Isagani M.

Dionela

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TECHNICAL SMUGGLING IN THE PHILIPPINES

INTRODUCTION Strengthening public institutions to regain public trust and confidence has been the current Philippine administrations commitment since the Philippine President was elected into office in 2010. The Philippine Bureau of Customs (BOC), one of the top two revenue collecting agencies of the country, is among these public institutions which need a major facelift primarily due the long history of negative perception tied to corrupt practices within the Bureau. Bribing Customs Officers to evade, if not minimize, duties and taxes for imported goods and articles, inefficiencies in validating documents presented by importers and/or brokers and lack of necessary skills, equipment and manpower to run after smugglers, are among the many issues thrown at the Bureaus table. In September 2012, the BOC reported P190.44 billion revenue collection from January to August 2012 which represents 10.7% growth, versus the same period in 2011. While it appears promising, the amount only represents 54.8% of its P347 billion revenue target for 2012 1. Barely four months is left for the Bureau to hit its target and it is taking a fighting chance to do so. Smuggling has been at the forefront of the many factors that deter the Bureau from generating what is due for the coffers of the Philippine government. Smugglers, Customs insiders and brokers were said to have been conniving so that duties and taxes can be evaded, if not minimized. There are two types of smuggling: (1) outright smuggling, wherein good or articles get into the Philippine domestic market without passing through the appropriate government agencies for clearance and (2) technical smuggling, wherein goods and articles get into the Philippine domestic market but the documents accompanying them where purposely altered. This paper attempts to document technical smuggling, its impact to select industries, the challenges faced by the government authorities, generated solutions and recommendations to curb this problem.

ISSUES/PROBLEMS/HIGHLIGHTS
1

Department of Finance (2012). January to August 2012 Fiscal Report. http://www.dof.gov.ph/wpcontent/uploads/2012/09/Fiscal-Reportaug12.pdf

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The BOC, one of the top two major revenue generating arms of the Philippine government was mandated under Section 602 of the TCCP to 2 : 1) Prevent smuggling and other frauds 2) Control vessels/aircrafts doing foreign trade 3) Enforce tariff and customs laws 4) Control the handling of foreign mails for revenues and prevention purposes 5) Control import and export cargoes 6) Jurisdiction over forfeiture and seizure cases In the September 2012 fiscal report submitted by the Department of Finance (DOF), The BOC recorded a 2.2% increase in revenues collected for the month of August 2012 versus the same month in 2011. Table 1 shows the recorded national government revenues for August 2011 and 2012: Table 1. National Government Revenues- August (in billions pesos)

For the first eight months of 2012, the BOC recorded P190.44 billion, a 10.7% increase in revenues collected versus the same period in 2011. The amount represents 74.09% of the target for the first nine months of 2012. Table 2 shows the national government revenues for January to August 2011 and 2012.

Table 2. National Government Revenues- January to August (in billions pesos)

Department of Finance Website. http://www.dof.gov.ph/?page_id=492

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Customs Commissioner Rufino Biazon said that the BOCs 2012 target is still a fighting target.3 A major factor that accounts for low revenue collection is the rampant tax evasion and smuggling in the country. 4 Importation All goods or articles, when imported to the Philippines, are subject to duty upon each importation, even though previously exported there except as otherwise specifically provided for in the Tariffs and Customs Code of the Philippines (TCCP), as amended, or in other laws. 5 Importation begins when the carrying vessel or aircraft enters the jurisdiction of the Philippines with the intention to unlade therein. Importation is deemed terminated upon payment of the duties, taxes and other charges due upon the articles, or secured to be paid, at a port of entry and the legal permit for withdrawal shall have been granted, or in case said articles are free of duties, taxes and other charges, until they have legally left the jurisdiction of Customs.6 The following are authorized to make import entries: 1. Importers and other persons who are holders of the bill of lading. 2. Licensed Customs broker acting under authority from a holder of the bill. 3. A person duly empowered to act as agent or attorney-in-fact for each other.
3

BIR, Customs, To Miss 2012 Targets- think thank. http://www.rappler.com/business/14214-bir,-customs-to-miss-2012-targets-think-tank Carmona, C.S. Closed Case Study of RATE and RATS Cases to Strengthen Criminal Prosecution of Tax Evasion and Smuggling. http://www.academia.edu/1515892/Closed_Case_Study_of_RATE_and_RATS_Cases_to_Strengthen_Criminal_Prosecution_of_Tax_Evasion_ and_Smuggling Bureau of Customs Website. Importation. www.customs.gov.ph Ibid.

