Our latest offering is a four-part series on smuggling in the Philippines. The series begins by giving an overview of the extent of the problem: the estimate of the revenues lost to smuggling range from P89 billion to P200 billion a year, enough to wipe out a big chunk of the budget deficit and to finance the building of thousands of schools and one million low-cost houses.
The series examines the impact of housing on both agriculture and industry. Farmers cannot sell their produce because the market is swamped with cheap imports and manufacturers are forced to downsize or close down operations because of the entry of dirt-cheap smuggled products. Almost every industry in the country has been affected: illegal imports range from onions to shoes, from chicken legs to pork belly, to floor tiles, tires, garments, resins (used to make plastics) and even charcoal. These wares flood both wet markets and upscale malls, easing out local goods.
The series cites the example of onion farmers in Nueva Ecija and shoemakers in Marikina who are being driven out of business by smuggling. It focuses on technical smuggling-which involves the misdeclaration undervaluation, misclassification of goods, and other kinds of importation fraud. It shows figures from industry organizations and government studies to show that technical smuggling is now being done on a massive and unparalleled scale.
Technical smuggling, in fact, is the main way in which goods are brought into the country. Outright smuggling, where goods are slipped in without going through Customs, is minor in comparison. And yet, the Bureau of Customs does not acknowledge the magnitude of technical smuggling in the country, much less take measures to contain it. The series examines the collusion between Customs officials and technical smugglers as well as the inability of government agencies to get their act together on smuggling.
BONGABON, NUEVA ECIJA — In 1987, Carlito and Lita Bayudan, both New People’s Army guerrillas, came down from the hills to begin a new life in this quiet farming town northeast of Manila. About to become parents for the first time, they traded their rifles for hoes, venturing into onion farming, the occupation of 80 percent of Bongabon residents. The young couple knew they would have to work hard, but they looked forward to a simple and peaceful life.
Seven years later, Lita Bayudan finds herself in the midst of another battle — this time against smugglers. Now a 34-year-old widow and mother of two, Ka Lita has gone from monitoring troop movements in the hinterlands to monitoring the volume of smuggled onions from China that are being sold in Divisoria. She has reason to be vigilant: this December, the cooperative to which she belongs is expected to make the first payment on a P750,000-loan, and she fears that they might not have enough cash because smuggled and dirt-cheap Chinese onions have flooded the market.
“The money to pay for our loan is in storage,” says Ka Lita, referring to the sacks and sacks of onions that they had harvested and now cannot sell without absorbing a huge loss.
Ka Lita knows that the problem of smuggling is not new. But even government agencies and officials say the situation has gone from bad to worse, with technical smuggling — which includes misdeclaration of goods, undervaluation, misclassification, and other kinds of importation fraud — now being done on a massive and unparalleled scale.
Almost every industry in the country has been affected as illegally imported products now range from onions to shoes, to floor tiles, tires, garments, resins (used to make plastics) and even charcoal, with these wares flooding both wet markets and upscale malls and easing out locally produced goods.
Because this has meant cheaper goods at a time when the peso’s buying power is at its weakest, consumers are not complaining. But what many don’t see is the hundreds of billions of pesos bilked out of the government in the form of lost tax revenues each year, as well as the massive layoffs and bankruptcies that are now taking place in sectors that cannot compete with smuggled goods.
Meanwhile, the anti-smuggling efforts of the government and the private sector are being defeated by unscrupulous traders and corrupt and incompetent state officials and personnel, especially those at the Bureau of Customs. Even incentives meant to encourage exports have been abused by technical smugglers.
The amounts of money involved are staggering. Last year, for example, a report by the United Nations Conference on Trade and Development or Unctad showed that, based on the records of the country’s trading partners, imports to the Philippines totaled $45.4 billion.
Philippine government records, however, reported imports of only $34.5 billion. The discrepancy of $10 billion could most likely be accounted for by smuggled goods. This translates into a P86-billion tax revenue loss for the government, given an average duty rate of 6.19 percent in 2003 according to the Tariff Commission, 10 percent value-added tax, and an exchange rate of P54.20 to the dollar for that year.
