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Dr Julius Bautista
In August 2004, President Arroyo emphasized that various reforms from tax bills to cost-cutting measures must be instituted within the next two years if the Philippines is to avoid an insurmountable fiscal crisis. Some commentators have pointed out, however, that instead of imposing a new set of taxes, the government would be well advised to increase revenues by addressing the problem of rampant smuggling and in the process help domestic industries by saving jobs threatened by low cost imports.
The National Statistics Office indicates that the Philippines imported US$37.5 billion worth of merchandise in 2003. Statistics from the country's trading partners, however, measured exports at US$45.5 billion that year: an amount matched by data from the International Monetary Fund and the United Nations Conference on Trade and Development (UNCTAD). The US$8 billion discrepancy between these figures is attributed to the widespread practice of technical smuggling, which costs the nation dearly in forgone import tax revenues.
Technical smuggling occurs when imported goods are falsely classified or declared in order to hide their true value. Such unscrupulous practices are having a devastating effect on domestic producers across all sectors of local industry. The Asian Ceramic Trade Magazine of 2004, for example, reported Chinese tile exports to the Philippines at 4.38 million square meters in 2003. Philippine Bureau of Customs (BoC) figures, however, show imports of only 397,345 sq. m. roughly one-tenth of what even Chinese figures admit. A similar scenario is evident among local onion producers, who have been devastated by smuggled imports sold at PHP17 per kilo, as opposed to the PHP26 per kilo local producers need to generate some profit. Given an average tariff of 6.19 per cent and a VAT of 10 per cent, instances of import understatement translate to an estimated US$1.28 billion in tax revenue losses in 2003. This is not to mention the loses from the presumed occurrence of outright smuggling in the high seas, or through the dodgy use of customs bonded warehousing units in the country's free trade zones.
The Philippine government has taken some decisive action to address this problem through a reinvigorated campaign against technical smuggling. A Senate inquiry began on 13 September and, after an initial hearing, filed a resolution recommending the reactivation of the National Anti-Smuggling Task Force (Nastaf). The BoC also publicized a list of some 200 importers and consignees suspected of illegal operations. In response, Mrs. Arroyo, on 18 September, gave the BoC 60 days to enact Executive Order 363, in which she gave the Customs Commissioner 'almost complete powers' and a 'wide latitude' to conduct the campaign against smugglers. As of 3 September, moreover, there are three bills pending in Congress that would effectively declare any form of smuggling as a heinous crime with stiff penalties.
While it might be suggested that terrorism is the biggest impediment to foreign investment in the Philippines, the government also faces an uphill battle in dispelling the notion that corrupt or incompetent officials are part and parcel of doing business in the country. There is evidence to suggest that incompetence in the government bureaucracies contributes to the problem. Measures to ensure that importers are made to justify the transaction values of their goods have proven ineffective. Furthermore, the accumulation of large amounts of uncollected customs bonds suggests an absence of cooperation between various import regulation bodies. While the government is taking firm action against this problem, its effectiveness depends largely on the extent to which it fosters an efficient and incorruptible bureaucracy that dissuades rampant smuggling. Their failure to do so, unfortunately, would come at the expense of local producers who, already burdened by unfavourable exchange rates, are the ones who pay the costly price for these acts of economic sabotage.
WATCHPOINT: Congress is seeking amendments to the Tariff and Customs Code which, many believe, is outdated and not responsive to the extent of the smuggling problem. It also remains to be seen whether the President will revive the Nastaf, which was dismantled in August.
About our company:
AFG Venture Group is an Asia and Australia based corporate advisory and consulting firm with over 20 years experience in creating alliances, relationships and transactions in Australia, South East Asia and India; including a 15 year history of corporate and equities advisory in Australia, undertaking merger, acquisition, divestment, fund raising and consulting for private and public companies.
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