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(The duly notarized power of attorney should be approved by the Port Collector and no more than such continuing power may be accepted or recognized)7 Within the non-extendible period of 30days from the date the last package of good or articles were discharged from the vessel, an entry must be filed in the Customhouse. If an entry was not made within this period, the goods or articles will be considered abandoned and will result in the ipso facto forfeiture of the goods or articles. 8 There are two kinds of import entry which must be filed with the BOC: Informal Entry

Articles of a commercial nature intended for sale, barter or hire, the dutiable value of which does not exceed P2,000.00 Personal and household effects or articles, not in commercial quantity, imported in passengers baggage, mail, or otherwise for personal use.

Formal Entry

Articles of a commercial nature intended for sale, barter, or hire, the dutiable value of which is more than P2,000.00. Articles for, which the Collector may, upon the recommendation of the Tariff Commission for the protection of a local industry, or the revenue, require formal entry regardless of value and whatever purpose and nature of the importation.

All imported articles are subject to formal and informal entry except importation admitted free of duty for the official use of embassies, legation and other agencies of foreign governments who accord like privileges to corresponding agencies of the Philippines.9 The following tariff and duty rates are levied against imported goods or articles10:

1. Import Duty All imported goods for consumption are subject to the payment of import duty prior to release of unless otherwise exempted in accordance with law by the Department of Finance.
7

Ibid. Ibid. Ibid. Philippines in the ASEAN Website. http://www.aseansec.org/14298.htm

10

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2. Value Added Tax (VAT) All imported goods are also subject to the payment of VAT at the uniform rate of 10% of the total landed cost. Even if the shipment is duty free, it may still be subject to VAT. 3. Ad Valorem Tax A few commodities, like passenger automobiles, jewelry, alcohol, tobacco, etc. may also be subject to the payment of Ad Valorem Tax aside from the import duty and VAT. The rate of Ad Valorem Tax depends on the make-up of the commodity such as the engine displacement cost in case of automobiles, or alcohol content in case of beverages. Like VAT, Ad Valorem Tax is an internal revenue tax, the collection of which is delegated to the Bureau of Customs in so far as imported goods are concerned. Imported goods subject to Ad Valorem shall be covered by an Authority to Release Imported Goods (ATRIG) issued by the Bureau of Internal Revenue before they can be released from the port. The rate of import duty varies depending on the commodity imported, ranging from 3 to 50%. The schedule of rates is listed under Section 104, TCCP, as amended. Under the unilateral tariff reduction programme, Section 104 has been modified and amended reducing the tariff structure of most commodities to its present level under Executive order (EO) 470; EO 189 which reduced the tariff on capital equipment, EO 204 on textile, textile articles and chemical inputs; and EO 264 which gradually reduces thetariff further to the uniform rate of 3% for raw materials and 10% for finished products by year 2003, and finally to a flat rate by year 2004. Certain commodities are exempt from the payment of import duties upon compliance with formalities prescribed and approved by the Secretary of Finance. Section 105, TCCP governs what is termed as Conditionally-Free Importations. Other special laws also provide tax and dutyfree treatment on certain importations. Duty is paid with all the other taxes and charges due on the shipment prior to release of the goods for consumption. Payments are made through banks which are electronically connected to Customs. Under the automated On-line Release System(OLRS), when the fact of payment made through the banks are relayed to Customs, Customs in turn keys in such payment and lifts the hold status of the shipment allowing the port operator to release the goods to the importer or his representative. Imported goods coming to the Philippines by air and sea are required to be manifested by the carrier. Upon arrival of the carrier, an inward foreign manifest must be submitted to Customs. There are four major steps involved in the processing of import documents: 1. Documentation;

