Suits the C-Suite

25 March 2019

Christian G. Lauron and Abner E. Serania

A New Green Revolution: The Green Bonds Part 2

(Second of two parts) In the first part of this article, we discussed some of the environmental consequences brought on by the rapid increase of infrastructure and economic development in the country. Although the Philippines maintains the lowest ecological footprint in ASEAN, growing overconsumption, unregulated production, and waste mismanagement all contribute to the environmental burden on the land. One method to increase the impact of environmental protection and sustainability involves grassroots efforts not just from private citizens, but from organizations, local communities, and Local Government Units (LGUs). Although there is a lack of funding on this front, the Department of Finance (DoF) has begun urging its Bureau of Local Government Finance to strengthening LGU fiscal autonomy. To be discussed further are the use of green bonds as an alternative funding source, which can encourage self-reliance and project autonomy, how green bonds are structured, and how they can be adopted for local implementation. Like conventional bonds, green bond prices are also driven by interest rates, credit risk, foreign exchange markets, market perceptions of liquidity, and supply and demand. As interest rates increase, bond prices decrease. Moreover, the required return for investors tends to increase as the credit risk assessed to the issuer increases. Also affecting bond pricing are the anticipation of the project’s success and backup plans for future business opportunities. All of these are taken into consideration in calculating bond return. Slightly deviating from a conventional bond, other additional terms and characteristics of a green bond — whether it is a floating rate, cancellable or callable — also affect its price. Further studies from Harvard Business School show that most US municipal green bonds are issued at a premium, where after-tax yields are six basis points lower than a conventional municipal bond. It makes sense to encourage more investors to invest, although most green bonds are generally oversubscribed. Since the first green bond issuance in 2007, investments in green bonds have increased in recent years, with the International Finance Corp. (IFC) a unit of the World Bank Group, reporting an annual additional $1-trillion investment. While the creation of the green bond seems to follow conventional bond creation, evolving guidelines have been published across different markets around the globe to guide the creation and issuance of these bonds. It also provides a clear distinction for green bonds since investors demand identification. Under the Climate Bonds Initiative, a four-stage bond certification process needs to be passed: project identification, bond structuring, transparency on use of proceeds, and screening of credentials. Furthermore, the International Capital Market Association has issued green bond principles aimed at streamlining voluntary guidelines in creating and issuing a ‘credible’ green bond. In the Philippines, the Securities and Exchange Commission (SEC) has adopted guidelines from the ASEAN Green Bond Standards (AGBS) to improve an awareness and appetite in capital funding for green projects in the ASEAN region. It outlines rules and procedures for issuing ASEAN Green Bonds in the country starting with: – The identification of eligible green projects, excluding fossil fuel power generation from the list; – Clear documentation of the utilization of proceeds; and – Proper establishment and disclosure of project selection and evaluation. Management of proceeds must also be disclosed, where net proceeds must be tracked and adjusted periodically to match allocations required. Lastly, there should be an annual report on the projects done with their corresponding resource allocation. APPETITE FOR GREEN BONDS In the Philippines, the first green bond was issued in 2016 by Aboitiz Power Corp. Banco de Oro Unibank followed in December 2017. In 2018, a locally denominated green bond emerged through the $90-million loan issued by the IFC for Energy Development Corp.’s (EDC) geothermal energy generation output. This is just a piece of the $30-billion funding requirement for the energy sector in the Philippines. Both public and private sectors have already begun gently nudging investors and issuers towards the green bonds market, as can be observed with the SEC’s recent adaptation of the AGBS, and the 2018 Philippine Investment Forum’s discourse on the future of green bonds. However, though the returns are fairly comparable to that of a conventional bond, issuers hesitate at the cost of additional requirements of the “green” label. Thus, where investors seek to ensure they invest in truly green projects, issuers look at it as a burden to consider. In the Philippines where the preliminary and strongest of impacts of climate change can be felt through intensifying typhoons and unusual flooding brought by rising sea levels, green bonds can be a way for the national government and the LGUs to raise funding for climate change mitigation and resiliency projects through proper waste management, waste-to-energy, and resilient infrastructure initiatives. This is the case in the US where municipal bonds were expected to increase to $15 billion in 2018, up 43% from 2017 based on S&P Global Ratings report. Given that the country requires much financing for its programs, green bonds can potentially tap into the $36-trillion market. After the SEC adopted AGBS, green bonds are now being seen as potential investment vehicles that can ease the flow of funds between needing LGUs and willing investors. They may be viewed as alternatives to the typical fund-raising avenues of the LGUs such as loan applications to Government Financial Institutions that are backed by their respective Internal Revenue Allotments to augment their income. Given that such bond issuances have additional (and more tedious) requirements, the national government must also be able to extend technical assistance to such LGUs willing to explore this fund-raising track, through the BLGF. Strides can be taken to foster widespread awareness of the key role green bonds can play in securing the sustainable development in support of the country’s economic and social growth. However, as in all worthwhile initiatives, it will require close and intense collaboration among the government, the private sector, and the country’s banking and capital markets. 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. Christian G. Lauron is a Partner and Abner E. Serania is a Senior Associate of SGV & Co., respectively.

