Philippines - Petron hits oil smuggling

About one in every three liters of gasoline or diesel sold in the country is smuggled, resulting in 30 billion pesos to 40 billion pesos (US$733 million to $977 million) in yearly forgone revenue on the part of the government, according to the head of the country’s biggest oil refiner.

The forgone revenue estimate is bigger than what the government expects to generate this year from higher taxes on sin products.

Ramon S. Ang, Petron Corp. chairman and chief executive officer, said studies from 2007 to 2011 showed that smuggled oil products “now account for at least a third of the total volume sold in the market.”

“(Our) retail or service station volumes have remained flat despite the fact that registered vehicles increased from 5.5 million to 7.1 million over the period,” Ang said in a phone interview.

“On top of lost government revenue and an uncertain investment climate in the oil industry, smugglers are cheating consumers since these products are of uncertain quality,” he said.

Ang said the uncontrolled oil smuggling in the country “is tax evasion in another form.”

Based on official data, the Philippines consumed a total of 110 million barrels of oil in 2012, of which 50 per cent were imported as finished products.

The rest were refined in the country by Petron and Pilipinas Shell. Other companies import finished petroleum products like gasoline and diesel mostly from Singapore.

36m barrels smuggled

Besides the official fuel imports, an estimated 36 million barrels were smuggled into the country, Ang said.

Petron is majority-owned by San Miguel Corp., which is still licking its wounds from last year’s defeat in Congress where allies of President Aquino approved higher taxes on sin products for the first time in more than a decade.

Petron, which accounts for an industry-leading 34.9-per-cent share of the domestic market in the first half of 2012, saw its profit plunge 73 per cent to 2.3 billion pesos last year from 8.5 billion pesos in 2011.

The huge drop in Petron’s profit came despite a 55-per-cent jump in revenue to 424.8 billion pesos in 2012.

The company attributed the fall in margins to volatility in crude and product prices last year. Its expanded Bataan refinery, which cost $2 billion, is expected to start operations next year.

Watch special zones

For Ang, stopping oil smuggling is not “rocket science”.

“It doesn’t take much to stop these smuggling activities since you would only need to closely monitor special economic zones and other ports. I believe another way the government can monitor smuggling activities is to go after retail outlets that are selling fuel at extremely low prices,” he said.

Fernando Martinez, chairman of the Independent Philippine Petroleum Companies (IPPC), said his group shared Ang’s concerns on the rampant oil smuggling.

“We have made presentations to both the Department of Finance and the BOC (Bureau of Customs) about the problem. We have made proposals on how to check it especially in ecozones—charge all imports upon entry and just give rebates to those who use the fuel within the zone,” said Martinez in a phone interview.

Don’t generalise

But Martinez, president of Eastern Petroleum, said that Ang should not generalize that retailers selling fuel at way below market prices was an indication that they were selling smuggled fuel.

Martinez said there could be valid reasons for a retailer to sell at below-market prices.

“What if the retailer is deliberately selling at a loss just to buy market share or meet a sales quota?” Martinez asked.

“He (Ang) cannot generalise, we are law-abiding as anyone. If he has evidence, he can sue them. Also, even a big player like Shell is facing charges of smuggling,” Martinez said.

Since the industry deregulation 16 years ago, small oil companies belonging to the IPPC have boosted their market share to 25 per cent, he said.

Last year, the government imposed taxes on fuel products entering the country through free ports and economic zones to help curb oil smuggling.

VAT, excise tax

The Bureau of Internal Revenue (BIR) issued in February last year a regulation that said  “the value-added and excise taxes which are due on all petroleum and petroleum products that are imported and/or brought directly from abroad to the Philippines, including the free port and economic zones, shall be paid by the importer thereof to the Bureau of Customs”.

An importer can claim credit or a refund from the customs bureau of the VAT paid on account of registered enterprises with tax privileges within a free port or economic zone. The importer can also get a refund of the excise tax paid on account of sales to international carriers of Philippine or foreign registry if the fuel was used outside the country under certain conditions, according to Revenue Regulation No. 2-2012.

The BIR issued the regulation because of findings that crude oil was being smuggled out of the free ports and economic zones.

Petroleum products imported through the free ports are exempt from the value-added tax and excise taxes provided that these are used inside the special economic zones. However, some of the fuel products found their way out of the zones and into the general market.

Finance Secretary Cesar Purisima told the Management Association of the Philippines in January last year that less than 10 per cent of the fuel brought into the Subic Freeport in Zambales was consumed on the premises.

“A very small portion of the [imported] oil is consumed by legally exempt entities,” Purisima said. “In Subic, my understanding is it’s about 5 per cent. Definitely, less than 10 per cent is consumed within Subic.”

He said the rest was shipped out. “If it’s shipped out, then it’s subject to taxes.”

Rampant

Customs Commissioner Rufino Biazon acknowledged that oil smuggling had remained rampant in the first three years of the Aquino administration’s “daang matuwid” (straight path).

“This problem is one that has been going on way before I came to this office. The problem is that the system is one that’s been in place for so long and many benefit from the status quo. Resistance to reform is quite strong and anyone embarking on a reform program is sure to face difficulties,” Biazon said.

He said he and Purisima had agreed to tighten the monitoring of oil imports into the country, especially the ports under the BOC’s direct jurisdiction.

“We’re doing a tour of these ports to gather information and impress upon our personnel the importance of stopping the smuggling of petroleum. We’re setting up an information-gathering system for analyzing the movement of petroleum through those ports. Under consideration is the issuance of a rule limiting the entry of petroleum only in specific ports,” Biazon said.

He explained that economic zones were a different matter because the “BOC does not have principal authority” over them.

Fuel marking

“We see such ecozones as potential loopholes for smuggling. We endeavor to coordinate with the concerned authorities in economic zones to plug these loopholes. One method is the fuel-marking program, which has seen retailers caught selling marked fuel. It’s a private sector-public sector program,” Biazon said.

Despite the long odds of beating the oil smugglers, Biazon remained optimistic. “There is always hope. There is nothing I’d like more than to be the one to reform the BOC. It will surely be an achievement of a lifetime. But from what I’ve experienced, there’s nothing that those who benefit from the current ‘kalakaran’ (arrangement) would do to stop any change in the system,” he said.—With a report from Inquirer Research

Gil Cabacungan

Philippine Daily Inquirer

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