Changes under the Customs Modernization and Tariff Act:

An Overview
SUITS THE C-SUITE By Mark Anthony P. Tamayo

Business World (06/20/2016 p.S1/4)

(Third of 5 parts)

In last weeks article, we discussed some of the changes introduced under the new
Customs Modernization and Tariff Act (CMTA), particularly the new threshold value of
those considered as small value importations, the rules on relief consignments, and
personal and household effects (including appliances and durables) brought in by
returning residents and Overseas Filipino Workers (OFWs).

In addition to the above, the CMTA also provides the following changes:

RELATED PARTY TRANSACTIONS

The CMTA upholds the hierarchical application of the six methods of valuation of imported
goods, with Method 1 or the Transaction Value (TV) of the imported goods being the
primary method. The TV is basically the price paid or payable for the goods when sold for
export to the Philippines, subject to certain adjustments such as selling commissions and
brokerage fees, cost of containers, cost of packing, assists, royalties and license fees, cost
of transport and insurance, among others.

Under the rules, one of the limitations on the application of the TV method is that, in cases
of a related party transaction, the price between the importer and its related foreign
supplier should not be influenced by such a relationship. The CMTA states that in order to
prove the absence of such influence, the importer must be able to demonstrate that the
declared value closely approximates one of the following test values occurring at or
about the same time:

The TV in sales to unrelated buyers of identical or similar goods for export to the same
country of importation;
The customs value of identical or similar goods as de termined using the Deductive Value
Method; and
The customs value of identical or similar goods as determined using the Computed Value
Method.

Aside from the application of test values, the WTO agreement also recognizes the
circumstances of sale analysis as a remedy in proving the absence of such influence. This
remedy, which is likewise embodied under Customs Administrative Order (CAO) No. 4 -2004
and Customs Memorandum Order (CMO) No. 16 -2010, involves showing the arms length
nature of the tran saction by proving that the price was:

Settled in accordance with normal pricing practices of the industry;

Settled in a manner consistent with sales to unrelated buyers;
Adequate to ensure recovery of all costs plus a profit equivalent to the firms overall
profit realized over a representative period of time in sales of goods of the same class or
kind.

Failure to establish either of the above proofs may result in the declared TV to be rejected
for purposes of customs appraisement and the price will be determined using other
methods of valuation in their sequential order.

MISDECLARATION, MISCLASSIFICATION, UNDERVALUATION IN GOODS

DECLARATION
The CMTA has increased the surcharge penalty for misdeclaration, misclassification and
undervaluation of import ed goods.

There is misdeclaration when the discrepancy pertains to quantity, quality, description,

weight, or measurement of the imported goods.

Misclassification, on the other hand, exists when insufficient or wrong description of the
goods or use of wron g tariff heading was declared resulting in a discrepancy.

Undervaluation is present when:

The declared value fails to disclose in full the price actually paid or payable or any
dutiable adjustment to the price; or
When an incorrect valuation method is used; or
The valuation rules are not properly observed.

Any misdeclaration, misclassification or undervaluation of imported goods resulting in a

discrepancy (in duty and tax to be paid) between what is legally determined upon
assessment and what is decla red will be subject to a fixed surcharge rate of 250% of the
duty and tax due (previously, 100% to 200% of the duty due).

Surcharge, however, will not be imposed when:

The discrepancy in duty is less than 10%; or

The importers declared value and/or ta riff heading/classification:
Relied on an official government ruling; or
Is rejected in a formal customs dispute settlement process involving difficult or highly
technical questions relating to the application of customs valuation rules and/or tariff
classifications.

If the misdeclaration, misclassification or undervaluation is intentional or fraudulent (such

as when a false or altered document is submitted or when false statements or information
are knowingly made), a 500% surcharge (of the duty and ta x due) will be imposed on the
importer and to those who willfully participated in the fraudulent act. The imported goods
will be subject to seizure regardless of the amount of the discrepancy.

The CMTA likewise adopts the previous rule under the TCCP, as a mended, on the existence
of a prima facie evidence of fraud if the discrepancy (in duty and tax to be paid) amounts
to more than 30%.

UNLAWFUL IMPORTATION OR EXPORTATION

The CMTA provides stiffer penalties for smuggling (which can either be outright or
technical) which has been defined as the fraudulent act of importing any goods into the
Philippines, or the act of assisting in receiving, concealing, buying, selling, disposing or
transporting such goods, with full knowledge that the same has been fraudul ently
imported. It likewise includes the exportation of goods in any manner contrary to law.

Outright smuggling refers to the act of importing goods into the country without complete
customs-prescribed importation documents, or without being cleared by cus toms or other
regulatory government agencies. In this case, imported goods are not registered at all with
the BoC or other government agencies.

Technical smuggling, on the other hand, refers to the act of importing goods into the
country by means of a frau dulent, falsified or erroneous declaration of the goods as to its
nature, kind, quality, quantity or weight. In other words, technical smuggling takes place
through undervaluation, misclassification or underdeclaration of the goods shipped.

The difference between outright smuggling and technical smuggling lies in the use or
non-use of legal trade channels when bringing the goods into the country. Outright
smuggling bypasses the usual and normal procedure and process of clearing the cargo at
the BoC, while technical smuggling involves fraudulent acts during the processing and
releasing of the goods. In both instances, however, the ultimate objective is to evade the
payment of the prescribed taxes, duties and other charges.

The penalty is imprisonment or a fin e which ranges from Php 25,000 to Php 50,0000,000
depending on the value (up to Php 200,000,000) of the goods unlawfully imported,
including duties and taxes. If the value (or aggregate value) exceeds Php 200,000,000, the
same shall be deemed as a heinous crime punishable with a penalty of reclusion perpetua
(imprisonment of 20 years and 1 day to 40 years) and a fine of not less than Php
50,000,000.

Each act of unlawful importation or exportation shall be deemed a separate offense.

In the fourth part of thi s article, we will discuss other changes introduced under the CMTA,
particularly the new rules relating to abandonment, period of storage in a Customs Bonded
Warehouse, advance customs rulings, post clearance audit, record keeping requirements
and penalties.

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 necessary represent the views of SGV & Co.