19 March 2019

Hemant M. Nandanpawar and Arielle Nicole R. Papa

A New Green Revolution: Green Bonds Part 1

(First of two parts) The Philippines’ GDP growth has maintained a relatively stable upward trend over the last decade. Regionally, the archipelago continues to outpace most of its neighbors, maintaining an average annual growth rate of six to seven percent in the last seven years. The driving force behind this economic and developmental progress is the reinvigoration of the national government’s investment in public works, health and education infrastructure, and improved public financial management. However, the effort and resources expended towards the modernization and overall development of the Philippines still falls short in one key consideration — climate and environmental resilience and the sustainability of these infrastructural pursuits, and of the overall development and growth path of the country in its entirety. Post-liberation, the Philippines has followed traditional development pathways that — while conducive to basic economic objectives of expansion and growth — are inherently unsustainable to the landscape and the environment. As of 2018, the manufacturing sector has contributed over a quarter of all value generated within the economy. Partnered with the increased activity in infrastructure development, and the resulting rising demand in land, resources, and energy, the economic activity of the country continues to exacerbate the environmental burden of sustaining day-to-day operations. Despite maintaining the lowest ecological footprint among its neighbors in Southeast Asia, the rapidly-growing incidence of overconsumption, unregulated production, and lack of a solid waste management framework have significantly amplified the population’s strain on the country’s natural carrying capacity. Since the 1960s, the country’s resource demand has more than doubled, and the resulting Greenhouse Gas (GHG) emissions have grown by a whopping 67% since 2007. Waste management remains another critical shortcoming. As of 2015, the Philippines has become the third-largest source of plastic pollution, directly affecting the rapid degradation of local marine life. A more direct and dire consequence of waste management malpractice is experienced during typhoon season, where major flooding across cities becomes a common and unfortunate occurrence. Linked to that are several other issues in energy, transportation, resilience, agriculture, and overall social and environmental welfare. Although bleak, it is certainly not too late to turn the tide against this lack of environmental awareness and integration. A hopeful study carried out by the United States Agency for International Development (USAID) shows that despite the rapid growth in GHG emissions, emission levels were just over a third of GDP growth for the same period, indicating the potential for notable improvements in the future. The responsibility of this environmental and climate change rehabilitation will need to fall on the collective shoulders of the public sector, private corporations, and most importantly, the citizens themselves. On that note, the most impactful and sustainable approach to environmental protection, climate change mitigation, and adaptation, often begins at the grassroots level — within organizations, localized communities, and even at the Local Government Unit (LGU) level. The bottom-up approach starts off simple, but it ultimately allows the target beneficiaries to create sustainable solutions that are tailored to their particular needs and context. The lack of financing, however, limits the potential for green growth and development. As an example, financing for LGU-led projects is sourced predominantly from government Internal Revenue Allotments (IRAs), which, depending on the size of its municipalities, make up 50-70% of their respective budgets. In response, the Department of Finance has been urging the Bureau of Local Government Finance to take more steps in strengthening LGU fiscal autonomy. At the moment, the push directing Public-Private Partnership and Overseas Development Assistance financing towards local governments has significantly increased funding pipelines for LGU-initiated projects. There is an opportunity to further accelerate this through the use of green bonds as an alternative funding source, which in turn can foster self-reliance and project autonomy. Through this, the investment can empower the community to learn, do, and offer more, leading to great growth potential. Within the private sector, green bonds may help incentivize the correction of negative environmental externalities within established operations, such as in energy efficiency improvements, pollution controls, and energy mix diversification. As most of these pursuits emphasize impact over profit, traction for their growth has been weak, in spite of the obvious benefits and pressing need for active action in striving for green infrastructure. In the second part of this article, the discussion will delve towards the structuring of green bonds as well as further opportunities for local adoption. 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. Hemant M. Nandanpawar is a Senior Director and Arielle Nicole R. Papa is an Associate of SGV & Co., respectively.