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2. Examination and appraisal; 3. Pre-liquidation and payment; and 4. Release of goods from the customs zone Outright and Technical Smuggling Smuggling generally refers to the importation of prohibited commodities, known as outright smuggling, as well as the misdeclaration/misclassification/undervaluation of imported goods/products, also known as technical smuggling 11. In outright smuggling, goods and articles of commerce brought into the country have no complete government required importation documents. The goods or articles are brought into the country and disposed in the local market without having been cleared by the Philippine Bureau of Customs or authorized government agencies for the purpose of evading payment of the correct taxes, duties and other charges due to the government agencies. In technical smuggling, imported goods are brought into the country through fraudulent, falsified or erroneous declarations, for the purpose of reducing or, if not totally avoid, the payment of the prescribed taxes, duties and other government charges, usually perpetrated by means of 1) misclassification as to the nature, quality or value; 2) undervaluation in terms of price, quality or weight; and 3) misdeclaration of the kind of imported articles 12 Legal and Regulatory Framework on Technical Smuggling The Tariff and Customs Code of the Philippines (TCCP) defines smuggling and penalties for violation thereof under Sections 3601 and 3602 13: Sec.3601. Unlawful Importation. Any person who shall fraudulently import or bring into the Philippines, or assist in so doing, any article, contrary to law, or shall receive, conceal, buy, sell, or in any manner facilitate the transportation, concealment, or sale of such article after importation, knowing the same to have been imported contrary to law, shall be punished by a fine of not less than six hundred pesos nor more than five thousand pesos and imprisonment for not less than six months nor more than two years and, if the offender is an alien, he shall be deported after serving the sentence.
11

Cited in Nonato, R.J. (2011), What is Smuggling? http://globalnation.inquirer.net/cebudailynews/enterprise/view/20110121-315727/What-issmuggling Cited in Palgan, R. (2011), Technical Smugglin as A Form of Corruption: Its Implication to National Development. http://misdeclared.blogspot.com/2011/02/technical-smuggling-as-form-of.html

12

13

Chan Robles Virtual Law Library. Tariffs and Customs Laws of the Philippines. http://www.chanrobles.com/republicactno1937book2title8.html#BOOK%202,%20TITLE%208

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When, upon trial for a violation of this section, the defendant is shown to have or to have had possession of the article in question, such possession shall be deemed sufficient evidence to authorize conviction, unless the defendant shall explain the possession to the satisfaction of the court. Sec. 3602. Various Fraudulent Practices Against Customs Revenue. Any person who makes or attempts to make any entry of imported or exported article by means of any false or fraudulent invoice, declaration, affidavit, letter, paper, or by means of any false statement, written or verbal, or by means of any false or fraudulent practice whatsoever, or shall be guilty of any willful act or omission by means of whereof the Government might be deprived of the lawful duties, taxes and other charges, or any portion thereof, accruing from the article or any portion thereof, embraced or referred to in such invoice, declaration, affidavit, letter, paper, or statement, or affected by such act or omission, shall, for each offense, be punished by a fine of not less than six hundred pesos nor more than five thousand pesos and by imprisonment for not less than six months nor more than two years and if the offender is an alien, he shall be deported after serving the sentence. Valuation for Customs purposes is based on the Fair Market Value of the Philippines (FMV), a system peculiar to the Philippines. The basic principle of the FMV is that the dutiable value of an imported article is the cost of SAME, LIKE, SIMILAR articles as bought and sold or offered for sale freely in the usual wholesale quantities. In the ordinary course of trade on the date of exportation or where there is none on such date, then on the date nearest to the date of exportation in the following principal markets in the descending order of preference:14

Exporting country; Country of manufacture or origin

When the dutiable value of the article cannot be ascertained in accordance with the preceding parameter or where there exists a reasonable doubt as to the cost, then the same shall be ascertained as follows:

Published value; Domestic wholesale price of such or similar article in Manila or other principal markets in the Philippines.15

In 1996 and in 2001 respectively, the Philippines enacted two laws to comply with its international treaty obligations to facilitate imports. These are: Republic Act (RA) 8181 or the Transaction Value Act in 199616 and RA 9135 in 200117 which provides amendments on the existing TCCP.
14

Ibid. Ibid. Republic Act 8181 or The Transaction Value Act. http://www.sme.com.ph/downloads/pronouncements/FILE283_001.pdf

