free access to importation records during the conduct of a post
clearance audit shall create a presumption of inaccuracy in the
transaction value declared for their imported goods and constitute
grounds for the Bureau to conduct a reassessment of such goods.

In addition, the imposition of the appropriate criminal sanctions

provided under this Act and other administrative sanctions may be
concurrently invoked against contumacious importers, including the
suspension of the delivery or release of their imported goods.

SEC. 1003. Requirement to Keep Records.

a. All importers are required to keep at their principal place of business, in

the manner prescribed by regulations to be issued by the Commissioner
and for a period of three (3) years from the date of final payment of
duties and taxes or customs clearance, as the case may be, all records
pertaining to the ordinary course of business and to any activity or
information contained in the records required by this title in connection
with any such activity.

For purposes of the post clearance audit and Section 1005 of this Act, the
term importer shall include the following:

1. Importer-of-record or consignee, owner or declarant, or a party who:

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1.1. Imports goods into the Philippines or withdraws such goods

into the Philippine customs territory for consumption or
warehousing; files a claim for refund or drawback; or transports
or stores such goods carried or held under security; or

1.2. Knowingly causes the importation or transportation or storage

of imported goods referred to above, or the filing of refund or
drawback claim.

2. An agent of any party described in paragraph (1); or

3. A person whose activities require the filing of a goods declaration.

A person ordering imported goods from a local importer or supplier in a

domestic transaction shall be exempted from the requirements imposed
by this section unless:

1. The terms and conditions of the importation are controlled by the

person placing the order; or

2. The circumstances and nature of the relationship between the person

placing the order and the importer or supplier are such that the
former may be considered as the beneficial or true owner of the
imported goods; or

3. The person placing the order had prior knowledge that they will be
used in the manufacture or production of the imported goods.

b. All parties engaged in customs clearance and processing are required to

keep at their principal place of business, in the manner prescribed by
regulations to be issued by the Commissioner and for a period of three
(3) years from the date of filing of the goods declaration, copies of the
abovementioned records covering the transactions handled.

c. Locators or persons authorized to bring imported goods into free zones,

such as the special economic zones and free ports, are required to keep
subject-records of all its activities, including in whole or in part, records
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on imported goods withdrawn from said zones into the customs territory
for a period of three (3) years from the date of filing of the goods
declaration.

Failure to keep the records required by this Act shall constitute a waiver
of this right to contest the results of the audit based on records kept by
the Bureau.

SEC. 1004. Power of the Commissioner to Obtain Information and Issue

Summons. – For the effective implementation of the post clearance audit
functions of the Bureau, the Commissioner is hereby authorized to:

a. Obtain on a regular basis from any person, in addition to the person who
is the subject of a post clearance audit or investigation, or from any office
or officer of the national and local governments, government agencies
and instrumentalities, including the BSP and GOCCs, any information such
as costs and "volume of production, receipts or sales and gross income of
taxpayers, and the names, addresses, and financial statements of
corporations, regional operating headquarters of multinational
companies, joint accounts, associations, joint ventures or consortia and
registered partnerships, and their members, whose business operations
or activities are directly or indirectly involved in the importation or
exportation of imported goods or products manufactured from imported
component materials;

b. Summon the person liable for duties and taxes or required to file goods
declaration, or any officer or employee of such person, or any person
having possession, custody, or care of the books of accounts and other
accounting records containing entries relating to the business of the
person liable for duties and taxes, or any other person, to appear before
the Commissioner or the duly authorized representative at a time and
place specified in the summons and to produce such books, papers,
records, or other data, and to give testimony;

c. Take such, testimony of the person concerned, under oath, as may be

relevant or material to such inquiry; or
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d. Obtain information from banks or other financial institutions on

commercial documents and records pertaining specifically to payments
relevant to import transaction

e. The provisions of the foregoing paragraphs notwithstanding, nothing in

this section shall be construed as granting the Commissioner the
authority to inquire into bank deposits of persons or entities mentioned
in this Title.

SEC. 1005. Failure to Pay Correct Duties and Taxes on Imported Goods. –
Any person who, after being subjected to post clearance audit and
examination as provided in Section 1000 of this Act, is found to have incurred
deficiencies in. duties and taxes paid for imported goods, shall be penalized
according to two (2) degrees of culpability subject to any mitigating,
aggravating, or extraordinary factors that are clearly established by available
evidence as described hereunder:

a. Negligence – When a deficiency results from an offender's failure,

through an act or acts of omission or commission, to exercise reasonable
care and competence in ensuring that a statement made is correct, the
offender shall be charged for committing negligence, and, if found guilty
shall be penalized with a fine equivalent to one hundred twenty-five
percent (125%) of the revenue loss: Provided, That subject to Section 108
of this Act, no substantial penalty shall be imposed on an inadvertent
error amounting to simple negligence, as defined by rules promulgated
by the Secretary of Finance, upon recommendation of the Commissioner;

b. Fraud – When the material false statement or act in connection with the
transaction was committed or omitted knowingly, voluntarily and
intentionally, as established by clear and convincing evidence, the
offender who is charged for committing fraud and is found guilty thereof,
shall be penalized with a fine equivalent to six (6) times of the revenue
loss and/or imprisonment of not less than two (2) years, but not more
than eight (8) years.
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The decision of the Commissioner, upon proper hearing, to impose

penalties as prescribed in this section may be appealed in accordance
with Section 1104 of this Act.

SEC. 1006. Records to be Kept by the Bureau – The Bureau shall keep a
database of importer and broker profiles which shall include a record of audit
results and the following information and papers:

a. Articles of Incorporation;
b. The company structure, which shall include, but not limited to,
incorporators and board of directors, key officers, and organizational
structure;
c. Key importations;
d. Privileges enjoyed;
e. Penalties; and
f. Risk categories.

The Bureau shall furnish the BIR and the DOF a copy of the final audit results
within thirty (30) days from the issuance thereof.
 9

REPUBLIC ACT NO. 9135 - AN ACT AMENDING CERTAIN PROVISIONS OF

PRESIDENTIAL DECREE NO. 1464, OTHERWISE KNOWN AS THE TARIFF AND
CUSTOMS CODE OF THE PHILIPPINES, AS AMENDED, AND FOR OTHER
PURPOSES

BASIS OF DUTIABLE VALUE (Methods)

A. Transaction Value – The dutiable value of an imported article subject to

an ad valorem rate of duty shall be the transaction value, which shall be
the price actually paid or payable for the goods when sold for export to
the Philippines, adjusted by adding:

1. The following to the extent that they are incurred by the buyer but are
not included in the price actually paid or payable for the imported
goods:
a. Commissions and brokerage fees (except buying commissions);
b. Cost of containers;
c. The cost of packing, whether for labor or materials;
d. The value, apportioned as appropriate, of the following goods and
services: materials, components, parts and similar items
incorporated in the imported goods; tools; dies; molds and similar
items used in the production of imported goods; materials
consumed in the production of the imported goods; and
engineering, development, artwork, design work and plans and
sketches undertaken elsewhere than in the Philippines and
necessary for the production of imported goods, where such goods
and services are supplied directly or indirectly by the buyer free of
charge or at a reduced cost for use in connection with the
production and sale for export of the imported goods;
e. The amount of royalties and license fees related to the goods being
valued that the buyer must pay, either directly or indirectly, as a
condition of sale of the goods to the buyer;

2. The value of any part of the proceeds of any subsequent resale,

disposal or use of the imported goods that accrues directly or
indirectly to the seller;
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3. The cost of transport of the imported goods from the port of

exportation to the port of entry in the Philippines;
4. Loading, unloading and handling charges associated with the transport
of the imported goods from the country of exportation to the port of
entry in the Philippines; and
5. The cost of insurance.