11 March 2019

Katrina F. Francisco

How non-financial reports can tell your value creation story

Of late, a number of companies in the Philippines have been releasing non-financial reports, either called “Environmental, Social and Governance (ESG) Reports,” or “Integrated Reports,” or “Sustainability Reports.” However, these are not yet mandatory. In fact, it was just recently that the Securities and Exchange Commission (SEC) released Memorandum Circular No. 4, which provides the sustainability reporting guidelines for publicly-listed companies on a “comply or explain” approach for the first three years of implementation, starting with the 2019 reporting period. In the absence of a reporting requirement, a key driver that has influenced companies to disclose non-financial information has been the demand from their investors for such reports. In the past four years, EY Global has been commissioning the Institutional Investor’s Custom Research Lab to conduct surveys with institutional investors around the world, to assess if non-financial information plays a role in their decision-making. According to the 2018 EY Global Climate Change and Sustainability Services study, “Does your non-financial reporting tell your value creation story?,” ESG information is now considered an essential criterion for investor decision-making. Investors have come to understand the significant link between ESG factors and a company’s performance and long-term value. INCREASING RELIANCE ON ESG A high of 97% among the investors surveyed in 2018 said that they evaluate, whether formally or informally, the non-financial disclosures of target companies. Risks related to governance, supply chain, human rights, and climate change are some of the main ESG factors that they look into. In the previous year’s report, only 78% undertook reviews of non-financial disclosures. The dramatic increase is mainly a result of widely-known scandals related to poor corporate governance, more data showing the impact of climate change on business, and an increasing awareness of the social impact of business. DEMAND FOR MORE CONSISTENT DATA The quality and relevance of disclosed non-financial data vary considerably by company, industry, and region, with 56% saying that the disclosures are either lacking or not available for any meaningful comparison to take place. Investors now want to see more comparable data at specific points in time, as well as over a period of time, which allows them to evaluate progress within a company and identify the leaders and laggards within an industry. In addition, investors note that there are extensive disclosures relating to governance policies and practices, yet they often overlook discussions on accountability in relation to non-financial information. Investors want to see not just the current practices, but also management effectiveness on these non-financial metrics over a short, medium and long-term basis. IMPROVING THE RATE OF DISCLOSURE Investors agree that ESG disclosures have improved significantly over the years, especially in the area of governance, which is largely driven by exchange-listing or accounting requirements. Additionally, investors perceived that 82% of the companies they do invest in are actually able to assess materiality of governance factors properly. However, only 64% of the companies they invested in actually assessed social factors properly, and only 11% of these companies properly assessed environmental factors. The surveys indicate positive growth in the area of ESG disclosures, although the numbers also show that the concept of materiality in relation to ESG factors and sustainability still has a long way to go before majority of them comprehend and integrate them into their business practices. CONCERN OVER PHYSICAL CLIMATE RISK Given that the risk from climate change is one of the main factors investors scrutinize, a majority (around 70%) indicated that they will closely evaluate disclosures relating to the physical risks of climate change in their investment decisions and allocations over the next two years. Without disregarding transition risks, 47% of the investors said that they will also consider these risks of adjusting to new regulations, practices, and processes. Investors are apparently keen on how board members and senior management intend to exercise oversight around these risks, especially if they are material to the business. NEED FOR INVESTMENT-GRADE ACCOUNTING STANDARDS AND COLLABORATION Of the survey’s respondents, 59% of investors saw the need for more prescriptive accounting standards for non-financial information. The investors recognize that since they are not experts in every industry, they need to adapt and try to establish the material factors for each industry with focus on those that mitigate risks and create value for business. However, quantifying those risks and translating them into financial terms can be challenging. This is why investors believe it is critical to develop a common standard that has enough flexibility to allow companies to report what is material to them and their respective industries. This way, they will be able to compare, establish benchmarks and spot trends relevant for their decision-making. Investors are confident that this can be realized when there is greater collaboration among regulators, trade groups, NGOs and even among themselves. The collaborative effort will assist investors in defining what are most substantial to a company’s long-term sustainable growth. NEXT STEPS The report recommends four key areas that companies should consider to effectively articulate what investors are looking for. First, establish a structured materiality analysis process that allows companies to: * Set strategic objectives and overall corporate strategy; * Define the issues that will be covered in disclosures and reporting; * Design Key Performance Indicators (KPIs) to enable measurement of performance; and, * Align ESG risks with the risks managed and prioritized by business for a more cohesive sustainability risk management. Second, since the materiality process allows companies to see where the largest impact can be made, appropriate methods to measure and report the social and environmental outcomes should be properly identified. Third, identify the KPIs that would translate risks and outcomes into financial proxies for investors to assess the risks and long-term value creation process of the companies. Last, continue to engage with investors and other stakeholders and report more comprehensively on material non-financial information for a better understanding of how they are creating long-term value. With the increasing global focus on environmental issues and corporate social responsibility, and now additional compliance pressure from SEC MC No. 4, Philippine companies with robust ESG reporting policies may find themselves reaping more significant long-term economic, social and reputational benefits. 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. Katrina F. Francisco is a Senior Director for Climate Change and Sustainability Services (CCaSS) under Assurance (Service Line) at SGV & Co