15

16

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The Bureau of Customs (BOC) adjusted its import assessment system to implement RA 8181. The value range information system (VRIS) was introduced to deter attempts to undervalue imported merchandise. The system consists of a database giving high and low transaction values of the merchandise imported in commercial quantities to the Philippines. If the declared value of a given shipment falls outside the range, the importer would have to show the relevant documents to the Valuation and Classification Review Committee (VCRC) to support his declared value. According to Philippines customs authorities, Article 17 of the WTO Customs Valuation Agreement allows the use of the VRIS for validation purposes. If the documents presented failed to remove reasonable doubt, the importer would need to post a bond to support the conditional release of the shipment. RA 8181 had two valuation rules: published official and transaction values. If they differed, customs authorities chose the higher of the two. 18 In RA 9135, the customs authorities sought to replace published values with post-entry audits to assure revenues. Before RA 9135 became law in 2001, customs authorities did not release goods to their owners until they had determined that such goods complied with the TCCP, the implementing regulations thereof and relevant regulations of other government agencies. The transaction valuation rules of the WTO, however, conferred legal rights on importers with respect to valuation. The declared transaction value, supported appropriately, is the dutiable value, unless the customs authorities have evidence to the contrary. 19

Impact to Selected Industries While the laws are in place to ensure that the government can generate revenues which are later translated to social services, it is still inevitable for importers to undervalue their goods as far as they can be allowed. Conviction rate of smugglers is also low. In the 2004 article of Tess Bacala in the Philippine Center for Investigative Journalism (PCIJ) website, technical smuggling is reported to be killing the shoe, garments and textile industries. The Samahan ng Magsasapatos ng Pilipinas (SMP) cited that while the average importation value of leather shoes in 1997 was valued at $12.65 a pair, the corresponding value in 2002 was only $0.76. The industry association estimates that the government loses an average of P30 billion in terms of uncollected duties and taxes annually because of this type of technical smuggling. In Marikina, where most shoe factories are located, the situation has been this: in 1994, the city had a total of 104,799 jobs in 513 registered manufacturers. By 2003, only 42,311 jobs and 188 registered shoemakers were left. Shoe production went down from almost 15 million pairs in 1993 to six million pairs in 2003. Between 1999 and 2003 alone, close to 61 percent of registered shoe companies closed while the number of people employed by the industry declined by more than 50 percent.20
17

Republic Act 9135. http://www.tariffcommission.gov.ph/ra9135.html

18

Clarete, R. Case Study 37: Philippines Adopting the Transaction Basis for Customs Valuation. http://www.wto.org/english/res_e/booksp_e/casestudies_e/case37_e.htm#fntext1 Ibid.

19

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Industry organizations and Customs insiders say importers can easily undervalue their shipments because of how the Bureau of Customs applies the concept of the transaction value, which is the basis for computing tariffs. In many cases, as cited in the same report, bureau insiders and businessmen alike says that the customs bureau does not question whatever transaction value is presented, although it can and does at times impose more reasonable values. Customs just accepts any value without validating it. There are tendencies to be passive when presented with questionable transaction values. Textile industry insiders for instance complain that import valuation for yarn is as low as $0.54 per kilogram. The valuation for fabrics is ridiculously low at $0.19 per kilo while it is $0.12 a kilo for garments.21 Aside from undervaluing their goods, some technical smugglers resort to misdeclaration and misclassification of the products they bring in. Misdeclaration takes place when an importer uses a product description outside the appropriate chapter heading under the Tariff and Customs Code. An example is when an importer declares on his import entry that he is bringing in apparel on his import entry when in fact what is shipped in are tires. Both are subject to different tariffs.22 Misclassification, meanwhile, is the use of another tariff line within the same chapter heading. This happens when an importer declares, says, slippers when his shipment consists of leather shoes. Again, the tariffs are different.23 In their 2009 to 2010 committee report, The Federation of Philippine Industries (FPI) placed the value of foregone revenues due to smuggling at P127 billion annually. Smuggled goods are unfairly competing with local products thereby resulting to closure of legitimate local businesses and unemployment. 24 Importers pay taxes and duties much lower than what they should really be charged, thereby enabling them to sell the items cheap. If the items already cost less than the local versions to start with, there would be no chance for the Philippine goods to beat their prices at the market.25 Challenges and Initiatives Challenged by revenue collection problems, the BOC introduced the Run-After-TheSmugglers or RATS program in 2005 which aimed to file customs cases against high profile smugglers at the rate of one case or seizure of cargo every two weeks. The program covers the monitoring/profiling, case-building and prosecution of smugglers in all of the fifteen (15) collection districts, including thirty (30) sub-ports all under the jurisdiction of the BOC. The
20

Bacala, T. (2004) Smuggling is killing the shoe, garment and textile industries. http://pcij.org/stories/smuggling-is-killing-shoe-garmentstextile-industries/ Ibid. Ibid. Ibid.