All additions to the price actually paid or payable shall be made only on
the basis of objective and quantifiable data.

No additions shall be made to the price actually paid or payable in

determining the customs value except as provided in this
Section: Provided, That Method One shall not be used in determining the
dutiable value of imported goods if:

a. There are restrictions as to the disposition or use of the goods by the

buyer other than restrictions which:

- Are imposed or required by law or by Philippine authorities;

- Limit the geographical area in which the goods may be resold; or
- Do not substantially affect the value of the goods.

b. The sale or price is subject to some condition or consideration for

which a value cannot be determined with respect to the goods being
valued;

c. Part of the proceeds of any subsequent resale, disposal or use of the

goods by the buyer will accrue directly or indirectly to the seller, unless
an appropriate adjustment can be made in accordance with the
provisions hereof; or

d. The buyer and the seller are related to one another, and such
relationship influenced the price of the goods. Such persons shall be
deemed related if:

- They are officers or directors of one another’s businesses;

- They are legally recognized partners in business;
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- There exists an employer-employee relationship between them;

- Any person directly or indirectly owns, controls or holds five percent
(5%) or more of the outstanding voting stock or shares of both seller
and buyer;
- One of them directly or indirectly controls the other;
- Both of them are directly or indirectly controlled by a third person;
- Together they directly or indirectly control a third person; or
- They are members of the same family, including those related by
affinity or consanguinity up to the fourth civil degree.

Persons who are associated in business with one another in that one is
the sole agent, sole distributor or sole concessionaire, however
described, of the other shall be deemed to be related for the purposes of
this Act if they fall within any of the eight (8) cases above.

B. Transaction Value of Identical Goods. – Where the dutiable value cannot

be determined under method one, the dutiable value shall be the
transaction value of identical goods sold for export to the Philippines and
exported at or about the same time as the goods being valued. “Identical
goods” shall mean goods which are the same in all respects, including
physical characteristics, quality and reputation. Minor differences in
appearances shall not preclude goods otherwise conforming to the
definition from being regarded as identical.

C. Transaction Value of Similar Goods. – Where the dutiable value cannot

be determined under the preceding method, the dutiable value shall be
the transaction value of similar goods sold for export to the Philippines
and exported at or about the same time as the goods being valued.
“Similar goods” shall mean goods which, although not alike in all
respects, have like characteristics and like component materials which
enable them to perform the same functions and to be commercially
interchangeable. The quality of the goods, their reputation and the
existence of a trademark shall be among the factors to be considered in
determining whether goods are similar.

If the dutiable value still cannot be determined through the successive

application of the two immediately preceding methods, the dutiable
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value shall be determined under method four or, when the dutiable value
still cannot be determined under that method, under method five, except
that, at the request of the importer, the order of application of methods
four and five shall be reversed: Provided, however, That if the
Commissioner of Customs deems that he will experience real difficulties
in determining the dutiable value using method five, the Commissioner of
Customs may refuse such a request in which event the dutiable value
shall be determined under method four, if it can be so determined.

D. Deductive Value. – The dutiable value of the imported goods under this
method shall be the deductive value which shall be based on the unit
price at which the imported goods or identical or similar imported goods
are sold in the Philippines, in the same condition as when imported, in
the greatest aggregate quantity, at or about the time of the importation
of the goods being valued, to persons not related to the persons from
whom they buy such goods, subject to deductions for the following:

1. Either the commissions usually paid or agreed to be paid or the

additions usually made for profit and general expenses in connection
with sales in such country of imported goods of the same class or kind;
2. The usual costs of transport and insurance and associated costs
incurred within the Philippines; and
3. Where appropriate, the costs and charges referred to in subsection (A)
(3), (4) and (5); and
4. The customs duties and other national taxes payable in the Philippines
by reason of the importation or sale of the goods.

If neither the imported goods nor identical nor similar imported goods are
sold at or about the time of importation of the goods being valued in the
Philippines in the conditions as imported, the customs value shall, subject
to the conditions set forth in the preceding paragraph hereof, be based
on the unit price at which the imported goods or identical or similar
imported goods sold in the Philippines in the condition as imported at the
earliest date after the importation of the goods being valued but before
the expiration of ninety (90) days after such importation.
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If neither the imported goods nor identical nor similar imported goods are
sold in the Philippines in the condition as imported, then, if the importer
so requests, the dutiable value shall be based on the unit price at which
the imported goods, after further processing, are sold in the greatest
aggregate quantity to persons in the Philippines who are not related to
the persons from whom they buy such goods, subject to allowance for the
value added by such processing and deductions provided under
Subsections (D)(1), (2), (3) and (4) hereof.

E. Computed Value. – The dutiable value under this method shall be the
computed value which shall be the sum of:

1. The cost or the value of materials and fabrication or other processing

employed in producing the imported goods;
2. The amount for profit and general expenses equal to that usually
reflected in the sale of goods of the same class or kind as the goods
being valued which are made by producers in the country of
exportation for export to the Philippines;
3. The freight, insurance fees and other transportation expenses for the
importation of the goods;
4. Any assist, if its value is not included under paragraph (1) hereof; and
5. The cost of containers and packing, if their values are not included
under paragraph (1) hereof.

The Bureau of Customs shall not require or compel any person not
residing in the Philippines to produce for examination, or to allow access
to, any account or other record for the purpose of determining a
computed value. However, information supplied by the producer of the
goods for the purposes of determining the customs value may be verified
in another country with the agreement of the producer and provided they
will give sufficient advance notice to the government of the country in
question and the latter does not object to the investigation.

F. Fallback Value. – If the dutiable value cannot be determined under the

preceding methods described above, it shall be determined by using other
reasonable means and on the basis of data available in the Philippines.
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If the importer so requests, the importer shall be informed in writing of

the dutiable value determined under Method Six and the method used to
determine such value.

No dutiable value shall be determined under Method Six on the basis of:

1. The selling price in the Philippines of goods produced in the

Philippines;
2. A system that provides for the acceptance for customs purposes of the
higher of two alternative values;
3. The price of goods in the domestic market of the country of
exportation
4. The cost of production, other than computed values, that have been
determined for identical or similar goods in accordance with Method
Five hereof;
5. The price of goods for export to a country other than the Philippines;
6. Minimum customs values; or
7. Arbitrary or fictitious values.

If in the course of determining the dutiable value of imported goods, it

becomes necessary to delay the final determination of such dutiable
value, the importer shall nevertheless be able to secure the release of the
imported goods upon the filing of a sufficient guarantee in the form of a
surety bond, a deposit, cash or some other appropriate instrument in an
amount equivalent to the imposable duties and taxes on the imported
goods in question conditioned upon the payment of customs duties and
taxes for which the imported goods may be liable: Provided, however,
That goods, the importation of which is prohibited by law shall not be
released under any circumstance whatsoever.