04 March 2019

Josef Pilger and Christian Lauron

Revitalizing retirement, pensions and social security Part 2

(Second of two parts) If we evolve our thinking about social security, pension, retirement and voluntary savings, could we deliver better socioeconomic outcomes for the Philippines and improve the financial well-being of millions of Filipinos? In the first part of this article, we discussed the existing social security, pension, retirement, and voluntary savings mechanisms in the Philippines. While these already provide great benefits to many Filipinos, these systems can still evolve to become more modern and efficient. By revisiting our social security and pension frameworks, they hold the potential to grow into powerful savings and economic engines which can proactively support the development of our national economy. We also discussed the nine key, systemic dimensions that were identified in EY’s global framework for social security, pension, retirement and voluntary savings. PUBLIC AND PRIVATE SECTOR COLLABORATION CAN LEAD TO BETTER OUTCOMES Many countries increasingly leverage the experience and capabilities of domestic and global financial services organizations to accelerate the evolution and growth of national savings pools. In the key anchor “faster, better, and cheaper,” outcomes and delivery are often applied to those products and services that the government considers less as core tasks, relegating them to enablement. Employment-based and customer-based voluntary pension, retirement, and savings systems are often delivered by financial services providers in the private sector. But the government’s interest is in the outcomes and conduct of those solutions. They must encourage concurrent development of contextual parameters to ensure that sustainable, predictable values are delivered. Community expectations are high. The government must ensure that the joint delivery of such values is in the best interest of the customers and the overall public. Some possible areas where private financial service providers could add value: financial inclusion; financial literacy and advice; digital customer and employer retirement platforms; data and payment enablement; investment, life insurance and other similar products and services; operating broader financial well-being ecosystems; and providing access to leading practices, solutions and capabilities supported by relevant experiences in both local and global markets. Naturally, there are also certain contextual elements that must be established to deliver sustainable value. Examples of this are robust management and governance systems that can handle possible conflicts of interest; meaningful deterrents for poor behavior and outcomes; clearly defined roles with effective monitoring and scrutiny protocols; appropriate incentives that are aligned with reasonable compensation; and a deep and mutual long-term commitment to service. The collective, direct benefits from evolving and expanding social security, pension, retirement, and voluntary savings solutions will be significant for all stakeholders. The indirect benefits from a deeper and broader capital market can enable the funding of more extensive and long-term infrastructures in the country. However, the transformation process will require effort and three very important steps: 1. A thorough understanding of the current situation; 2. A comprehensive analysis of options and their qualitative and quantitative socioeconomic stakeholder impact to determine the desired next evolution stage; and 3. An implementation road map that systematically converts policy aspirations into member and economic outcomes. To help us better understand what is needed to evolve our current systems, we should consider some relevant questions, such as: 1. What social contract do Filipinos expect from the government? What are the strategic objectives of our social security, pension, retirement, and voluntary savings systems? What are our measures of success to expand public confidence? How do we measure up today against delivering the objectives? 2. What are the roles of the existing providers and solutions against the strategic objectives? And what oversight, governance, regulatory, and accountability frameworks and mechanisms do we need to effectively align and ensure each piece delivers against short and long-term expectations? 3. How do we systematically expand inclusion and participation in the existing solutions? What additional and refined solutions do we need to achieve our strategic objectives? 4. What are the short and long-term costs, benefits, and risks for the government and the ordinary Filipino citizen to evolve the current state of the country’s social security, pension, retirement, and voluntary savings systems? What are the risks of doing nothing? 5. How could we further improve efficiency and effectiveness of existing providers and solutions? How can we explore collaboration and shared services solutions to future-proof delivery, while enhancing member and employer outcomes and experiences? 6. What would a sustainable plan to gradually close the funding gap of the three, existing government-based solutions to ensure fiscal budget predictability, and long-term financial system sustainability look like? 7. Would the existing systems and mechanisms and their members benefit from Shariah-compliant products? How would we design and implement such products? These are just some of the initial questions we need to raise, and ultimately address, for our pension mechanisms to grow even more fruitful for the benefit of hardworking Filipinos. Regardless of status and sector, the primary goal of every citizen is to create a prosperous life. The conversation must continue on this front by asking more questions, and raising potential solutions in other related subjects. There is some interest in areas concerning private pensions, as envisaged by PERA (Personal Equity Retirement Account), the rise of digital and micro pensions, the convergence of advice and wealth and pension, and the role of pensions in infrastructure investments. Encouraging collaboration between the public and private sectors may eventually result in productive solutions that can address these and other questions. It is envisioned that a partnership between government and private industry will spur dialogue for a more detailed and developed framework on our existing saving mechanisms. 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. Josef Pilger is EY’s Global Pension and Retirement Leader. Christian Lauron is an Advisory Partner from SGV’s Financial Services and Government and Public Sectors.

