2019 Articles - Suits the C-Suite - Page 5 | SGV & Co. | EY

04 February 2019

Stephanie G. Vicente-Nava

To have and to hold: Customs import documents

Many struggle to remember certain details, such as the phone numbers even of those close to them. This is due to the intrinsic limitation of human memory, or perhaps some see the brain simply as an organ to process information but not to store data. In any case, we acknowledge the importance of keeping records appropriately — not just mentally — but in some retrievable form. With the current strides in digital disruption and innovation, we now have more tools and devices to assist in storing and accessing whatever information we need. Record-keeping is particularly crucial for importers. They are obliged to do so not just to remember details of their import transactions, but because the law expressly requires them to keep and maintain comprehensive records about their importations. The proper retention of complete import documents is often overlooked by importers, but it has proven to be essential during a Post Clearance Audit (PCA). CUSTOMS RECORD-KEEPING REQUIREMENTS The Customs Modernization and Tariff Act (CMTA) requires all importers to keep all records of their importations, books of accounts, business and computer systems and all customs commercial data including payment records. These are to be kept at their principal place of business for a period of three years from the date of final payment of duties and taxes or customs clearance. In relation to the Bureau of Internal Revenue’s (BIR) requirement to keep books of accounts and accounting records for 10 years, the Customs Administrative Order (CAO) No. 01-2019 only provided for general periods (in the absence of fraud, 3 years to audit and 3 years to keep records.) No period was prescribed for fraud, unlike the BIR regulations which expressly provides for 10 years. Therefore, it appears that in the case of fraud, importers may have to keep documents longer. Customs brokers and parties involved in the process of clearing imported goods are covered by this requirement with respect to the transactions that they handle. Locators, or those authorized to bring imported goods to special economic zones and free ports according to the CAO, are also required to keep records of importation even if they are enjoying tax and duty-free incentives on qualified importations. DOCUMENTS THAT SHOULD BE KEPT CAO No. 01-2019 provides for the specific documents that all importers must keep for PCA purposes. The list is quite exhaustive, effectively covering all records related to the imported goods and the entity’s import activities. Apart from the typical import documents, such as product descriptions or specifications and shipping documents (goods declarations, commercial invoices, import licenses or permits, bills of lading, shipping instructions, certificates of origin, etc.), the CAO also requires importers to keep documents on the entity organization and structure, orders and purchases, manufacturing, stock and resale records, financial documents, charts and codes of accounts, and any information or records that have been electronically stored. In addition, locators are required to maintain documents proving their entitlement to tax incentives on importation, as well as records of all transactions and activities relating to the admission and withdrawal of goods from free zones into the customs territory. The rationale for keeping records of importation is