21

22

23

24

Federation of Philippine Industries. Anti-Smuggling Committee Report 2009-2010. http://www.fpi.ph/fpi.cms/Research/uploads/AntiSmuggling%20Committee%20Report%202009-2010.pdf

25

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RATS program is designed not only to collect taxes but also to ensure that importers comply with existing laws and regulations on tariff and customs which complements the post-audit power of the BOC under RA 9135. 26 With the creation of the Post-Entry-Audit Group, the BOC is committed in exercising its audit power under RA 9135. The post entry audit provides a mechanism for the verification of the correctness and accuracy of import entry declarations after the goods have been released from customs custody. The law empowers the BOC to conduct an audit within three years from the date of the filing of the import duties. The post entry audit aims to verify, among others, the importers compliance with the following: 1. Use of appropriate valuation method of imported goods. 2. Correctness and completeness of determining dutiable amount 3. Correctness of tariff classifications used and proper description of the goods 4. Correctness of declared quantity of goods 5. Compliance with reportorial, registration and other administrative requirements imposed by BOC. Underpayment of taxes and duties would expose the importer to stiff administrative fines and/or criminal sanctions. If audit uncovers underpayment/deficiencies in duties and taxes, the penalty imposable ranges from one-half (1/2) to eight (8) times of the revenue loss depending on the degree of culpability. To ensure the implementation of the audit, the law requires importers to keep and maintain all records of importation at its principal place of business within three years from the date of the filing of the import entry. Failure to keep the records required or to give customs access to said records could result in administrative and/or criminal liability. 27 In 2011, one of the most celebrated technical smuggling case was the one filed by the BOC headed by then Customs Commissioner Angelito Alvarez against Jetti Petroleum, Inc. The Php4 billion suit filed before the Department of Justice (DOJ) indicated that the RATS Team of the BOC discovered28: Between June 2010 and June this year, Jetti made several importations of various petroleum products with a combined dutiable value of P4.1 billion. Broken in 49 import entries which were unloaded at the Sub-Port of Mindanao International Terminal in Tagoloan, Misamis Oriental . Forty-five (45) of the said import entries were found by RATS investigators to have been tainted with the following anomalies:
26

Aceron, E. (2006). Beware of RATS. http://www.punongbayan-araullo.com/pnawebsite/pnahome.nsf/section_docs/FQ467H_7-3-06 Ibid. BOC Website. Jetti Petroleum Slapped with a P4 Billion Smuggling Suit. http://customs.gov.ph/news/2011/09/08/jetti-petroleum-slappedwith-a-p4-billion-smuggling-suit/

27

28

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1. Some P1.1 billion worth of imported petroleum products the company brought in between September 28, 2010 and May 16, 2011 cleared customs despite the fact that the covering import entries for the said shipments were filed beyond the required thirty-days period from the date of discharge. Existing regulations require that those shipments involving a total of 15 import entries should have been deemed abandoned in favor of the government; 2. Some P2.9 billion worth of imported petroleum products covered by 30 import entry declarations cleared customs despite the failure of the importer to submit the required Load Port Survey (LPS) and/or Discharge Port Survey (DPS). Again, existing regulations require that said shipments should have been considered high risk and should have remained in customs custody until accomplishment and submission of the DPS and other applicable control measures; and, 3. Some P11.7 million in duties and taxes were not paid by Jetti for its various importations as it only paid P896.4 million when, in fact, it should have remitted P908.2 million to the BOC. The non-compliance of Jetti with the required LPS coupled with the failure of the District Collector of the Sub Port of Mindanao Container Terminal to subject the shipments to comprehensive Cargo Survey and Dischare Port Survey before their release from customs custody renders the private and public respondents liable for the illegal release of subject shipments and other fraudulent acts and practices under Section 3602 of the TCCP. Alvarez instructed the filing of amended charge sheet to include the names of customs employees who aided and abetted the illegal activities of Jetti.29 The petroleum company, on the other hand, expressed sentiments through various media interviews that they were planning to file charges against the former Customs Commissioner for an alleged trial by publicity. They claim that they do not owe the government anything and that all duties and taxes were paid for by their company.30 For all the struggling efforts of the BOC to run after alleged smugglers, conviction rate apparently seems to be very low since the RATS program was initiated in 2005. In a recent interview published in a national daily with Customs Commissioner Rufino Biazon, of the more than 100 smuggling cases filed by the BOC over the past two years (2010 to 2011), only one has resulted to conviction. Biazon pointed out that the bureaus RATS program has been consistently filing smuggling cases every other week, but that a big number of cases (remain) pending in the judicial system, which affects the credibility of the program (and its)
29