26 February 2019

Josef Pilger and Christian Lauron

Revitalizing retirement, pensions and social security Part 1

(First of two parts) If we evolve our thinking about social security, pension, retirement and voluntary savings, could we deliver better socio-economic outcomes for the Philippines and better financial well-being for millions of Filipinos? SUSTAINABLE ECONOMIC PROSPERITY REQUIRES A MATURE CAPITAL MARKET FUELED BY SAVINGS The Philippines has been experiencing a long period of unprecedented growth and prosperity. At the same time, its young population offers a temporary demographic dividend. However, the capital needed for infrastructure to further spur the country’s economic growth is lacking and has exposed an area demanding additional evolution: the depth and breadth of the country’s capital market constrained by limited sources of long-term savings to enable sustainable domestic funding. More evolved social security, pension and retirement systems, and long-term savings are the most effective and sustainable answer. We should note that there are many relevant regional and global success stories. Both Singapore and Malaysia used substantial savings generated by mandatory social security, pension and retirement systems to support their creation of deep and broad capital markets, which in turn enabled economic prosperity and infrastructure evolution. Even in the United States, a significant share of the fuel for the country’s capital market originates from public and private pension, retirement and voluntary savings. This article focuses on government-driven solutions. Future articles will cover private retirement and savings. EVOLVING EXISTING SOCIAL SECURITY AND PUBLIC PENSION The Philippines has three well-established mechanisms, two of which already rank among the country’s largest institutional asset owners. But various challenges currently limit maximizing savings, which in turn limit positive capital market and funding effects. 1. Social Security System (SSS): Mandatory contributions from participating Filipinos provide pension, retirement and related benefits to more than 36 million Filipinos globally. Long-term sustainability and funding gaps are exacerbated by significant challenges to nudge more Filipinos, mostly from the informal sector, to participate and contribute. Benefit adequacy and administrative efficiency challenges are also heavily impacted by common manual processing limits, available savings and increased cost to service. Additionally, regulatory investment restrictions result in lower than expected average investment returns. Improvements could both increase savings and returns while reducing cost to service. However, change requires all stakeholders (including members and employers) to collaborate. (Note: Republic Act No. 11199 or the Social Security Act of 2018 was signed by the President on Feb. 7). 2. Government Service Insurance System (GSIS): Mandatory contributions from most public sector and government employees provide benefits to more than 1.5 million members, but benefits adequacy remains insufficient. Long-term funding gaps and administrative efficiency challenges impacted by common manual processing and lack of standardization across various government agencies offer improvement opportunities. Similar to the SSS, regulatory investment restrictions result in less than expected average investment returns. Progressive changes could significantly expand available savings and member outcomes. But that change requires the collaboration of all stakeholders including members and government agencies as sponsoring employers. 