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‘Assists’ as a Duty Base Component

By Mark Anthony Tamayo on October 7, 2021

The dutiable value of imported goods is the value (or duty base) upon which the applicable duty rate is multiplied to arrive at the customs duty payable. To determine the correct duty base, importers (and their customs brokers) should not focus mainly on the price appearing on the commercial invoice, but more so, in so far as applicable, on “side payments” made, directly or indirectly, to the foreign supplier in consideration for the purchase of the imported goods.

These “side payments” refer to the dutiable additions or adjustments that are required to be added to the transaction value of the imported goods under existing customs laws, rules, and regulations.

One of the dutiable additions or adjustments is the so-called “assists.” As the term connotes, it refers to the value of certain goods or services supplied, directly or indirectly, by the Philippine importer (buyer) to the exporter (seller/supplier) free of charge or at a reduced cost. The said goods or services supplied are used to produce or manufacture goods for sale to such Philippine importer. Such assistance effectively results in a lesser production cost on the part of the supplier and reduces the invoice value of the imported goods to the extent of the value of the particular assist given by the Philippine importer.

Section 701 of Republic Act 10863 (otherwise known as the ‘Customs Modernization and Tariff Act’) lists down the different types of “assists,” as follows:

a) Materials, parts, or components incorporated in the imported goods;

b) Tools, dies, molds, or machinery used to produce imported goods;

c) Materials consumed in the production of imported goods; and

d) Engineering, development, artwork, design work, and plans undertaken outside of the Philippines and necessary for the production of imported goods.

Thus, for instance, a Philippine importer provides steel belts to its foreign supplier to be used to provide strength and stability to the tread area in the production of tires. The tires produced shall then be sold to said Philippine importer at an invoice price that excludes the value of the steel belts provided by the Philippine importer. In this case, the value of the assistance given by the Philippine importer should be declared as an addition or adjustment for purposes of computing the dutiable value of the imported tires.

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

Having determined the value of an assist, the next step is to pro-rate that value to the imported goods. The value may be apportioned to the first shipment if the importer wishes to pay duty on the entire value at one time. In the alternative, the importer may request the Bureau of Customs that the value be apportioned over the number of units produced up to the time of the first shipment, or over the entire anticipated production where contracts or firm commitments exist for that production. The method of apportionment used will depend upon the documentation provided by the importer.

Thus, if a mold is provided by the Philippine importer to the foreign producer to be used in the production of finished goods and contracts to buy 5,000 units, the entire value of the assist should be added to the price of the 5,000 units. In cases where the total volume to be imported is uncertain, then a method of apportionment must be decided upon and followed until the entire value of the assist has been declared.

In the case of engineering, development, artwork, design work, and plans the value is: the cost of obtaining copies of the assist, if the assist is available in the public domain; the cost of the purchase or lease, if the assist was bought or leased by the buyer from an unrelated person; or the value-added outside the Philippines if the assist was produced in the Philippines.

The dutiability of this type of assist depends on the actual function of these items to the manufacturer, and their essentiality to the manufacturing process. In other words, there is a need to distinguish between services that are completely unrelated (or incidental) to the production of the imported merchandise and services that are necessary for the production of the imported merchandise.

Thus, if certain unique designs and patterns are created for sample garments and provided free of charge by the Philippine importer to the foreign garment manufacturer, the same shall be considered an assist particularly when the foreign manufacturer could not produce or manufacture the finished product without the importer’s designs and patterns.

In contrast, a roughly drawn design (which is general and does not show the exact pattern that the manufacture must follow) shall be construed as merely inspirational and therefore, not a dutiable assist. The assist given reflects instructions to the manufacture as to what to produce, but not how to produce, the particular garment.

Managerial and supervisorial services performed abroad that relate to the direction and management of plant operations are not dutiable assists because such services are not necessary or integral to the production of the imported merchandise. On the other hand, quality control services involving production-related designs and intimate involvement of the goods produced shall be considered as dutiable assist.

The statutory list or enumeration of the types of dutiable assists is exclusive. If the goods or services provided by the Philippine importer do not fall within these categories, the same should not constitute an assist.

To sum up, dutiable additions are items oftentimes inadvertently omitted or disregarded by importers in their declarations. These items are default verification areas by the Bureau of Customs that are closely scrutinized either at the border or during a post-clearance audit.

Undeclared assists result in undervaluation and could expose the importer to unnecessary penalties. It is, therefore, a must for Importers to implement a strict review process in the preparation of their goods declarations.Mark Anthony P. Tamayo is a CPA-lawyer and a partner of Mata-Perez, Tamayo and Francisco (MTF) Counsel. He is a recipient of the 2016 Asia Tax Practice Leader award, and is consistently voted as one of the recognized indirect tax leaders in the Philippines by the Internatinal Tax Review.

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