primarily to ascertain that the goods declaration filed by the importer is correct, and that the taxes and duties paid on said importation are accurate. STEEP PENALTIES The CAO emphasizes the importance of keeping records of importations, and prescribes the penalties for non-compliance. At the outset, importers who fail to keep the prescribed records will be subject to a 20% surcharge on the dutiable value of the goods for which no records were kept and maintained. Thus, even if there are no findings for deficiency duties and taxes, importers may still be required to pay this 20% surcharge if record-keeping violations are discovered during a PCA. This is quite relevant for some locators, particularly those enjoying tax incentives on importations, since they are similarly required to keep complete records of importations and may be subjected to a PCA. That said, compliance with the customs record-keeping requirements is the most common issue encountered by PEZA-registered entities during a PCA. Despite being exempted from duties and taxes, the Bureau of Customs (BOC) may still generate significant revenue from such entities simply by imposing the 20% surcharge for violating the record-keeping rules. Moreover, the BOC may suspend or cancel the accreditation of an importer for failure to keep the prescribed documents and hold the delivery and release of subsequent imported goods. Under both instances, the importer may suffer massive operational disruption which can adversely impact business relationships and lead to significant losses. To further stress the importance of record-keeping, the CMTA introduced a new penalty for importers who fail to comply with this requirement. Section 1003 provides that the failure to keep documents constitutes a waiver of the right to contest the results of the audit based on records kept by the BOC. Accordingly, even though the assessed duties and taxes on a particular importation is patently erroneous, the importer loses the right to dispute the same if it cannot produce complete records pertaining to the importation being assessed. Consequently, the importer may be required to pay the basic duties and taxes as assessed plus the administrative penalties which range from 125% to 600% of the revenue loss and 20% legal interest per annum — all this on top of the 20% surcharge for failure to keep records. Finally, importers should be aware that they can be subject to criminal prosecution for violating the customs record-keeping requirements. The punishment is imprisonment of not less than 3 years and 1 day but not more than 6 years, and/or a fine of Php One Million. The importance of keeping and maintaining complete records of importations cannot be overstated because non-compliance can have a serious impact on the business. Importers are encouraged to constantly check and ensure that their records of importation are complete and compliant with the prescribed rules for them to avoid exorbitant fines and penalties. In view of the recent issuance of CAO No. 1-2019 on the conduct of the PCA (discussed in a previous column last 20 January 2019), the BOC is expected to intensify the audit of all importers, including locators. Ensuring compliance with the record-keeping requirements can result in a significant and positive difference to the eventual outcome of a PCA. 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. Stephanie G. Vicente-Nava is a Tax Principal for Indirect Tax Services — Global Trade & Customs at SGV & Co.