That P89.4 billion, however, would cover only the unpaid duties and taxes on the $10-billion worth of “missing” goods. As much as 60 percent of all imports may be assumed to be non-dutiable, with some of them supposedly meant for re-export. But re-exporting often doesn’t happen, as the imported goods end up being sold locally. Even if one assumes that only one-fourth of all non-dutiable imports involved some form of fraud, the total revenue loss for the government could reach as much as P200 billion.
The Fair Trade Alliance (FTA) and the Federation of Philippine Industries (FPI) estimate that tax leakage from the collection of import duties and taxes is P174.2 billion annually, or P52 billion more than what the finance department claims could be generated from the president’s proposed new tax measures.
Former Sen. Wigberto Tañada also pointed out that the amount of leakages could pay for one million new low-cost houses every year or 11,611 school buildings with 30 classrooms each. It could also be used to finance 11,613 barangay health centers, each measuring 30 square meters and with minimum equipment worth P1.5 million, or perhaps 19,352 kilometers of concrete roads. Tañada, who is the FTA’s lead convenor, added that the amount of uncollected import duties translates to an annual subsidy of P58,056 for three million Filipino farmers.
The likes of Ka Lita prefer earning their own keep instead of relying on subsidies. To recoup their investment and generate some profit, onion farmers should sell at a farmgate price of at least P650 per 30-kilo bag or P26 a kilo. The going rate these days, however, is more like P480 per bag or P19 a kilo. Some traders even want to buy at P17 a kilo, which is how much Chinese red onions are being sold for.
“Luging-lugi (We will have to take a huge loss),” complains Ka Lita, who worries that she might be sued for estafa if her cooperative defaults on its loan. As the cooperative’s president, she signed the loan papers and the six postdated checks her group gave the lender.
Ka Lita knows this wouldn’t have happened if those who were supposed to be keeping watch were doing their jobs properly. But not one of the agencies she approached would own up to its responsibility regarding the matter. Because the Bureau of Customs (BOC) is supposed to monitor the importation of goods, among other things, Ka Lita asked a representative of the agency why it was allowing imported onions when the Bureau of Plant Industry (BPI) was not issuing permits needed for these. She says she was referred to the Plant Quarantine Service, which the customs representative said had the duty to detect imported onions that didn’t have these permits. Ka Lita reports that the respective chiefs of the BPI and the Plant Quarantine Service had no concrete answer to her queries about the illegal imports.
“They’re pointing at each other,” the diminutive ex-rebel says in disgust. She says she told them to meet face to face so that they would stop blaming one another.
There is no doubt, however, that the customs bureau is supposed to be on top of matters when it comes to imports. The bureau does not deny that smuggling exists, but downplays the extent of revenue losses due to smuggling. No mention of such losses were made when the BOC made a presentation before the now-defunct Cabinet Oversight Committee on Anti-Smuggling (COCAS).
On the contrary, even as government insiders and businessmen complain of escalating technical smuggling, the bureau has been crowing about its achievements. Its 2003 annual report says that it had exceeded its collection target of P100 billion by “a whooping (sic) P13.055 billion or 13 percent higher than the target.” It calls last year “a moment of triumph.” What its report leaves out, however, is how much higher the collected revenue would have been were it not for what insiders, businessmen, and observers describe as rampant technical smuggling.
Many say technical smuggling cannot exist without the collusion of unscrupulous traders and corrupt government personnel and officials. In an interview, Customs chief George Jereos describes corruption in his agency as being “petty.” But many other people think otherwise.
To begin with, economists and businessmen say, the BOC’s targets are too low. “You start from a low base due to technical smuggling and corruption, your projections will be lower than what they should be,” says economist Nonoy Oplas, who also heads the Minimal Government Movement.
Even the defunct National Anti-Smuggling Task Force (Nastaf) described the bureau’s collection targets as “unrealistic/too low” in its final report to President Arroyo.
Nastaf also said that Customs collection has failed to keep pace with the growing value of imports. Citing data from the National Statistics Office, Nastaf noted that the ratio of collection to the value of imports has declined through the years. In 1995, it said, Customs collected P1 billion for every P7 billion worth of imports. By 2002, P1 billion was collected for every P19 billion worth of imports.