3. Military retirement and separation benefits: Annual budget appropriations fund this mechanism. However, the rising longevity of military personnel drives benefits costs, which makes this pay-as-you-go solution a growing burden for Government’s annual budget. Benefits are accumulated over 40 years without any dedicated system assets. Therefore, enabling long-term financial sustainability will require a systemic solution. These three existing saving mechanisms provide a sound starting point to evolve into a necessary comprehensive and modern social security, pension, retirement and voluntary savings solution that aligns with the Philippines’ current and future socio-economic strengths. Such a solution acts as a savings engine that will fuel the capital market, attract more foreign investors and increase employment and prosperity. A GLOBAL FRAMEWORK FOR SOCIAL SECURITY, PENSION, RETIREMENT AND VOLUNTARY SAVINGS While economies vary in terms of population and stages of economic development, EY has developed a global framework for social security, pension, retirement and voluntary savings. There are nine key dimensions supported by various sub-dimensions that serve to guide a holistic assessment, design and evolution of such systems in emerging, evolving and mature countries and systems. The framework focuses on the relevant ecosystem with key direct and indirect drivers across relevant stakeholders. Country and policy context — This entails gaining deeper insights into various areas such as socio-economic context and outlook; the social contract, vision and social culture of the stakeholders; the pension program’s long-term strategy and objectives; existing regulations and incentives to save; measurable outcomes; and the depth and breadth of the capital market. Customer and member context — This sub-dimension looks at the needs of customers and members; a balance between the savings culture of the country and the risk appetite of members; consumer protection and advice programs; customer relevance and choices; empowerment for informed decision-making; and alignment to financial well-being. Benefits, products, and services context — This considers the existence of subsistence welfare programs; basic retirement; sound retirement; death, disability and other protections; healthcare and related essentials; and additional retirement and voluntary savings practices. Delivery context — Effective programs will require a sound operating model and appropriate delivery agility; relevant focus on best interest fiduciary duties, effective governance and oversight on possible conflicts of interest; effective risk management; and programs to strengthen public confidence. Solution context — The system should have adequate benefits, financially sustainable operations and investment rules; and efficient management that addresses customer relevance and empowerment. Reform context — This sub-dimension considers elements such as political, stakeholder and reform governance; flexibility in implementing reforms; and continuous evolution for the system. Solution culture, leadership and accountability — Building the right system necessitates establishing the right culture and expected conduct, with the right incentives, all supported by accountable and outcome-driven leadership, including appropriate supervision and relevant penalties. Stakeholder behavior — Members and stakeholders need to be willing to collaborate to come up with new ideas and innovations, work under a culture of transparency and disclosure, share a long-term perspective, all while taking responsibility and accountability for their behavior. Delivery principles — At the last step, a good system should be customer-centric, providing relevant choices while maintaining simplicity, which can be supported by automation, digital platforms and straight-through-processing protocols that leverage exchange-to-exchange value chains. There is hope that this framework adds value to an informed debate in the Philippines to evolve the existing government-driven long-term savings system. Such evolution is perceived to deliver better retirement and financial well-being outcomes for all Filipinos, and, in turn, deepen the capital market and assist in delivering further economic prosperity. In the second part of this article, we will discuss how greater collaboration between the public and private sectors can deliver improved results. 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. Josef Pilger is EY’s Global Pension and Retirement Leader. Christian Lauron is an Advisory of Partner from SGV’s Financial Services and Government and Public Sectors.