Nothing in this Section shall be construed as restricting or calling into

question the right of the Collector of Customs to satisfy himself as to the
truth or accuracy of any statement, document or declaration presented
for customs valuation purposes. When a declaration has been presented
and where the customs administration has reason to doubt the truth or
accuracy of the particulars or of documents produced in support of this
declaration, the customs administration may ask the importer to provide
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further explanation, including documents or other evidence, that the

declared value represents the total amount actually paid or payable for
the imported goods, adjusted in accordance with the provisions of
Subsection (A) hereof.

If, after receiving further information, or in the absence of a response, the

customs administration still has reasonable doubts about the truth or
accuracy of the declared value, it may, without prejudice to an importer’s
right to appeal pursuant to Article 11 of the World Trade Organization
Agreement on customs valuation, be deemed that the customs value of
the imported goods cannot be determined under Method One. Before
taking a final decision, the Collector of Customs shall communicate to the
importer, in writing if requested, his grounds for doubting the truth or
accuracy of the particulars or documents produced and give the importer
a reasonable opportunity to respond. When a final decision is made, the
customs administration shall communicate to the importer in writing its
decision and the grounds therefor.”

IMPORT ENTRIES – All imported articles, except importations admitted free

of duty shall be subject to a formal or informal entry. Articles of a
commercial nature intended for sale, barter or hire, the dutiable value of
which is Two thousand pesos (P2,000.00) or less, land personal and
household effects or articles, not in commercial quantity, imported in
passenger’s baggage, mail or otherwise, for personal use, shall be cleared on
an informal entry whenever duty, tax or other charges are collectible.

The Commissioner may, upon instruction of the Secretary of Finance, for the
protection of domestic industry or of the revenue, require a formal entry,
regardless of value, whatever be the purpose and nature of the importation.

A formal entry may be for immediate consumption, or under irrevocable

domestic letter of credit, bank guarantee or bond for:

a. Placing the article in customs bonded warehouse;

b. Constructive warehousing and immediate transportation to other port
of the Philippines upon proper examination and appraisal; or
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c. Constructive warehousing and immediate exportation.

READJUSTMENT OF APPRAISAL, CLASSIFICTION OR RETURN – Such

appraisal, classification or return as finally passed upon and approved or
modified by the Collector shall not be altered or modified in any manner,
except:

a. Within one year after payment of the duties, upon statement of error
in conformity with Section seventeen hundred and seven hereof,
approved by the Collector.
b. Within fifteen days after such payment upon request for reappraisal
and/or reclassification addressed to the Commissioner by the
Collector, if the appraisal and/or classification is deemed to be low.
c. Upon request for reappraisal and/or reclassification, in the form of a
timely protest addressed to the Collector by the interested party if the
latter should bed dissatisfied with the appraisal or return.
d. Upon demand by the Commissioner of Customs after the completion
of compliance audit pursuant to the provisions of this Code.”

FINALITY OF LIQUIDITY. When articles have been entered and passed free of
duty or final adjustments of duties made, with subsequent delivery, such
entry and passage free of duty or settlements of duties will, after the
expiration of three (3) years from the date of the final payment of duties, in
the absence of fraud or protest or compliance audit pursuant to the
provisions of this Code, be final and conclusive upon all parties, unless the
liquidation of the import entry was merely tentative.”

GOVERNMENT’S RIGHT OF COMPULSORY ACQUISITION – In order to

protect government revenues against the undervaluation of goods subject
to ad valorem duty, the Commissioner of Customs may acquire imported
goods under question for a price equal to their declare customs value plus
any duties already paid on the goods, payment for which shall be made
within ten (10) working days from issuance of a warrant signed by the
Commissioner of Customs for the acquisition of such goods.
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An importer who is dissatisfied with a decision of the Commissioner of

Customs pertaining to this section may, within twenty (20) working days
after the date on which notice of the decision is given, appeal to the
Secretary of Finance and thereafter if still dissatisfied, to the court of Tax
Appeals as provided for in Section 2402 of the Tariff and Customs Code of
the Philippines, as amended.

Where no appeal is made by the importer, or upon reaffirmation of the

commissioner’s decision during the appeals process, the Bureau of
Customs or its agent shall sell the acquired goods pursuant to existing laws
and regulations.

Nothing in this Section limits or affects any other powers of the Bureau of
Customs with respect to the disposition of the goods or any liability of the
importer or any other person with respect to an offense committed in the
importation of the goods.”

SUPERVISION & CONTROL OVER CRIMINAL & CIVIL – Civil and criminal
actions and proceedings instituted in behalf of the government under the
authority of this Code or other law enforced by the Bureau shall be brought
in the name of the government of the Philippines and shall be conducted by
customs but no civil or criminal action for the recovery of duties or the
enforcement of any fine, penalty or forfeiture under this Code shall be filed
in court without the approval of the Commissioner.”

DISPOSITION OF SURPLUS FROM THE PROCEEDS OF SALE OF ABANDONED

OR FORFEITED OR ACQUIRED ARTICLES. – Except in the case of the sale of
abandoned or forfeited articles, and articles which are not claimed by
payment of duties, taxes and other charges and compliance with all legal
requirements within the prescribed period, any surplus remaining after the
satisfaction of all unlawful charges as aforesaid shall be retained by the
Collector for ten (10) days subject to the call of the owner.

Upon failure of the owner to claim such surplus within this period, the
Collector shall deposit such amount in a special trust fund which shall be
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used solely for the purpose of financing the compulsory acquisition of

imported goods by the government as provided in Section 2317 hereof.

In all such cases the Collector shall report fully his action in the matter,
together with all the particulars, to the Commissioner and to the Chairman
on Audit. After one year, the unused amounts in such special trust funds,
except for an amount necessary to finance forced government acquisitions
before the first auction of the succeeding year, shall be turned over to the
Bureau of Treasury as customs receipts.”

REQUIREMENT TO KEEP RECORDS – All importers are required to keep at

their principal place of business, in the manner prescribed by regulations to
be issued by the Commissioner of Customs and for a period three (3) years
from the date of importation, all the records of their importations and/or
books of accounts, business and computer systems and all customs
commercial data including payment records relevant for the verification of
the accuracy of the transaction value declared by the importers/customs
brokers on the import entry.

All brokers are required to keep at their principal place of business, in the
manner prescribed by regulations to be issued by the Commissioner of
Customs and for a period of three (3) years from the date of importation
copies of the above mentioned records covering transactions that they
handle.”
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REPUBLIC ACT NO. 9135 - AN ACT AMENDING CERTAIN PROVISIONS OF

PRESIDENTIAL DECREE NO. 1464, OTHERWISE KNOWN AS THE TARIFF AND
CUSTOMS CODE OF THE PHILIPPINES, AS AMENDED, AND FOR OTHER
PURPOSES

COMPLIANCE AUDIT OR EXAMINATION OF RECORDS – The

importers/customs brokers shall allow any customs officer authorized by the
Bureau of Customs to enter during office hours any premises or place where
the records referred to in the preceding section are kept to conduct audit
examination, inspection, verification and/or investigation of those records
either in relation to specific transactions or to the adequacy and integrity of
the manual or electronic system or systems by which such records are
created and stored. For this purpose, a duty authorized customs officer shall
be full and free access to all books, records, and documents necessary or
relevant for the purpose of collecting the proper duties and taxes.

In addition, the authorized customs officer may make copies of, or take
extracts from any such documents. The records or documents must, as
soon as practicable after copies of such have been taken, be returned to
the person in charge of such documents.

A copy of any such document certified by or on behalf of the

importer/broker is admissible in evidence in all courts as if it were the
original.