Oplas says that even if tariff rates are declining because of the country’s commitment to the World Trade Organization and other trade agreements, these could still be compensated by larger import volumes. “If percent increase in imports volume is much larger than percent decrease in tariff rates,” he says, “then total collections should still increase.”
Observers say one only has to look at official figures to realize that the customs bureau is probably doing its math wrong if it feels entitled to puffing its chest. In 2003, for example, 67 percent of imported yarns were entered in the customs ledgers under warehousing, which means these were supposed to be re-exported as part of finished products. Yet only five of the top 20 yarn importers were included in the Garments and Textile Export Board’s (GTEB) list of Top 100 garment exporters for that year. The same was true for fabrics: 80 percent of the total imports for 2003 were declared under warehousing. Of the top 20 fabric importers, only 11 were listed among GTEB’s Top 100 garment exporters.
Garment industry insiders surmise that much of the “warehoused” fabric and yarns were sold to the domestic market without the importers paying any taxes. As incentive to exporters, warehousing entries — which are called such because they have to be stored in a customs-bonded warehouse — are tax- and duty-free.
Jose Sereno, executive director of the Association of Petrochemical Manufacturers of the Philippines (APMP), believes something similar has been happening in the petrochemical industry. He says that as late as 1998, only 25 percent of imported resins were placed in customs-bonded warehouses. Today, close to 72 percent are being placed under warehousing. “This is questionable because we do not see an equivalent increase in exports of plastic products,” says Sereno. “Besides, many of the local resin users are APMP’s clients, so we know their volume of consumption.”
Overall figures quoted in a Nastaf report indicate that this may have already become a common experience among Philippine businesses. In the first half of 2003, imports declared as warehousing comprised 42 percent of imports, while consumption entries, meaning imports bound for the domestic market, made up the remaining 58 percent.
In 2002, imports totaled $35.4 billion, of which $15.5 billion, or 44 percent, was declared as warehousing entries. Only 4.8 percent of the imports declared under warehousing, however, were re-exported. “At least 95 percent of warehousing entry may have been diverted to the domestic market,”said Nastaf.
The rise in the proportion of consumption and warehousing entries means that an increasing volume of imported products are being placed in customs-bonded warehouses purportedly for re-export. Without a corresponding rise in export figures, however, it is likely that a generous share of the warehouse entries wound up in the local market.
Still another indication of the rampant diversion of imported items declared as warehousing entries is the accumulation of uncollected bonds that had been posted by importers. The Nastaf report estimates these to be anywhere between P5 to P10 billion annually. Data provided by Customs meanwhile show that the value of unliquidated/expired bonds for 2000 to 2003 is P1.27 billion, covering the Port of Manila, the Manila International Container Port, and the Ninoy Aquino International Airport. The bureau says this figure represents 95 percent, “more or less,” of its total expired bonds for the same period.
Customs bonds are intended to guarantee payment of taxes and duties as well as other charges in case a company that has warehousing entries does not re-export these as intended. Articles entered for warehousing may remain in bonded warehouses, owned and operated by the importers, for a maximum of one year, from the time these arrived at the port of entry. Surety companies that issue the bonds are supposed to collect those that are forfeited, but this rarely happens.
Under the present system, Customs does not go after the importer that does not re-export warehoused items, but is supposed to hunt down the surety companies that issued the bonds. More often than not, however, these companies fold up as fast as they are formed.
It may seem unlikely that illegally imported onions were passed off as warehousing entries and then later dumped in the local market and spelled doom for the modest dreams of Ka Lita, who is now growing other vegetables while contemplating what to do next with her cooperative’s onion stock. But representatives from several industry sectors say the absence of audits has made anything possible in the customs warehousing system. They say some importers even make it appear that they exported items placed in customs-bonded warehouses through what insiders call “paper exporting”: they rent a container and ship it empty to a foreign port.
“Nobody in Customs is checking,” says a broker. “If I want to send a bomb to New York, the best place to ship it from is Manila.”