28 January 2019

Lucil Q. Vicerra

Prior disclosure or a customs audit: Which is the wiser option?

(Second in a series) As discussed in last week’s column, Customs Administrative Order (CAO) No. 01-2019 has been issued. The CAO covers the conduct of the post clearance audit (PCA) and implementation of the prior disclosure program (PDP). Considering the high penalties — ranging from 125% to 600% of the revenue loss — to be imposed during a customs audit, it is imperative for an importer to consider if it will be beneficial to avail of the PDP. The PDP is a program based on international best customs practices. The PDP authorizes the BoC Commissioner to accept, as a potential mitigating factor, prior disclosure by importers of errors and omissions in goods declaration resulting in deficiency in duties and taxes on past importations. PDP is an option given to importers who do not want to go through the trouble of a full audit. This would enable the importer to voluntarily disclose or report to the BoC any errors in goods declarations and in payment of duties, taxes and other charges with significantly lower penalties. WHO QUALIFIES FOR THE PDP? Any importer, whether issued with an Audit Notification Letter (ANL) or not, may avail of the PDP. The applicant needs to submit a duly accomplished form prescribed by the BoC for prior disclosure, stating the errors in goods declaration and tendering the payment of deficiency duties, taxes and penalties, if applicable. However, it should be noted that the following are not qualified for the PDP: – Goods declarations which are the subject of pending cases with any other Customs office; – Those which are covered by cases already filed and pending in courts; and – Those involving fraud. BENEFITS OF THE PDP An importer who has not yet received an ANL and applies for a PDP, will only be subject to payment of the deficiency duties and taxes plus 20% interest per year. On the other hand, an importer who has already received an ANL but applies for a PDP, will be subject to payment of deficiency duties and taxes plus a reduced penalty of 10% of the basic deficiency and 20% interest per year. The importer has 90 calendar days from the receipt of the ANL to avail of the PDP option. A PDP application may be amended if there are any adjustments to the original application or new issues discovered that need to be disclosed. The amendment should be made within 30 days from the filing of the PDP application. The above penalties are in lieu of the 125% and 600% penalty in case of negligence and fraud, respectively. Importers may also avail of the PDP for the following without penalty and interest: – Dutiable royalty payments; – Other proceeds of any subsequent resale, disposal, or use of the imported goods that accrues directly or indirectly to the seller; or – Any subsequent adjustment to the price paid or payable. For the above, 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. VERIFICATION AND PROCESSING OF PDP APPLICATIONS The post clearance audit group (PCAG) will verify the completeness of the PDP application form, including payment and other supporting documents. If the importer fails to provide the necessary documents, the PCAG may decline or disapprove the application. If the PDP application is accepted, the PCAG will verify and process the application within a period of 90 calendar days from the submission of complete PDP documents. As part of the process, the PCAG will verify the accuracy of the deficiency duties and tax computations. It will also determine if all errors have been disclosed. If there is a finding of fraud or other material inaccuracies, mistakes or errors in the goods declaration, the PCAG will recommend to the BoC Commissioner that a formal and full audit be conducted. This also holds in case of outright violations committed that are not the subject of the disclosure, but which have an adverse impact on government revenues. APPLICATION OF TENDER OF PAYMENT The BoC will accept tender of payment in all cases. This payment will be applied to the deficiencies in duties and taxes, including penalties, interest, fines, or surcharges as voluntarily disclosed, regardless of the approval or denial of the PDP application. Importers who avail of the PDP may also want to request a waiver of penalties but CAO 1-2019 provides that any such request for a waiver of penalties, interest, fines, or surcharges, will be subject to the final approval of the Secretary of Finance. THE PDP AS A WISER OPTION The PDP should enable government to generate additional customs revenues with the least administrative cost to both parties. Given the penalties that may be imposed during a customs audit, combined with the penalties for administrative and criminal offenses, we cannot overemphasize the importance of being prepared for a customs audit. It will be highly advantageous for importers to review and know their probable exposure and risk areas to a potential deficiency duty assessment. This will aid them in determining whether or not a PDP would be the road to take. In addition, importers who are aware of their exposure and risk areas, will be able to better implement corrective measures to strengthen their compliance with existing BoC rules and regulations. So is the PDP the wiser option for an importer? It does seem that the PDP is still worth considering even as you compare this with the previous voluntary disclosure program of the BoC wherein no penalty and/or interest were imposed on voluntary disclosures. Given the resources involved in undergoing a full audit, the stiff penalties imposed, and other economic variables that affect business operations, availing of the PDP may eventually end up as a wise option and a smart business move. 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 at SGV & Co.