An authorized customs officer is not entitled to enter any premises under

this Section unless, before so doing, the officer produces to the person
occupying or apparently in charge of the premises written evidence of the
fact that he or she is an authorized officer. The person occupying or
apparently in charge of the premises entered by an officer shall provide
the officer with all reasonable facilities and assistance for the effective
exercise of powers under this Section.
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Unless otherwise provided herein or in other provisions of law, the Bureau

of Customs may, in case of disobedience, invoke the aid of the proper
regional trial court within whose jurisdiction the matter falls. The court
may punish contumacy or refusal as contempt. In addition, the fact that
the importer/broker denies the authorized customs officer full and free
access to importation records during the conduct of a post-entry audit
shall create a presumption of inaccuracy in the transaction value declared
for their imported goods and constitute grounds for the Bureau of
Customs to conduct a re-assessment of such goods.

This is without prejudice to the criminal sanctions imposed by this Code

and administrative sanctions that the Bureau of Customs may impose
against contumacious importers under existing laws and regulations
including the authority to hold delivery or release of their imported
articles.”

SCOPE OF AUDIT

A. The audit of importers shall be undertaken:

1. When firms are selected by a computer-aided risk management

system, the parameters of which are to be based on objective and
quantifiable data and are to be approved by the Secretary of Finance
upon recommendation of the Commissioner of Customs. The criteria
for selecting firms to be audited shall include, but not be limited to,
the following:

1.1. Relative magnitude of customs revenue from the firm;

1.2. The rates of duties of the firm’s imports;
1.3. The compliance tract records of the firm; and
1.4. An assessment of the risk to revenue of the firm’s import
activities.

2. When errors in the import declaration are detected;

3. When firms voluntarily request to be audited, subject to the approval
of the Commissioner of Customs.
 21

B. Brokers shall be audited to validate audits of their importer clients

and/or fill information gaps revealed during an audit of their importers
clients.”
DOCUMENTS IN FOREIGN LANGUAGE – Where a document in a foreign
language is presented to a customs officer in relation to the carrying out of
any duty or the exercise of any power of the Bureau of Customs under this
Code, said document in a foreign language must be accompanied with a
translation in the official language of this country.”

RECORDS TO BEKEPT BY CUSTOMS – The Bureau of Customs shall likewise

keep a record of audit results in a database of importer and broker profiles,
to include but not be limited to:

a. Articles of Incorporation;
b. The company structure, which shall include but not be limited to:
- Incorporators and Board of Directors;
- Key officers; and
- Organizational structure;
c. Key importations;
d. Privileges enjoyed;
e. Penalties; and
f. Risk category (ies).”
 22

SEC. 13. Part 3, Title VII of the Tariff and Customs Code of thePhilippines, as
amended, shall be renamed as “PROVISIONS ON PENALTIES”.
SEC. 14. Section 3604 of Part 3, Title VII of the Tariff and Customs Code of
thePhilippines, as amended, is hereby further amended to read as follows:
“SEC. 3604. Statutory Offenses of Officials and Employees. – Every official,
agent or employee of the Bureau or of any other agency of the government
charged with the enforcement of the provisions of this Code, who is guilty of
any delinquency herein below indicated shall be punished with a fine of not
less than Five thousand pesos nor more than Fifty thousand pesos and
imprisonment for not less than one year nor more than ten years and
perpetual disqualification to hold public office, to vote and to participate in
any public election:
(a) Those guilty of extortion or willful oppression under color of law;
(b) Those who knowingly demand other or greater sums than are authorized
by law or receive any fee, compensation, or reward except as by law
prescribed, for the performance of any duty;
(c) Those who willfully neglect to give receipts, as required by law for any
sum collection the performance of duty, or who willfully neglect to perform
any of the duties enjoined by law;
(d) Those who knowingly demand other or greater sums than are authorized
by law or receive any fee, compensation, or reward except as by law
prescribed, for the performance of any duty;
(e) Those who willfully make opportunity for any person to defraud the
customs revenue or who do or fail to do any act with intent to enable any
person to defraud said revenue;
(f) Those who negligently or designedly permit the violation of the law by
any other person;
(g) Those who make or sign any false entry or entries in any book, or make
or sign any false certificate or return in any case where the law requires the
making by them of such entry, certificate or return;
(h) Those who, having knowledge or information of a violation of the Tariff
and Customs Law or any fraud committed on the revenue collectible by the
Bureau, fail to report such knowledge or information to their superior official
or to report as otherwise required by law;
 23

(i) Those who, without the authority of law, demand or accept or attempt to
collect directly or indirectly as payment of otherwise, any sum of money or
other thing of value for the compromise, adjustment, or settlement of any
charge or complaint for any violation or alleged violation of law; or
(j) Those, without authority of law, disclose confidential information gained
during any investigation or audit, or use such information for personal gain
or to the detriment of the government, the Bureau or third parties.”
SEC. 15. A new section to be known as Section 3610 is hereby inserted in
Part 3, Title VII of the Tariff and Customs Code of thePhilippines, as
amended, which shall read as follows:
“SEC. 3610. Failure to Keep Importation Records and Give Full Access to
Customs Officers. – Any person who fails to keep all the records of
importations and/or books of accounts, business and computer systems and
all customs commercial data in the manner prescribed in Part 2, Section 3514
of this Title shall be punished with a fine of not less than One hundred
thousand pesos (P100,000.00) but not more than Two hundred thousand
pesos (P200,000.00) and/or imprisonment of not less than two (2) years and
one day but not more than six (6) years. This penalty shall likewise be
imposed against importers/brokers who deny an authorized customs officer
full and free access to such records, books of accounts, business and
computer systems, and all customs commercial data including payment
records. This is without prejudice to the administrative sanctions that the
Bureau of Customs may impose against the contumacious importers under
existing laws and regulations including the authority to hold delivery or
release of their imported articles.”
SEC. 16. A new section to be known as Section 3611 is hereby inserted in
Part 3, Title VII of the Tariff and Customs Code of the Philippines, as
amended, which shall read as follows:
“SEC. 3611. Failure to Pay correct Duties and Taxes on Imported Goods.
– Any person who, after being subjected to post-entry audit and examination
as provided in Section 3515 of Part 2, Title VII hereof, is found to have
incurred deficiencies in duties and taxes paid for imported goods, shall be
penalized according to three (3) degrees of culpability subject to any
mitigating, aggravating or extraordinary factors that are clearly established
by the available evidence:
(a) Negligence – When the deficiency results from an offender’s failure,
through an act or acts of omission or commission, to exercise reasonable
 24

care and competence to ensure that a statement made is correct, it shall be

determined to be negligent and punishable by a fine equivalent to not less
than one-half (1/2) but not more than two (2) times the revenue loss.
(b) Gross Negligence – When a deficiency results from an act or acts of
omission or commission done with actual knowledge or wanton disregard for
the relevant facts and with indifference to or disregard for the offender’s
obligation under the statute, it shall be determined to be grossly negligent
and punishable by a fine equivalent to not less than two and a half (2 ½) but
not more than four(4) times the revenue loss.
(c) Fraud – When the material false statement or act in connection with the
transaction was committed or omitted knowingly, voluntarily and
intentionally, as established by clear and convincing evidence, it shall be
determined to be fraudulent and be punishable by a fine equivalent to not
less than five (5) times but not more than eight (8) times the revenue loss
and imprisonment of not less than two (2) years but not more than eight (8)
years.
The decision of the Commissioner of Customs, upon proper hearing, to
impose penalties as prescribed in this Section may be appealed in
accordance with Section 2402 hereof.”
SEC. 17. The following provisions of the Tariff and Customs Code of the
Philippines, as amended, are renumbered as follows:
(a) Section 3514 of Part 2, Title VII (“Words and Phrases Defined”) is
renumbered as Section 3519; and
(b) Section 3610 of Part 3, Title VII (“Violations of Tariff and customs Laws
and Regulations in General”) is renumbered as Section 3612.
SEC. 18. Rules and Regulations. – The Secretary of Finance shall, upon the
recommendation of the Commissioner of Customs, promulgate the
necessary rules and regulations for the effective implementation of this Act.
SEC. 19. Repealing Clause. – All laws, decrees, executive orders, rules and
regulations and other issuances or parts thereof which are inconsistent with
this Act are hereby repealed or modified accordingly.
SEC. 20. Effectivity. – This Act shall take effect fifteen (15) days after its
publication in the Official Gazette or in any two (2) newspapers of general
circulation, whichever date comes earlier.
 25

