One country, two standards?

The Bureau of Customs (BOC) is now going on a tear, conducting audits like what the BIR does. Can the BOC, with its imperfect trust rating, credibly conduct an audit for deficiency import duties and taxes? My answer would be a flat-out yes.

You see, even if the BIR itself is not perfect, they are capable of conducting good examinations, with everything above board. I know, because our practice is to always only deal above board. 

That being said, it would help a lot in the trust rating department if the audit initiative begins at home, in Customs. There is already in place since 2009 a “partial” electronic filing of import entry declaration and bank payment with what the BOC calls the e2m system. In e2m, there is at least an electronic trail of what the brokers/importers declare, and the bank payment based on that electronic declaration goes directly to the government.

However, the operative word here is “partial”. There are those excused from the system when imported values could not readily be verified. There are also instances where “pro forma” import entry declarations, done manually, are used for some reason. There can be deficiency import duties and taxes assessed because of discrepancy in electronic declaration. This latter phase is manual and has more legroom for players. So importation still remains a contact sport. 

I personally handled a case for a client during this e2m era where the broker used a pro forma import entry declaration, instead of the electronic one, and our client paid taxes on that declaration through the broker. The broker, it turned out, made another import entry declaration that’s understated by 70 percent. So 30 percent of the money went to the government, and the 70 percent was divided among the cohorts. During the examination, our client, who was a victim of fraud, was required to pay again the unremitted 70 percent. The import entry declaration and (Landbank) receipt that our client had as proofs turned out to be fake documents from the broker.

That would probably have been avoided if there were no discretionary legroom in the operations. So if Customs is serious with conducting audits, it can start with all manually filed declarations, including adjustments. This can be a table audit that can draw a lot of findings. Of course, there should also be action on all Customs brokers and personnel who assisted in these under- or misdeclarations, and who took liberties on government’s supposed revenue.

Moving on to Customs audit investigations after the goods leave Customs’ custody: a favorite area being looked at by the Bureau today are royalties. What on earth do royalties have to do with importation? Well, if tariffs and taxes are high on an imported item, the related parties to an import transaction may lower the import price and pay some royalties instead to reduce duties – theoretically.

This, I would say, is a difficult angle to pursue for the BOC. If you talk about manufacturing royalties or even packaging royalties paid to a foreign-related licensor, these are costs incurred after importation and will be part of the local selling price of the goods. In other words, if you start with the domestic selling price and deduct all expenses (including royalties and costs after importation), you can work back to the true importation cost.

Even marketing licenses or royalties (for the use of the brand and logos) are not really dutiable because they help sell the product, not the import transaction value. For example, a store called Kaimito Tech Retail Store sells Apple-branded products. An Apple store, of course, already sells Apple-branded products. How would Kaimito store’s sales compare to that of an Apple store? Huge difference. There will still be a lot of trust on an Apple store vs. an unknown retailer like Kaimito. The Apple store will be importing more because of the growing demand from their store.

Whether or not the BOC pursues this royalty angle, it will serve the BOC well to look at the impact on government revenue. We should talk Team Philippine Government here – meaning, the BOC and the BIR. The fact that royalties are both subject to 30 percent withholding tax (rates can be lowered by tax treaties) and 12 percent VAT is a better deal for the government.

If taxpayers learn how to reduce their royalty payments, and compensate by adjusting the import price, they can lower BIR taxes on royalties. They can also get away with minimal duties or even zero duties if goods are imported under the free trade agreement. Thus the government can lose dramatically on this attempt to make royalties dutiable. The government cannot retort that it can collect BIR taxes on these royalties and then collect import duties and taxes on them as well. If the government does, it will be a real villain in a global business world crying for fairness and ease of doing business.

There is one needed shift of policy, a difficult one, and we pray that day will come: one standard for all. Not only be strict with and collect from the compliant ones, but make those non-compliant ones comply and pay, moving forward. Enforcement, especially against Customs personnel, I know is easier said than done. Sadly, it’s even improbable. Only true, sincere political courage can do so. Invariably though, the government will need to answer this. If we have one country, why do we have two standards?

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 Alexander Cabrera is the chairman of the Integrity Initiative Inc. (II Inc.), a non-profit organization that promotes common ethical and acceptable integrity standards. He is also the chairman and senior partner of Isla Lipana & Co./PwC Philippines. Email your comments and questions to [email protected]. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.