21 January 2019

Lucil Q. Vicerra

Are you ready for a customs audit?

It has been more than a year since Executive Order (EO) No. 46 was issued which revived the post clearance audit (PCA) function of the Bureau of Customs (BoC). Finally, the implementing rules necessary for the BoC to resume audits have now been issued. The BoC and the Department of Finance issued Customs Administrative Order (CAO) No. 01-2019. The CAO covers the conduct of the PCA and the implementation of the Prior Disclosure Program (PDP). News and details concerning the CAO were published on Jan. 16. The EO takes effect 30 days from the publication of the CAO which means it will start on Feb. 15. The BoC Post Clearance Audit Group (PCAG) will be responsible for the PCA function. It is important to note that the time given to respond to any demand letters, as well as to submit any additional documents, is very tight. There may not be sufficient time to completely and satisfactorily address significant audit findings. Having said that, importers are encouraged to closely monitor the receipt of the Audit Notification Letter (ANL) from the PCAG and ensure audit readiness. The salient features of the CAO regarding the conduct of the PCA are as follows: Period to conduct PCA — In the absence of fraud, the BoC has three years from the date of final payment of duties and taxes or Customs Clearance to conduct a PCA and determine any deficiency duties, taxes, and other charges, including any fine or penalty, for which an importer may be liable. Selection criteria — Importers that will be subjected to a PCA will be selected based on any of, but not limited, to the following criteria: – Relative magnitude of customs revenue to be generated from the firm; – The rates of duties of the firm’s imports; – The compliance track records of the firm; – An assessment of the risk to revenue of the firm’s import activities; – The compliance level of a trade sector; and – Non-renewal of an Importer’s customs accreditation. PCA process — The PCA will be conducted through the following process: Profiling/Information Analysis — Risk profiling and analysis on the importers will be performed in order to identify importers who are to be subjected to a PCA; Issuance of the ANL — The letter containing the names of the authorized personnel to perform the audit will be issued by the BOC Commissioner. The ANL will be valid for 30 calendar days, subject to revalidation for another 30 days. This will be personally served to the importer via registered mail or through electronic notice. Preparation of the audit plan by PCAG Conduct of audit proper — The audit will start within 60 calendar days and should be completed within 120 days (per year of audit) from the date that the ANL is served. This may be deferred if the importer manifests an intention to avail of the PDP. Upon completion of the audit, the team will issue either a Final Audit Report (FAR) with a demand letter if there are findings of deficiency duties, taxes and other charges; or a Clean Report of Findings (CRF) if there are no findings, which shall be endorsed by the Assistant Commissioner, and approved and signed by the Commissioner; Service of demand letter for payment of deficiency — If the audit will result in findings of deficiency duties, taxes, and other charges, the demand letter will be served personally to the importer through registered mail or electronic notice. The importer will have to pay within 15 days from the receipt of the demand letter; The BoC will issue an acknowledgement letter stating that the audit is completed if the importer opts to pay the amount per the demand letter; – The following remedies are available to importers who opt to contest the audit findings: · Importer may file a request for reconsideration or reinvestigation with the Commissioner within 15 days from receipt of the demand letter. When requesting for reinvestigation, the importer has 30 days from the submission of the request to provide all relevant supporting documents. · If the Commissioner denies a request for reconsideration or reinvestigation, the importer may appeal to the Court of Tax Appeals within 30 days from the receipt of the denial. · Applicable penalties for failure to pay correct duties and taxes on imported goods determined through the conduct of PCA — Importers shall be penalized according to two degrees of culpability, subject to any available mitigating, aggravating or other extraordinary factors: – Negligence — 125% of the revenue loss Additionally, in case of inadvertent error amounting to simple negligence, a penalty of 25% will be applicable. – Fraud — 600% of the revenue loss and/or imprisonment of not less than two years, but not more than eight years. Interest on deficiency duties, taxes and other charges plus fine & penalty — An interest of 20% per annum, counted from the date of final assessment, will be imposed on: – PDP availment; – Deficiency duties, taxes and other charges; – Fine or penalty, if any. Because of the short periods of time involved (i.e., 15 days from receipt of the demand letter to contest the deficiency assessment and 30 days to submit all supporting documents from filing of request for reinvestigation), early preparation for an audit is crucial. An importer needs to be “audit ready.” This can be done through self-assessment, or by conducting an internal review or a customs compliance review. At this moment, importers should evaluate their importation practices and procedures to determine compliance with customs laws, rules, and regulations. Additionally, importers should identify risk areas and potential exposures so that these may be legally corrected prior to and/or during the customs audit. More importantly, importers should consider PDP, if practicable, to reduce the stiff penalties. PDP refers to the program that authorizes the BoC Commissioner to accept prior disclosure of errors and omissions in goods declaration resulting in payment of deficiency duties and taxes. The PDP will be discussed in more detail in next week’s column. 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 at SGV & Co.