Customs Administrative Order (CAO) 4-2004 – Amendment to CAO 5-2001

Major Changes in the Rules. Among the many changes provided in CAO 4-
2004 are as follows:

a. Annual Registration of Importers now includes undertaking to keep

records and allow the conduct of customs audit;
b. Payment of duties on adjustments (e.g. Assist, Royalty and License Fees,
Proceeds from Resale) to the declared price within 45 days from such
payment/remittance;
c. Copies of Import Entries automatically provided to PEA Group; and
d. Streamlining of procedures for customs conduct of the audit including the
provision for an audit manual.

Several changes were made on existing rules relating to the various methods
of customs valuation, the specific records to be kept, the operating
procedures for valuing imported articles, the issuance of audit notices and
the provision for penalties.

Implementation of the valuation rules at the border. Declarations provided

in the Supplemental Declaration of Value (SDV) should be under scrutiny.
Assessment Notices may be issued on undervalued imported articles as well
as on duty exposures for adjustments (e.g. royalty, license fee, management
fee, assists, proceed from resale, year-end adjustments) to be made on the
declared price to customs. For some companies, audit notices will likely be
issued to cover importations for the last 3 years or so. For those subject to
audit already, the audit will simply resume.

Verify the accuracy and completeness of what is being declared in both the
Import Entry and the SDV. Importers should ensure that all duty payments
are made through customs-authorized banks. In light of the newly
implemented classification rules (i.e., AHTN), importers should review how
goods are being classified by customs brokers as against what is being
declared by suppliers in the export documents.
 26

The Philippine Bureau of Customs (BOC) has recently revived its Post
Clearance Audit Group (PCAG) that conducts compliance audits on
importers’ records of importation relating to their past shipments of goods
to the country.

Said compliance audit is essentially a control mechanism done at the back-

end of cargo clearance. It aims to facilitate trade by generally allowing
release of low risk imports with minimum customs intervention at the
border. The BOC, however, retains the option to verify the truthfulness and
accuracy of goods declarations by looking at the pertinent records of the
importer-auditee.

The Post Clearance Audit (PCA) was introduced in the Philippines in 2001
and was originally carried out by the BOC Post-Entry Audit Group (PEAG).
During its time the PEAG. was able to contribute quite significant revenue
collections from its conduct of PCA which resulted in payment of additional
duties and taxes arising from deficiency assessments, penalties and voluntary
disclosures from importers.

Towards the end of 2013, the PEAG was dissolved under Executive Order
(EO) No. 155 and its functions were transferred to the Fiscal Intelligence Unit
(FIU) under the Department of Finance (DOF) with a primary role of
conducting an independent audit on importers with the end goal of further
boosting revenues. As there were uncertainties and grey areas in the
implementation of subsequent D.O.F. issued rules and procedures, the
objectives of EO 155 were purportedly not fully met.

Accordingly, the Customs Modernization & Tariff Act (CMTA), which took
effect last June 16, 2016, reverted to the BOC the power to examine and
audit a company’s books and import records.

E.O. 46 series of 2017 (signed last October 20, 2017), as implemented by

Customs Memorandum Order (CMO) No. 32-2017, created an empowered
post clearance audit group (PCAG) that is expected to aggressively
 27

commence its customs audit as soon as the forthcoming implementing rules

and regulations on PCA are issued.

The PCAG, which is directly under the supervision of the BOC Commissioner,
is headed by a BOC Assistant Commissioner who shall exercise direct
supervision and control over the management of its operating units, which
include the Trade and Information and Risk Analysis Office (which
recommends to the BOC Commissioner potential priority audit candidates)
and the Compliance Assessment Office (which conducts the actual audit).

The PCAG is mandated to conduct an audit examination, inspection,

verification and investigation of records pertaining to any goods declaration
within three years from the date of final payment of duties and taxes or
customs clearance. This shall include statements, declarations, documents,
and electronically generated or machine-readable data, for the purpose of
ascertaining the correctness of the goods declaration and determining the
liability of the importer for duties, taxes and other charges, including fine or
penalty.

CRITERIA FOR AUDIT SELECTION

With the CMTA’s goal of facilitating the easier flow of goods, a great deal of
responsibility is placed on the importers. Importers are responsible for
declaring the details of their imports such as, among others, the value,
classification, and rate of duty applicable to imported goods. Compliance
with the rules, on the other hand, is checked by the BOC either at the border
or through the PCA system.

The importers targeted for PCA are selected based on a “computer-aided risk
management system” that takes into consideration the highest level of risk
to (and the greatest impact upon) customs revenue and other priority
objectives of the administration.

The selection criteria are based on, but not limited, to the following:
 28

 Relative magnitude of customs revenue 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 trade sector
 Non-renewal of an importer’s customs accreditation

Customs brokers may be audited to validate audits of their importer-clients

and/or fill in information gaps revealed during an audit of their importer
clients. Locators in the Economic Zones and those enjoying duty and tax
incentives are likewise not exempt from BOC compliance audit.

Once selected for PCA by the BOC, the audit process will be triggered by the
issuance of a BOC Audit Notification Letter (ANL) sent to the importer-
auditee.

The coverage of the compliance audit is 3 years (10 years in case of fraud)
from the date of the ANL counted backwards.

AREAS OF ANTICIPATED CUSTOMS ISSUES

The main aim of the PCA is to verify a company’s past import transactions for
the purpose of determining whether the:

 Value of the imported goods declared by the importer is correct and

reflected the price actually paid or payable by the importer to the
supplier;
 Required dutiable adjustments are included thereto;
 Imported goods are valued using the appropriate customs valuation
method;
 Goods are properly described, and the correct tariff classifications are
used;
 Quantities of goods, as reported, are correct;
 Declarations as to country of origin are correct
 Special or preferential tariff rates are correctly applied, and importer is
qualified to avail of special/ preferential rates;
 29

 Required import records are kept; and

 Other compliance requirements a met.
Apart from the above focus areas, the BOC also, as a matter of procedure,
compares specific figures contained in an auditee’s records with that of their
own data. Discrepancies would usually require the submission of a
reconciliation document from the auditee.

Any deficiency duty assessment issued by the BOC after audit would normally
include a deficiency VAT (on importation) assessment since the import VAT
base, under the rules, includes, as components, the dutiable value and
customs duty. Thus, any under declaration of customs duty shall, as a
consequence, result to undervaluation of the VAT and vice versa.