Ibid.

30

Remo (2011). In Philippine Daily Inquirer. Jetti Petroluem to Sue Outgoung Customs Chief for Maligning Firms Reputation.

http://business.inquirer.net/19443/jetti-petroleum-to-sue-outgoing-customs-chief-for-%E2%80%98maligning%E2%80%99-firm %E2%80%99s-reputation

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success rate. The pending smuggling cases against erring importers and customs brokers were at least Php60 billion worth of goods.31 On top of the collection problem, an industry insider who requested for anonymity said that the BOC also appears to lack the necessary number of people to guard the ports and airports. With so many entry and exit points in the country, the BOCs presence is only confined to the biggest ports and airports. BOC personnel are not on 24 hours duty at some of the Customs Bonded Warehouses. Some importers or their respective brokers were allowed to process the documents of shipments bound for export processing zones before the shipments arrive in Manila. When the shipments arrive Manila, the importers or their brokers will submit the advance processed documents to the Warehouses for the release of shipments. Non-validation of documents versus the actual shipments happens since some Customs Officers are not even physically present. Transit shipments from international stations to domestic stations are not also thoroughly checked due to lack of Customs personnel who will monitor each arriving vessel or aircraft. Customs Officers further lament that they are not paid for their overtime work. While they are duty-bound to perform their tasks beyond their regular working hours, the Customs Officers cite that the TCCP provides for payments on their overtime work to be shouldered by importers, shippers or other persons served. The Philippine Senate is already probing on the issue of overtime pay of immigration and customs workers.32

CONCLUSIONS AND RECOMMENDATIONS

The deep-seated problem on technical smuggling requires a closer look at the systems and processes in all aspects by which stakeholders act. As it was not thoroughly covered in this paper, there is a need to take a closer review on the BOCs process of accrediting its importers. Once importers are thoroughly screened, those who will remain are those who have legal, moral and financial capacities to transact with the BOC remain. The move to clean-up the list of accredited brokers, the posting of cash bond by known importers and a post-entry audit within a span of three years are good deterrents on possible illegal activities. The BOC can always refer to the cash bonds once the importers were found to undervalue their shipments.

31

Esplanada, Jerry (2012). Conviction Rate on Smuggling Cases: 1:100. In the Philippine Daily Inquirer. http://globalnation.inquirer.net/51972/conviction-rate-of-smuggling-cases-1-in-100 Press Release (2012). Senate Probe on Overtime Pay of Immigration, Customs Workers Sought. http://www.senate.gov.ph/press_release/2012/0905_estradaj1.asp

32

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The imposition of higher penalties for violation of offenders is also recommended. The sanction under Section 3602 of the TCCP provides punishment by a fine of not less than six hundred pesos nor more than five thousand pesos and by imprisonment for not less than six months nor more than two years and if the offender is an alien, he shall be deported after serving the sentence. Once there is a higher penalty for violation of technical smuggling, the possible perpetrators will think several times before committing the offense. The adoption of the Pareto Principle provides that the BOC focuses on ensuring that the number of importers who can provide 80% of the needed revenue by the government will be closely watched. The BOC must also ensure that the major entry and exit points of the country which were identified to provide 80% of the governments revenue are guarded. Manpower technical training and specialization of BOC personnel in partnership with the private sector such as the FPI must be continued. The BOC must keep a welcoming arm in the initiatives of the private sector to provide technical training assistance to its personnel to curb smuggling. The government must also review its importation quotas to avoid surplus of goods in the country.