14 January 2019

Roderick M. Vega

Tech-based compliance in emerging markets

The nature of business today is very different from how it was just a few years ago. Technology, innovation and new consumption behaviors are driving disruption every day. Yet, some things – such as fraud, bribery and corruption – have remained constant. This was the main finding of the EY Global Fraud Survey 2018: Integrity in the spotlight, which focused on emerging markets. The survey included interviews with 2,550 senior business decision-makers from 55 countries and territories to gain in-depth insights into bribery and corruption conditions. The survey yielded the following: · 52% of respondents from emerging markets stated that bribery and corruption happen widely in their business, compared to 38% globally. · 19% said that cash payments can be justified to help their business survive. · 16% said that it is a common practice to use bribery to win contracts. Levels of perceived bribery and corruption are double that of developed markets, despite many emerging markets implementing stricter anti-corruption laws, enforcement and anti-fraud frameworks. This would indicate the need for more structured, integrity-based compliance cultures backed by new technologies that can provide better data insights. Some of these digital compliance tools include predictive analytics and real-time risk alerts, integrated into a forensic data analytics (FDA) system that can improve monitoring and reporting to maintain compliance. THE OUTLOOK FOR FRAUD IN THE DIGITAL AGE More and more companies are embarking on digital transformation to enhance their operations in various aspects – with great implications for legal, compliance and internal audit functions. A great majority of respondents (91%) stated that their organizations will be leveraging advanced technologies – such as digital payments, Internet of Things, robotics and artificial intelligence within the next two years. A very small segment (4%) even expect to conduct transactions using cryptocurrency. However, with the larger volumes of customer and employee data being maintained by companies, the need for greater data privacy also arises. Information governance is one of the new challenges for companies today. In the Philippines, the implementation of the Data Privacy Act spells increased vigilance for companies that are made more accountable for the data they safeguard. While technology offers increased benefits for companies, the digital transformation also presents new fraud risks and fraud schemes using the same technologies. For example, wire transfer fraud has been increasing in recent years with more companies switching to digital payments. Fraudsters now have a wider global reach and can conduct illegal activities with more efficiency and speed. Their potential victims are frequently in emerging markets. ARE CURRENT EFFORTS WORKING? It is interesting to note that while respondents know of their management’s anti-corruption policies and training, whistleblower hotlines, and codes of ethics in their organizations, these seem to have had little impact on decreasing unethical behavior. The differences between management statements and employee conduct are evident in the following findings: · While 97% of heads of compliance state that the company has anti-corruption policies in place, only 77% of sales and marketing respondents state this, implying a disconnect between high-level policies and the level of awareness of these policies in key employees. · While 66% of internal audit, compliance and legal respondents stated that they had a customized, risk-based due diligence approach to third-parties, 29% of sales and marketing were not even aware of such due diligence approaches. · While the penalties for misconduct are made clear to employees, less than 60% are aware of people being penalized. · Over 25% of respondents state that people managing relationships with third parties are not required to complete fraud and compliance risk training, while only 30% of organizations incentivize third parties to act ethically. These observations indicate that a more proactive approach is needed beyond simply laying down a compliance program which states the ethical intentions of the organization. Companies need more proactive and sustained communications and training to increase employee awareness of company policies and whistle-blowing programs. INTEGRITY REMAINS PARAMOUNT Nevertheless, what is encouraging is that 97% of respondents recognize the importance of integrity in their organization’s operations. Not only does this help the company avoid regulatory scrutiny and penalties, but the business also gains more competitive advantages including enhanced customer and public perception, higher business performance, and better employee retention. What is still lacking, however, is the individual responsibility for integrity among employees. Most employees still see integrity as a function of human resources, compliance, legal or senior management, rather than a personal responsibility. This is another area where leaders need to take proactive action and communication, including: · Clearly defining principles and behavioral standards rather than simply issuing a blanket mission and values statement. · Leveraging verifiable data about the behavior and culture in the organization. · Developing enhanced metrics and accountability processes that go beyond standard policies. · Consider transitioning into a Purpose-led organization. Studies have shown that having an overarching Purpose not only helps companies perform better overall, but also help employees achieve a stronger alignment with company values and ethical behavior. THE FUTURE OF COMPLIANCE As business models continue to evolve, compliance functions will likewise need to transform to better detect, respond to and prevent fraud and corruption. Compliance policies and procedures, supported by training and consistent enforcement, are necessary yet often insufficient. However, the application of FDA may bring significant improvements like the use of advanced analytics for continuous monitoring and employing artificial intelligence to provide more personalized, risk-based training and communications. Given the importance of emerging markets in driving the global economy, it is worthwhile for companies and regulators in these areas to work together to implement effective practices, consultative policies and integrity-based corporate cultures that are strongly supplemented by powerful digital platforms and forensic data technologies. 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. Roderick M. Vega is a Partner and the Forensic and Integrity Services Leader of SGV & Co.