TRANSACTION VALUE OF IMPORTED GOODS. Section 701 of the CMTA

reiterated the adoption of the World Trade Organization (WTO) “Transaction
Value” (TV) system as basis for valuing imported goods for duty purposes.

Generally, in an arm’s length transaction, imports shall be assessed using the

Transaction Value (TV) of the imported article (Method 1). However, when a
higher comparable value exists to cast reasonable doubt as to the
truthfulness or accuracy of a given value declaration and the subsequent
verification done establishes that any of the elements or conditions of
Method 1 is not present or complied with, the importation shall be assessed
using the alternate methods of valuation in their order of priority: (Method 2
—transaction value of identical goods; Method 3 —transaction value of
similar goods; Methods 4—deductive method; Method 5—computed value
subject to reversal of Methods 4 and 5 at the option of the importer if it can
be done as determined by the Commissioner of Customs; and Method 6—
fallback).

Generally, the BOC would utilize reference values to alert customs to do a

value verification check either upfront through a system created for the
purpose (which in turn may trigger a valuation query on the applicability of
the method of valuation used by the importer) or pursuant to a PCA. Once a
valuation issue is raised, the burden of proof to justify the correctness of a
declared value is shifted to the importer.
 30

Specific issues that are likely to focus on during PCA include the following
adjustments to the price paid or payable:

1. Commissions and brokerage fees. Selling commissions incurred by the

buyer with respect to the imported merchandise constitutes part of the
T.V. On the other hand, buying commission does not, since the buyer
usually pays his agent a fee that is independent of the payment for the
goods. However, if already included in the price, buying commission
cannot be deducted. Brokerage fees, on the other hand, if paid by the
seller, will be normally included in the invoice price as part of the price
actually paid or payable.

2. Cost of Containers and Packing. The value of these items refers to the
cost incurred by the buyer of goods rather than their actual values. Re-
usable pallets and containers such as 20- and 40- foot shipping
containers, aircraft pallets, and the familiar wooden pallets on which
cargo is often stacked, strapped or shrink-wrapped for ease of handling
by forklift trucks are not includable as part of the customs value of the
goods.

3. Assists. This particular component refers to the value, apportioned as

appropriate, of certain goods and services supplied, directly or indirectly,
by the buyer to the seller free of charge or at a reduced cost for use in
connection with the production and sale for export of the imported
goods to the extent that such value has not been incorporated in the
price actually paid or payable. They include
a. Materials, components, parts and similar items incorporated in the
imported goods;
b. Tools, dies, molds and similar items used in the production of the
imported goods;
c. Materials consumed in the production of imported goods; and
d. Engineering, development, artwork, design work, and plans
undertaken elsewhere than in the Philippines and necessary for the
production of imported goods;
 31

The value of an assist for items is basically the cost of acquisition if the
same is acquired by the buyer from an unrelated seller or the cost of its
production if produced by the buyer or a person related to the buyer.

In the case of engineering, development, artwork, design work and

plans, the value is

a. the cost of obtaining copies of the assist, if the assist is available in

the public domain;
b. the cost of the purchase or lease, if the assist was bought or leased
by the buyer from an unrelated person;
c. the value added outside the Philippines, if the assist was produced
in the Philippines.

Having determined the value of an assist, the next step is to prorate

that value to the imported merchandise.

4. Royalty or license fees. Customarily, importers would compute the

customs duty of their imported goods based on the amount appearing on
the commercial invoice. This, however, is not necessarily correct under
the TV system which looks primarily at the price agreed upon between
the buyer and the seller and essentially captures all payments related to
the imported goods.

Importers should be aware that royalty (and license fee) payments (for
intangibles rights such as, among others, patent, trademark or copyright)
made by them to their foreign suppliers may be dutiable as additions to
the “price paid or payable” for purposes of determining the dutiable value
and VAT base of the imported goods vis-à-vis the customs duty and VAT
liabilities on importation.

Under the C.M.T.A., royalty or license fee payments are dutiable when

a. related to the goods being valued (Relationship Test),

b. paid by the buyer, directly or indirectly, to the seller (Payment Test),
and
c. payment is a condition for the sale of imported goods (Condition Test).
 32

Relationship Test. In applying this test, there must be a careful

examination of exactly what the royalty or license fee is being paid for.
Hence, there is a need to analyze the relationship between the
payments and the imported goods. The most essential point in
assessing the relationship of goods (the tangible) is whether the
importer could have purchased the tangible without the purchase of
the intangible rights. If there is no connection between the payments
and the imported goods, the two should be considered unrelated and
thus, not part of the TV.

Payment Test. The payment test determines whether the royalty or

license fees were directly or indirectly paid by the buyer to the seller.
This is in relation to the aspect that adjustments for royalty or license
fee payments shall be made to the TV to the extent that they are
actually paid or payable to the supplier. Hence, in order to be liable,
the requirement that the fees must be paid directly or indirectly to the
seller presupposes that such payment ultimately redounded to the
benefit of the seller. Without such benefit, any payment should not be
considered as part of the TV, and therefore, not liable.

Notably, where a buyer makes payment to a party related to the

seller, there arises a presumption that the payments are part of the
price actually paid or payable to the seller. Such presumption may,
however, be overturned through the presentation of contrary
evidence.

Condition Test. If an importer pays a third party for the right to use
intangible property and such payment is not a condition of the sale of
the goods for exportation to the Philippines, then the payment will not
be considered an addition to the T.V. of the imported merchandise.
Conversely, if the payment is made as a condition of sale of the goods,
an addition should be made.

The mere fact that the payment of the royalty (or license fee) is a term of the
contract between the parties does not mean that payment of the royalty is a
condition of the sale if the buyer had a genuine choice whether to take the
 33

goods with or without the rights. Thus, the question to be determined is

whether the purchase could have been made without the payment of royalty
or license fee.

The above tests must be satisfied separately and the absence of any one of
the conditions should result to non-dutiability of the royalty payment.

Ultimately, a royalty or license fee is liable depending on whether a) the fee

bears directly on the goods being imported, such as, when a payment is
calculated as a percentage of the price at which the goods are sold or resold,
and b) the sale of the goods to the importer is inextricably intertwined with
the payment thereof, regardless to whom it is paid and under what
circumstances it was paid. In other words, the matter will have to be decided
on a case to case basis.

Royalty (and license fee) arrangements are most likely to be scrutinized (in
fact the favorite area) by the BOC, particularly during the conduct of a PCA.
The default position of the BOC during PCA is that all royalty and license fee
payments are dutiable. The burden of proving otherwise is with the
importers.

Proceeds of subsequent resale. Any proceeds resulting from the subsequent

resale, disposal, or use of the imported goods that accrue, directly or
indirectly, to the seller are liable. (Thus, for instance, if the importer of the
goods is required to pay the supplier an amount of the former’s net profit on
the resale, the amount thus paid is proper additions to the T.V. of the
imported goods.)

Cost of transport of the imported goods from port of exportation to the port
of entry in the Philippines.

Loading, unloading and handling charges associated with the transport of

the imported goods from the country of exportation to the port of entry in
the Philippines.
 34

Cost of Insurance. Considering the above adjustments required to be

included for purposes of customs appraisement, the TV of an imported
article is not necessarily equal to the invoice value, unless the invoice reflects
the above dutiable elements.

