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Philippines: Customs moves to put a lid on fuel smuggling
MANILA, Philippines – President Duterte made it clear from the very start: he is going to eradicate corruption, crime and criminality in his six years in office.
But while he wages a bloody war against suspected drug criminals, other “criminals” are having a grand time doing illegal activities.
Such is the case with fuel smugglers, which the Bureau of Customs (BOC) said are among the agency’s biggest problems.
These fuel smugglers are quietly evading the Duterte administration’s watchful eyes, as seen in marked-down pump prices in southern Philippines in recent months.
Fuel price war in Mindanao
Late last year for instance, the oil industry was disrupted by reports of widespread smuggling in Davao and possibly throughout Mindanao.
One small firm, already a major player among “the smaller ones,” brought down pump prices of gasoline by P5 to P8 per liter, giving the bigger players a run for their money.
Industry sources said this unfair competition, which they blamed on illicit trade, was so rampant in Davao for several months last year.
Pissed off, one of the country’s so-called Big Three, decided to slash prices by P10 per liter to play the small player’s “game.” The rest of the Big Three had no choice but to drop their prices as well.
“Mr. Big Player was really pissed off so he brought pump prices rock bottom,” said an oil ndustry source.
This went on for months, until the small player gave in and decided to stop the price war, effectively stabilizing the price.
“It’s no longer fair competition. This small player was selling below cost and they were only able to do this because of smuggling,” another source said.
But another oil industry source said pump prices in Mindanao remain cheap.
To illustrate, prevailing pump prices of diesel in Mindanao currently average of P33.62 per liter while gasoline is at P36.90 per liter, according to industry data.
In Metro Manila, average diesel price is P33.42 per liter while gasoline is at P46.24 per liter.
The discrepancy in pump prices is telling because logic dictates that prices in Mindanao should be significantly higher compared to prices in Metro Manila as oil players need to spend on transport cost, according to industry sources.
It is now up to the Department of Energy to look into the reasons behind the marked down prices in Mindanao to determine whether they are due to smuggling or just toughening competition.
Fuel Smuggling Still Rampant
The BOC said across the country, fuel smuggling remains rampant.
“That is one of the biggest smuggling problems,” Customs commissioner Nicanor Faeldon told The STAR in a recent interview.
He said BOC’s fight against smugglers isn’t easy because they are “big names” and well connected.
“But eventually, their luck will run out.”
The BOC estimates that “hundreds of billions” are lost to fuel smuggling.
“We are losing billions. We have a huge collection target but we are losing billions in fuel smuggling,” said BOC spokesperson Neil Anthony Estrella.
The BOC has a collection target of P468 billion this year or about 14 percent higher than the 2016 target of P409 billion.
Estrella said fuel smuggling, indeed, remains widespread.
“Everybody is part of the game, including the boat. If the boat agrees, there is conspiracy so fuel smuggling is one of our priorities,” he said.
Last December, the BOC, under a new leadership, scored its first big break against oil smuggling in only six months under the Duterte administration after it seized two oil vessels carrying a combined 45,000 metric tons (MT) of smuggled fuel worth P700 million in the Port of Limay in Bataan.
The two vessels, M/T Alpine Magnolia and M/T Malolos, which were carrying the smuggled fuel, were also seized by customs agents.
According to sources inside the BOC, the vessels have links to an oil industry player but this could not be verified.
Types Of Smuggling
In the Philippines, there are three major types of fuel smuggling: outright smuggling, technical smuggling and one coursed through the economic zones.
For outright smuggling, smugglers bring the petroleum, usually through the country’s porous borders, without duly reporting the shipments to the BOC.
The common form of outright smuggling is high seas smuggling, which, occurs outside but near the Philippines where officials have no jurisdiction.
As in any other products, smuggled fuel comes from nearby countries such as Malaysia or Indonesia, where petroleum prices are much lower. A mother vessel brings in the shipment while smaller ships withdraw fuel for distribution and sale to the smuggler’s network of customers.
Sometimes, some oil players dock in small ports across the country and discharge the fuel directly to waiting tanks which, in turn, deliver the smuggled fuel to service stations, escaping the BOC.
Another way of smuggling is through the country’s economic zones where exporters can import petroleum products tax-free but on the condition the products are used within the zone or are reexported.
However, some smugglers skirt around this privilege to import tax-free petroleum products and then smuggle these out of the economic zones.
The second major form of smuggling is technical smuggling, which is what smugglers do when they lower the declared value of their shipment so they pay lower value added tax and excise tax. This is done through fake invoices.
They also declare lower volume to be able to pay lower taxes.
Some smugglers misdeclare their imports altogether to avoid paying taxes.
For instance, gasoline is misdeclared as diesel to avoid paying the specific tax of P4.35 per liter.
According to the Philippine Institute of Petroleum (PIP), smuggling remains rampant and that “unaccounted volume” continues to increase.
As proof of this, it said from 2003 to 2014, official petroleum sales showed a dismal performance compared to the economic growth and other leading economic indicators such as car sales.
“Over the 12 year period in review – 2003 to 2014 — DOE’s official sales volume statistics increased at an annual average growth of 0.6 percent. From a high total petroleum products consumption of 138.6 million barrels in 1997 when the industry was still regulated, full year demand declined to 117 million barrels at the start of the updated review period in 2003 slightly increasing to 124 million barrels in 2014. The indicated figures still includes fuel oil and diesel volumes used for power generation, which has been displaced partly by alternative energy sources, i.e. natural gas, coal and geothermal and renewable,” PIP said.
Removing diesel and fuel oil utilized for power generation, however, demand for petroleum products register a 1.3 percent average annual growth rate to 122 million barrels from 106.5 million barrels, which PIP said is very dismal in the context of the country’s growth rate – an average of 5.3 percent annually since 2001 and over ten years of continuous positive economic growth.
Likewise, over the same review period, vehicle registration grew 5.77 percent annually, with an almost 90 percent increase in the number of oil-based motor driven vehicles in 2014 from 2003, according to data from the Land Transportation Office.
Indeed, in contrast to the continuous growth of major drivers of the economy such as agriculture, construction, services and exports, petroleum products use, notably diesel, fuel oil and kerosene reflected minimal growth or at worse reduction, the PIP said.
In reality, petroleum demand to GDP growth is closely correlated such that for every percentage growth of the domestic economy, petroleum demand should be growing by at least 1.2 percentage points to support that growth.
‘As a conservative estimate, assuming demand for petroleum products (net of power use) approximates that of gross domestic product (GDP) growth and assuming further that consumers responded to price increases thru fuel conservation starting in 2003 when pump and wholesale posted price were significantly felt, petroleum demand in 2014 should have been 160.2 million barrels, about 31.5 percent higher than the volume 10 years ago. The ‘unaccounted’ volume therefore seems to have been 2.9 million barrels in 2003, increasing to 3.57 million barrels in 2014,” PIP said.
Assuming an estimated unaccounted and unreported volume of 35 million barrels per day or 5.6 billion liters — comprised of 90 percent diesel at P5.065 billon litters and 10 percent Jet A-1 at P562 million litters — total revenue loss to the government is estimated at P31 billion (in one year alone), the PIP also said.
This is computed at an average 12 percent value added tax of P5.10 per liter for diesel or P25.84 billion for the total volume of 5.065 billion and P7.82 per liter for specific tax and 12 percent VAT for Jet A1 fuel or P4.40 billion for the total volume of 562 million, thus the total revenue loss of P31 billion.
Source: http://www.philstar.com/business/2017/03/06/1678263/customs-moves-put-lid-fuel-smuggling