07 January 2019

J. Carlitos G. Cruz

Moving forward with our reason for being

It has barely been a week since the New Year and already we have seen or experienced changes. Why? Because we are living in an age of transformation. Every single day, innovations spring forth and industries may morph in character and needs. From digital trends to shifting work cultures, norms are being rewritten in favor of faster processes, cutting-edge technologies, and highly specialized competencies. Given this evolving landscape, how do companies, firms, and employees stay afloat? Should businesses simply rely on adapting new workflows and processes to stay relevant and competitive? These are the questions that have propelled businesses and entrepreneurs to rethink their strategies and methods of transactions over the past few years. Globalization has moved emerging markets and e-commerce into the forefront of local and regional economies, challenging traditional companies to either integrate digital products into their ecosystem, or risk getting left behind by competitors and consumers alike. Moreover, today’s business environment is able to offer an abundance of opportunities which can sway a young professional’s career goals in unexpected ways. This is the business landscape that greets us in 2019, and the world will only move faster from here. Although there may not be a single answer to address these issues, there is one constant that acts as a North Star amid this flurry of uncertainty and change: Purpose. This is not a foreign concept by any stretch, but there is still plenty of merit in revisiting its intrinsic worth here and now, as we prepare for another year of development and growth. REVISITING PURPOSE FOR THE INDIVIDUAL In French, “purpose” can translate to raison d’etre or one’s reason for being – its dictionary meaning is “the justification for existence.” On the level of the individual, purpose prescribes the underlying belief that there is a reason for every choice made and every action done. Therefore, to have a strong sense of purpose should ideally lead to productive and tireless action. However, no matter how personal it may be, purpose will usually be aligned with something greater than one’s self. It is in this pursuit of a bigger dream or goal that makes the journey to know one’s purpose important, regardless of background or circumstance. SGV defines purpose in a similar manner — it is the aspirational reason for being that is grounded in humanity, it inspires, and calls to action. Purpose is what sets SGV’s talent pool apart, and it is what keeps both leadership and staff in constant motion towards delivering quality work. PURPOSE IS OUR MAIN DRIVER On the level of the business environment, purpose exists to motivate the overall vision of a company. The EY Beacon Institute conducted a global survey, sponsored by Harvard Business Review Analytic Services (HBRAS), which championed Purpose as a main driver for strategy and decision-making aimed at long-term success. The snapshot of the results show that most executives believe purpose is transformative on almost all levels – from better employee satisfaction to increasing customer loyalty. Meanwhile, companies which have yet to develop their own purpose-driven management are now trying to create one. Why the impetus for purpose in the workplace? The answer is simple: a unified, collective, corporate purpose empowers individual members of the organization with a greater sense of fulfillment and meaning. When one person wholly understands the power of one positive action, they become more engaged, they access higher levels of creativity, and they function beyond expectations of the job. EMBARKING ON OUR PURPOSE JOURNEY Following the results of this survey, how does SGV articulate its purpose? What drives SGV to succeed above and beyond the call of duty? What should drive its individual members to do the same? From the very beginning, SGV’s core values of meritocracy, fairness, integrity, and steadfast support for lifelong learning have driven generations of leaders and staff to carry a torch of excellence for over 70 years. These values are embedded in many aspects of their personal and professional life, long after their tenure in SGV. These constitute the blueprint of SGV’s reason for being — the Firm’s purpose. SGV’s Purpose Journey is the collective ambition of a talented, dynamic, and team-based organization encapsulated in the statement: “In everything we do, we nurture leaders and enable businesses for a better Philippines.” There is now a greater call to align one’s personal sense of purpose to the idea that even small acts at work can exponentially affect the community, and the country, in a positive way. SGV strives to help build a better Philippines that has people unafraid to take up positions of leadership and management; who live with integrity; who are engendered with the spirit of doing what is right, even when it is challenged. In 2019, we have committed to continue to walk the path of our Purpose Journey. In recognition of the greater majority of the company’s millennial workforce, the Purpose has also been captured in a hashtag: #SGVForABetterPhilippines. This will be the unshakeable compass that will aid all of us in navigating through new trends, disruptions, and unpredictable movements in the marketplace. And may this “reason for being” inspire many to pursue greater work and success, all towards the aim of a better working world. 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 author and do not necessarily represent the views of SGV & Co. J. Carlitos G. Cruz is the Chairman and Managing Partner of SGV & Co.

2019

To have and to hold: Customs import documents

Prior disclosure or a customs audit: Which is the wiser option?

Are you ready for a customs audit?

Tech-based compliance in emerging markets

Moving forward with our reason for being

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