LIMITATIONS ON THE USE OF TV OF IMPORTED GOODS

One of the conditions on the applicability of Method 1 or the TV of the goods

is that the buyer and the seller must not be related, or if related, such
relationship did not influence the price of the goods. Under the CMTA, the
parties are deemed related if they are

1. Officers or directors of one another’s business,

2. Legally recognized partners in business,
3. Employer and employee,
4. Directly or indirectly owning, controlling or holding 5% or more of the
outstanding stock or shares of both of them,
5. Directly or indirectly controls the other,
6. Both of them are, directly or indirectly, controlled by a third person, or
7. Related by affinity or consanguinity up to the fourth civil degree.

The fact that the buyer and seller are related though should not result to an
outright rejection of the TV declared by the importer. The existence of a
relationship, however, serves to alert the BOC to the fact that there may be a
need to inquire as to the circumstance surrounding the sale. Each import
transaction is assessed independently.

Thus, the BOC, as a matter or procedure, would check, either whether the
value declared for purposes of customs appraisement was undervalued
resulting in effect, to short payment of customs duties and VAT on
importation.

Assuming that the issue (price has been influenced by the relationship) is
raised by the BOC, the importer can establish arm’s length by demonstrating
that:
 35

1. an examination of the “circumstances of sale” indicates that the

relationship between the parties did not influence the price actually
paid or payable, or
2. the transaction value of the imported articles approximates certain
“test values”.

The “test value method” may be based upon previously accepted TV of

identical goods, deductive value, or computed value. In practice, however,
“test values” are, in most instances, not available. Consequently, the
“circumstance of sale” condition is often times resorted to by related party
importers to justify their prices.

If the importer fails to refute the allegation, the BOC may proceed to
determine the customs value by applying, in their sequential order,
alternative methods of valuation as discussed above.

The circumstances of sale test examine the relevant aspects of a transaction,

including the way in which the buyer and seller organize their commercial
relations and the way in which the price in question was arrived at, to
determine whether relationship influenced the price. Under this test, the
importer may prove, among others, any of the following:

a. the price has been settled in a manner consistent with the “normal
pricing practices” of the industry in question,
b. the price is settled in a manner “consistent with sales to unrelated
party”
c. the price is adequate to ensure recovery of all costs plus a profit.

There is a similarity between the customs method of valuation and the

arm’s length standard in transfer pricing (TP) rules. It may thus be stated
that customs values may, but not necessarily, indicate an arm’s length
outcome.

RECORD KEEPING REQUIREMENTS

 36

As a control measure, all importers are required under the CMTA to hold at
their principal place of business all the records of their importations and/or
books of accounts, business and/or computer systems and all other customs
commercial data, in whatever form, including payment records relevant for
the verification of the accuracy of the transaction value declared by the
importers/customs brokers on the import entry.

The documents required to be held are as follows:

 Company or entity structure (e.g. articles of incorporation or

partnership, organizational structure, management and key personnel,
capital composition, stock and transfer book, principal and/or
subsidiaries and their capital composition).

 Ordering and purchase documentation (e.g. sales and other related

agreements, such as distribution, royalty, agency, warranty, terms of
payment, and the like; correspondence relating to the import
transaction including purchase orders, vouchers, confirmations, pro-
forma invoice, acknowledgement receipts, notices, advisories etc.;
product description or specifications, brochures, manuals, catalogues,
pamphlets etc.).

 Shipping, importation, exportation, and transportation

documentation (e.g. import/ export entry, invoice/consignment notes,
import and export licenses/permits, bill of lading, shipping
instructions, certificates of origin/ eligibility, inspection and loading,
freight and insurance contracts, packing lists.

 Manufacturing, stock, and resale documentation (e.g. records of

production, inventory, costing, and sales).

 Banking and accounting information (e.g. letters of credit, remittance

advice, credit card transactions, telegraphic money transfers).
 37

 Charts and code of accounts, ledgers, financial statements,

accounting instruction manuals, and systems and program
documentation that describes the accounting system used by the
importer.

The above documents must be retained for a period of three (3) years
from the date of filing of the import entry. Customs brokers are likewise
required to keep copies of the importation records covering transactions
that they handle.
PENALTIES IMPOSABLE DURING PCA. Under the CMTA, any importer who,
after being subjected to compliance audit, is found to have incurred
deficiencies in duties and taxes paid for imported goods, shall be penalized
according to 2 degrees of culpability, namely:

 Negligence. The applicable penalty is an administrative fine of 125%

of the revenue loss.

 Fraud. The applicable penalty is an administrative fine equivalent to

six (6) times the revenue loss and/or imprisonment of not less than 2
years, but not more than 8 years.

Aside from the administrative fine, a 20% interest (per annum) on deficiency
duties, taxes and other charges (plus fines and penalties, if any) can now be
imposed under the CMTA The interest is counted fifteen (15) days from
receipt of demand letter by the importer arising from audit findings on
deficiency duties, taxes and other charges as well as fine or penalty, if any.

For failure to keep the required records of importation, the penalties are as
follows:
 Suspension or cancellation of accreditation as Importer or Broker with
the Bureau;
 Surcharge of twenty percent (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 subsequent imported articles to answer for
the fine and any revised assessment;
 38

 Criminal prosecution punishable with imprisonment of not less than

three (3) years and one (1) day but not more than six (6) years, and/or
a fine of one million pesos (PhP1,000,000.00); and
 Waiver of the right to contest the results of the audit based on records
kept by the Bureau.

AUTHORITY OF THE BOC COMMISSIONER TO COMPROMISE

Under the CMTA, the BOC Commissioner, subject to the approval of the DOF
Secretary, may compromise any administrative case involving the imposition
of fines and surcharges, including those arising from the conduct of a post
clearance audit. This contemplates a prior disclosure reported by importers
arising from plain errors or innocent mistakes in the goods declaration
resulting to deficiency in duties, taxes and other charges on past
importations.
Excluded from the coverage are cases a) already pending with any other
customs office, b) already filed and pending in courts; and c) goods
declaration involving Fraud.

The prior disclosure (PD) provision of the CMTA is basically a compliance and
revenue measure. Under the draft implementation rules and regulations on
P.C.A., the benefits are as follows:

For PD availment prior to receipt of ANL

 Payment of basic deficiency duties and taxes due

 Plus, a reduced penalty of 5% of the basic deficiency (as compared
to administrative fine of 125% of the revenue loss for cases involving
negligence)

For PD availment after receipt of ANL

 Payment of basic deficiency duties and taxes due
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 Plus, a reduced penalty of 10% of the basic deficiency (as compared

to administrative fine of 125% of the revenue loss for cases involving
negligence)

For PD availment on Royalties, and other proceeds on any subsequent

resale that accrues directly or indirectly to the seller of goods

 Payment of basic deficiency duties and taxes due without penalty.

 Provided, the applicant files for P.D.P. within 45 days from date of
payment to the seller.
 If after 45 days, the 5% (No A.N.L.) or 10% (with A.N.L.) rate shall
apply.

What to expect from the BOC moving forward

The present BOC Commissioner has recently presented his 5-point program
to further introduce radical reforms in the B.O.C. This program covers the
goal of eradicating corruption, ensuring trade facilitation, strengthening anti-
smuggling efforts and enhancing the personnel incentives, rewards system as
well as compensation benefits for BOC. personnel.