18 February 2019

Arlyn A. Sarmiento-Sy

Data is power: Using analytics for a Customs audit

Our last four Suits the C-Suite articles have emphasized the need for importers to be audit-ready in the event that the Bureau of Customs (BoC) conducts a Post Clearance Audit (PCA). The BoC has already issued 32 Audit Notification Letters (ANLs) to importers; anyone could be next on the list. Audit readiness can be achieved by conducting a Customs Health Check or a Customs Compliance Review (CCR) to identify areas of risk and potential exposures prior to a PCA, to ensure that importation records are complete, and to enable the importer to determine the issues and amounts for a possible availment of the BoC’s Prior Disclosure Program (PDP), which is an option available to importers to voluntarily disclose errors in good declarations and pay deficiency duties, taxes, and other charges that may arise in lieu of a full audit. Given the limited time for importers to be ready for a customs audit — which can occur at any moment — or to consider to do a prior disclosure, how can this be done? Data analytics offers an alternative and possibly, a more efficient approach to audit readiness. DEFINING ‘DATA ANALYTICS’ Data analytics is the application of tests on information that is electronically available, either from the company’s Enterprise Resource Planning (ERP) systems or through brokers’ database and other digital sources. The aim is to identify key focus areas which uncover risks and opportunities, while also providing basis to make strategic decisions over core processes and compliance activities. In doing so, data analytics can help allocate resources to areas of highest saving potential, or for risk mitigation. Data analytics can be used to perform the following: – Identify errors in order to take appropriate actions to minimize exposure; – Discover potential tax and cash flow savings, and tax recovery opportunities; – Detect process inefficiencies or risks, as well as consider opportunities to remove inherent risks, and; – Provide management insight to help address the company’s key trade and value-added tax (VAT) concerns and priorities. THE ROLE OF DATA ANALYTICS IN A PCA The insights gleaned from an importer’s electronic data could be used to identify customs and trade-related risks, issues with noncompliance, and financial exposures. The use of these data will facilitate an accurate and timely disclosure to the BoC, and even to the Bureau of Internal Revenue (BIR). By using available digital data, importers may also avoid resource constraints such as lack of manpower, or the tedious task of manual vouching importation documents. This will also minimize risks of error and oversight that come with purely manual processes. There is also ample possibility of testing 100% of all import transactions, which is preferable to just a sampling. The process involved with data analytics will provide instantaneous multilevel perspectives, allowing an importer to make informed decisions supported by evidence. Some examples of core tests involving trade analytics include: – Import overview — This allows for a quick, “get a sense” of the business, as it illustrates total customs value, duties, or VAT paid, per year, month, or day. It could diagnose unusual dips or increases from the expected or average amounts, allowing the company to investigate the underlying import transactions which may have caused them. – Duty analysis — This creates a pictorial identification of the duty rates paid by the importer, which could show potential variations in duty rates used for similar products. Duty analysis may be able to show product groups with more than one distinct Tariff Classification, which could indicate if one or more products are being incorrectly classified. – Incoterms — The Incoterms (or the International Commercial Terms) are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) relating to international commercial law. Trade analytics can identify suppliers using multiple Incoterms which may be contrary to those agreed or desired. Additionally, analytics may point out risks on the use of Ex-Works, that could give rise to findings of underpayment of duties and taxes since customs values should be based on Free on Board (FOB) or Free Carrier At (FCA) value. Ex-Works is an international term by which a seller makes the product available at a designated location, and the buyer incurs transport costs. – Free Trade Agreement (FTA) usage and opportunities — This would identify where FTAs have been utilized and thus, would point out a need to provide documentation to support the lower duty rate used on specific imports. It will also help identify where FTAs are available (but not currently utilized) to help save costs. – Related party transactions — Analytics may also identify anomalies in related party transactions against unrelated parties. – Physical supply chain — This will identify unusual or inefficient routes, and the value or weight and method of transportation used. Importers also have the option to perform customized tests to compute total landed cost for importations per month, quarter, and year. This will address the question on whether the landed cost per VAT returns tallies with landed cost per the BoC’s summary of importations. Tests can also be devised to compute for the correct customs duties and taxes per import entry, to determine any possible underpayment that may be considered for a voluntary disclosure. Since a PCA covers three years of importation (potentially involving thousands of importations), but only provides a limited time of 15 days to respond to findings of noncompliance and/or assessment of underpaid duties and taxes, it is vital that importers take every available measure to be audit-ready. If applicable, they should also consider the benefit of the PDP. A PCA may result in heavy consequences for importers, since penalties during a PCA range from 125% to 600% of the revenue loss to the Government, depending on the degree of culpability. Upfront disclosure may bring significant material savings to affected importers. With the recent issuance of Customs Administrative Order (CAO) No. 01-2019, it is expected that the BoC will intensify PCAs and issue numerous ANLs. Thus, unprepared importers may face steep penalties, interests and surcharge on noncompliance. This is why the BoC is encouraging importers to seriously consider the PDP. In this age of Information Technology, it will be most prudent to consider harnessing the power of data analytics to sift through and utilize all information that may just be sitting dormant in the company’s database and systems. 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. Arlyn A. Sarmiento-Sy is a Senior Director for Indirect Tax Services – Global Trade & Customs at SGV & Co.

11 February 2019

Victor C. De Dios and Josephine Grace R. Sandoval

Dealing with common issues in a BoC Audit

When shipments are “cleared” at the border after payment of duties and taxes, importers often assume that the Bureau of Customs (BoC) will simply move on without double-checking the shipment. This assumption is inaccurate. The BoC can actually conduct an audit of past transactions, similar to the function of the Bureau of Internal Revenue (BIR). This exercise is the Post-Clearance Audit (PCA). It usually covers the last three years of importations and the PCA is undertaken to check the correctness of importers’ goods declarations, and the accuracy of their tax payments. The BoC recently issued Customs Administrative Order (CAO) No. 1-2019, which sets new rules in the conduct of PCAs effective Feb. 15. The CAO and its related topics have been written about in the three previous Suits the C-Suites columns. We will now focus on the following: What exactly will the BoC look for? What are the common issues that importers should anticipate? How should importers deal with the common issues in a PCA? RECORD KEEPING After an Audit Notification Letter is issued, the first order of business is for the importer to submit various importation documents identified in a checklist. The most common documents required are those that pertain to shipping, importation, and transport. These are the Single Administrative Documents (SAD) or the actual goods declarations, commercial invoices from foreign suppliers, supply agreements, import licenses and permits (for regulated imports), bills of lading or airway bills, packing lists, freight and insurance documentation, and Certificates of Origin (if lower duty rates under Free Trade Agreements or FTA were used). The BoC can also require other documents such as Audited Financial Statements, filed tax returns, and schedules of importations for the period covered by the audit. The auditors also have the authority to visit the company for verification purposes. In this documentation exercise, the BoC will assess if the importer complies with the obligation to keep importation records. Lack of or incomplete documentation could lead to penalties, including a surcharge of 20% of the value of the goods for which no records are kept or maintained. To overcome this issue, importers should gather importation documents and ensure that they are complete before the PCA begins. The significance of proper record keeping bears repeating, because the BoC will identify the core common issues in an import transaction on the basis of the documents you present to them. VALUATION When an importer declares the value of imported goods at the border, it does so based on its own assessment. Hence, it becomes necessary during a PCA for the BoC to evaluate if the importer’s assessment is correct and compliant with existing valuation methods. Valuation involves a wide range of sub-issues. Here are some of the most common ones: Proper declaration of value, in general — For transactions between a related foreign supplier and importer, the BOC will inquire if the price of the goods is arms-length; meaning, it was not influenced by the relationship between the parties. Similarly, for transactions between unrelated parties, the BoC can question the value declared by the importer based on existing reference values available in the BoC database, or elsewhere. Accurate declaration of the cost-insurance-freight (CIF) — The BOC counterchecks if the CIF per invoice, insurance, and freight documentations tally with the CIF declared in the SADs, applying the specific rules on the proper declaration of such items. Existence of additional payments to suppliers — Additional payments made after importation can form part of the dutiable value of the imported goods. These include items such as transfer price adjustments, dutiable royalty payments or license fees, and proceeds of subsequent resale of imported goods. Proper declaration of all other components of the dutiable value of imported goods — The BoC can likewise check if the importer properly included all adjustments to the price of imported goods, such as dutiable commissions, packing costs and charges, assists, interests, and transport costs, among others. CLASSIFICATION OF GOODS In all importations, the importer should be able to properly ‘classify’ goods under the applicable 8-digit tariff code, or Harmonized System (HS) code. Each unique code has a corresponding duty rate that applies to goods classified under such code. In a PCA, the BOC will check if the importer captured the correct classification and used the applicable rate when it paid the duties. In case of doubt in the applicable classification, the BoC may ask the importer to establish proof of proper classification, such as details of the imported goods and tariff classification rulings obtained in the past. For importers who make use of lower duty rates available under existing FTAs, the BoC can perform a more detailed assessment. This involves a validation of compliance with the origin rules under the FTAs, as well as the availability of the supporting document called the Certificate of Origin (CO). If they fail to refute questions on origin or present COs, the importers may end up losing the privilege of using the lower duty rates. WHERE THE IMPORTER ENJOYS DUTY AND TAX INCENTIVES There is a common misconception that importers who enjoy exemption from paying duties and taxes (such as economic or freeport zone locators, or even importers through a bonded warehouse) are relieved from customs audits. In fact, the BoC remains strict in its audits of special importers, to verify if there are any duty and tax leakages in their activities. Some of the common issues specific to importers with incentives are: Actual entitlement to incentives — The BoC checks if importers have proof of entitlement to the incentives such as their Certificates of Registration and Registration Agreements. Normally, there is a determination if the importations are within the limits of the registered activity. Domestic sales — Goods imported into an ecozone, freeport zone, or bonded warehouse are normally destined for export. In the case of domestic sales, the BoC would like to see if duties and taxes were paid on such sales. Proper liquidation of raw materials — The BoC asks importers to completely account for the raw materials imported free from duties and taxes. Failure to do so can trigger a deficiency assessment. Availability of records — In relation to the record keeping requirements, the BoC checks if there is proper entry documentation, particularly import permits for ecozone locators. OTHER RELEVANT ISSUES The BoC also typically raises other issues, such as the proper computation of duties (components of dutiable value and forex conversion) and VAT (components of landed cost), payment of excise tax for certain articles, among others. Upon looking at values declared per SAD, AFS, VAT returns, and other relevant schedules, the BoC also identifies discrepancies for possible reconciliation. The importer is then required to reconcile discrepancies which could be a lengthy exercise. For failure to fully reconcile, issues may be raised such as incompleteness of records, underpayment of taxes, and in extreme circumstances, allegation of smuggling. Needless to say, there are many other issues that the BoC may raise, depending on the circumstances of each audit. Now that PCAs are well on their way, the most prudent action for importers is to perform a self-assessment for an early detection of potential issues. When importers are “audit ready,” they will be able to better remedy or mitigate any consequences before a PCA commences. 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. Victor C. De Dios and Josephine Grace R. Sandoval are Tax Principal for Indirect Tax (Customs and Global Trade) and Tax Manager, respectively, at SGV & Co.

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.

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