The implementation of “One-Strike” policy and ordered the filing of cases

against erring importers and customs brokers at the BOC removes District
Collectors and officers who consistently fail to reach their monthly collection
targets due to incorrect classification or undervaluation of goods under their
jurisdiction.

To increase revenue collections, on the other hand, the BOC will, among
others, aggressively pursue the collection of additional duties, taxes or
penalties from PCA and towards this end, a Joint Task Force with the Bureau
of Internal Revenue (Local Inland Revenue Service) will be created precisely
to intensify the government’s effort to improve the collection of duties and
taxes.
With all these developments and programs for the BOC, importers should
expect closer monitoring of their importation activities through intensified
examination of imported goods either at the border or thru P.C.A.
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SURVIVING A BOC AUDIT

1. The importer is responsible for using reasonable care to enter, classify

and determine the value of imported merchandise and to provide any
other information necessary to enable the BOC to properly assess duties,
collect accurate statistics, and determine whether other applicable legal
requirements, if any, have been met.

2. An importer’s failure to exercise reasonable care could result in the delay

of the release of its merchandise and, in some cases, could result in the
imposition of penalties.

3. Since, however, the declaration on the entry is based on self-assessment,

the burden of proof to show that the declaration is untruthful lies with
the BOC. However, once a deficiency assessment is issued by the BOC,
the burden is again shifted to the importer to dispute the findings.

4. As importers may soon undergo PCA, the logical thing for them to do is to
prepare themselves by carefully planning the duty aspects of their
intended importations. If importations had already been made, the next
logical thing to do is to review the company’s possible exposure and risk
areas to a potential deficiency duty assessment and adopt corrective
measures to strengthen its compliance with existing B.O.C. rules and
regulations.

Audit readiness is the key to survive a PCA. To avoid the payment of

unnecessary additional import costs for shipments to the Philippines,
importers should ensure informed compliance with importation laws, rules
and regulations. The time tested best practice is to conduct a regular self-
assessment for the purposes of determining errors in the past that could
result to potential exposures to penalties. This approach should enable
importers to adopt corrective measures such as, among others, the
availment of a prior disclosure.
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POST CLEARANCE AUDIT. Within three (3) years from the date of final
payment of duties and taxes or customs clearance, the Bureau of Customs,
through Post Clearance Audit Group (PCAG), may conduct an audit
examination, inspection, verification, and investigation of importation
records to assess the correctness of goods declaration.

The criteria for selecting companies to be audited comprises of:

a. Relative magnitude of customs revenue to be generated from the

company;
b. Rates of duties of the company’s imports;
c. Compliance track records of the company; and
d. Assessment of the risk to revenue of the company’s import activities.
Post Clearance Audit is mandated to importers, locators, customs brokers,
and all other parties engaged in customs clearance and processing. They are
required to keep records at the principal place of business for a period of
three (3) years. For importers, maintenance of records shall start from the
date of final payment of duties and taxes or customs clearance, whichever is
later. For locators and other parties engaged in customs clearance, it shall
start from the date of filing the goods of declaration.

What are the records required to be maintained?

a. Documentation of the organization and structure of the company;

b. Documentation on orders and purchases;
c. Documentation on shipping, importation, exportation, and transport;
d. Documentation on manufacturing, stock, and resale;
e. Financial documents and other accounting information;
f. Charts and codes of accounts, general and subsidiary ledgers, general
journal, accounting instruction manuals, and systems and program
documentation that describe the accounting system used by the
importer; and
g. Any other relevant information or record.
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Failure to keep records shall result to the following penalties:

1. Suspension or cancellation of accreditation as importer or broker;

2. 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;
3. Hold delivery or release of subsequent imported articles to answer for the
fine and any revised assessment;
4. Criminal prosecution punishable with imprisonment of not less than 3
years and one day but not more than 6 years, and/or fine of P1M; or
5. Waiver of the right to contest the results of the audit.

In the conduct of Post Clearance Audit, the Commissioner shall issue an Audit
Notification Letter (ANL) to the company identified to be audited. It shall be
valid for thirty (30) days prior to its expiry, and must be served to the
importer either by personal service at the principal place of business,
personal service at the registered mail, or through the registered electronic
mail address.
During audit, full and free access to the premises where the records are
located shall be given. Failure or refusal to full and free access to authorized
customs officer will result to following penalties:

1. Suspension or cancellation of accreditation as an importer or broker;

2. Punishment for contempt, for contumacy or for refusal to provide access,
from the proper court having criminal jurisdiction over the matter;
3. Re-assessment of the importations subject of audit, the declared
transaction value being presumed inaccurate applying therein the correct
valuation method, tariff classification, quantity and/or country of origin,
as applicable, based on available data;
4. 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;
5. Hold delivery or release of subsequent imported articles to answer for the
fine and any revised assessment; or
6. Criminal prosecution punishable with imprisonment of not less than 3
years and one day but not more than 6 years, and/or fine of P1M.

Upon completion of the audit, the Bureau of Customs shall give a copy of the
final audit results to the Bureau of Internal Revenue and Department of
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Finance within thirty (30) days from the issuance. Any company who is found
to incur deficiencies in payment of correct duties and taxes shall be
penalized. If found guilty of negligence, a fine equivalent to 125% of revenue
loss will be imposed. On the other hand, if the offender is charged for
committing fraud and found guilty, will be penalized with a fine equivalent to
6 times of revenue loss and/or imprisonment not less than 2 years but not
more than 8 years. Inadvertent error amounting to simple negligence shall
only result to payment of 25% penalty of the revenue loss.

Considering the high penalties that may be imposed after the post clearance
audit, it is advisable for companies to consider availing the Prior Disclosure
Program.

PRIOR DISCLOSURE PROGRAM. Prior Disclosure Program (PDP) is an option

given to importers to voluntarily report to the Bureau of Customs any errors
or deficiencies in goods declaration. Based on the international best customs
practices, it is a program authorizing the Commissioner of Customs to accept
prior disclosure of errors and omissions in goods declaration of importers.

Who may avail PDP?

1. Any importer who has not been issued ANL; and

2. Any importer who has received ANL, provided that the necessary
documents are submitted within ninety (90) days from the receipt of ANL.

A PDP application shall not be applicable for goods declarations that are
subject of pending cases with any other customs office, for goods
declarations already covered by cases filed and pending in the court and for
goods declarations involving fraud.

What are the documents required to be accomplished to avail PDP?

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1. Duly accomplished application form disclosing the errors in goods

declaration; and
2. If applicable, tendering payment of deficiency duties and taxes.

Should there be any adjustments to the application, the importer may

amend the PDP application within an additional non-extendible period of
thirty (30) calendar days from the filing of the application.

An approved PDP application will result in any of the following:

a. In case of non-receipt of ANL, the applicant shall only pay the deficiency in
duties and taxes plus a legal interest of 20% per annum.
b. If the applicant received an ANL, the applicant shall pay the deficiency in
duties and taxes plus a penalty of 10% (based on the deficiency) and a
legal interest of 20% per annum.
c. If the applicant disclosed and filed within 30 days from the payment date
or accrual of royalties and other proceeds any subsequent resale,
disposal, or use of importations accruing directly or indirectly to the
seller, or any subsequent adjustment to the price paid or payable, the
applicant shall only pay the deficient duties and taxes without any penalty
or interest. However, if the applicant fails to pay within 30 days, the
above provisions shall apply
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POST CLEARANCE
AUDIT FRAUD
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DR. MARY ANN CO AYDE