Fueled by greed
by Karl Allan Barlaan and Christian Cardiente
There’s supposedly an untold story behind the country’s biggest technical smuggling case in history.
After Senator Ralph Recto’s call last month for a “greed check” on oil firms amid the growing public perception of government’s inability to keep oil giants on the leash, the Bureau of Customs, on October 14, filed a P24-billion smuggling complaint against one of them – Pilipinas Shell Petroleum Corporation, local unit of Royal Dutch Shell Plc – for alleged “intentional misclassification and misdeclaration” of imported petroleum products, and evasion of excise and value added taxes between 2005 and 2009.
The filing of the case with the Justice Department, according to Customs Commissioner Angelito Alvarez, signifies that the administration of President Benigno Aquino III has “shifted to high gear” in pursuing smuggling cases.
“The Aquino administration respects no sacred cows. This is by far the biggest complaint we have filed and the first [against any] multinational company at that,” Alvarez said.
In a report published in this paper, it was said that Alvarez claimed: “in Shell’s 52 import entries filed in 2007, 2008 and 2009, the company’s officers, employees and customs brokers misclassified the shipments of unleaded gasoline that were intended to produce tetrapropylene, or kerosene derived from petroleum” and “Shell also declared its imports between August 2005 and December 2008 as merely catalytic cracked gasoline (CCG) or light catalytic cracked gasoline (LCGG), when the documents described those shipments as unleaded premium gasoline.”
The root of it all
The multinational of course strongly denied government’s claim alongside the accusation that “Alvarez has been misled by holdovers from the previous administration” – the same people against whom it threatens to file counter-criminal charges of “gross negligence, gross incompetence, and defamation.”
Notwithstanding a skirmish that is about to fought on the battlefield of legal jargon on taxation and gobbledygook on CCG, LCGG, and tetrapropylene, sources from the BOC and legal circles allege that the country’s biggest-ever case of technical smuggling tells a story of greed, best traced across a timeline.
According to them, shortly before the exposé on Shell’s supposed misdeclaration of imported petroleum products, the company’s new plant manager refused to pay monthly “overtime/ underguarding fees” in the amount of almost half a million pesos to customs employees handling cargo in the port of Batangas.
Both the BOC and Shell have denied the allegations. Chevron and Petron, on the other hand, did not respond to Manila Standard Today's inquiry. Still, insiders insist that it has become customary for oil companies to pay the amount without the benefit of a receipt – something the new Shell official opposed. Allegedly, the company’s refusal to pay the “customary dues,” which it had previously tolerated, caused a significant dip in the “extra income” of customs employees based in the area.
After a supposed string of failed attempts to negotiate payment for these “overtime fees” and a “compromise sum” which was considerably less than what the company would later be charged, Shell was accused of evading payment of excise taxes on its importations.
Purportedly, officials from the Bureau were emboldened by the courts’ favorable ruling on a case involving another oil multinational, Chevron Philippines, for unpaid customs duties in the amount of close to P900 million. The said case was decided in favor of the BOC by the Court of Tax Appeals in 2007 and the Supreme Court in 2008.
On record, it was a certain Geronimo Pinar who had first informed Customs of Chevron’s violations, for which, under the Bureau’s Informants Rewards System, he was to be awarded 20 percent of the P900 million (close to P200 million) collected from the erring company.
The reward, substantial as it was, would be later contested by several other claimants: a certain Isidro Agapay, an Alfonso Orioste, and curiously, some Customs investigators.
On 29 January 2009, lawyer Juan Tan, BOC Batangas district collector, issued a demand letter to Shell for supposedly declaring unleaded gasoline imports as CCG to evade payment of excise taxes.
The letter claimed that "the liability of shipments covered by entries filed in years 2004, 2005 and 2009 is P3,778,834,048.00 while in year 2006, 2007 and 2009, the liability of Shell reached the amount of P3,569,933,885.00 for a total of P7,348,767,933.00.”
It was later announced that Customs had acted on a 21 January 2009 report by Geronimo Pinar, the same informant who had previously blown the whistle on Chevron.
This time, Pinar, under the same rewards system, stands to earn 20 percent of P7.3 billion (excluding penalties) equivalent to a hefty sum of P1.5 billion.
On 10 February 2009, upon the prodding of Leyte Rep. Andy Salvacion, a former Customs official, the House of Representative ways and means committee convened to conduct an inquiry into the case.
Shell’s country tax manager Nigel Avila argued that CCG was not a finished product but an additive to unleaded gasoline and therefore exempt from excise taxes imposed on imported market-ready petroleum products.
During the hearing, lawyer Jethro Sabariaga, then chief of the Bureau of Internal Revenue litigation division and now chief-of-staff of BIR Commissioner Kim Henares, confirmed Avila’s testimony. Sabariaga, citing a 24 March 2004 memorandum by then-BIR Deputy Commissioner Jose Mario Buñag, said that based on studies by the Department of Energy, CCG being an intermediate good not intended for domestic consumption, was not excise-taxable.
According to reports, in 2004, BIR Deputy Commissioner Estelita Aguirre also wrote then-Customs Commissioner Antonio Bernardo informing the latter that excise tax should no longer be collected on Shell’s similar future importations.
Since then, the BIR had issued an authority to release imported goods (ATRIG) to BOC, certifying that Shell’s CCG and LCGG imports were not to be covered by excise taxes.
Juan Tan would, however, later contest this, saying, “both Deputy Commissioners Buñag and Aguirre were then mere Deputy Commissioners of the BIR, hence without any authority to change the law or grant exemption of tax import payments.”
A tighter squeeze
On 17 September 2009, Tan, insisting that the product grade of CCG was the same quality as unleaded gasoline, announced in a press conference that he had given Shell 10 days to pay P7 billion in various unpaid taxes.
“If you fail to pay said amount on time, much to our regret, we will already hold the release of all your incoming shipments pursuant to the provision of Section 1508 of the Tariff and Customs Code of the Philippines. In addition to that, if they fail to pay the taxes on time, we will require them to pay also the landed cost including the interest, surcharge and other penalties," wrote Tan to Shell country chairman Edgardo Chua.
But Chua would not budge. He reportedly said: “if they want P7 billion, we will spend P7 billion just to fight them off.”
On 08 December 2009, after a protracted period of demands and threats of confiscation, Shell brought the case to the CTA, requesting the issuance of a temporary restraining order to prevent the BOC from seizing its imports as payment for the P7.3 billion in alleged unpaid taxes.
Representing the multinational was former Ombudsman Simeon Marcelo, senior partner of Villaraza Cruz Marcelo & Angangco, otherwise known as “The Firm” for its supposed influence during the first half of former President Gloria Macapagal-Arroyo’s term.
Insiders claim that Shell had contracted the services of “The Firm” for P200 million in acceptance fees alone.
The request for a 60-day TRO was granted two days later.
An unexpected twist
On 21 December 2009, the new BIR Chief Joel Tan-Torres, barely a month into his appointment, reversed the BIR’s position exempting CCG and LCGG from excise taxes.
Starting in 2004, when the exemption was first granted during the term of former Commissioner Guillermo Parayno Jr., three other previous commissioners – Buñag, Lilian Hefti, and Sixto Esquivias – have upheld the policy.
Tan-Torres however denied that his ruling contradicted those of his predecessors. “The rulings of the previous commissioners are valid, based on the representations made by Shell then. But based on factual findings of (Customs) which were previously not represented or given by Shell, there is basis for reversing the previous BIR position,” he said.
But another source claims that the reversal was simply a preparation for the impending legal battle. “He (Tan-Torres) was put there to make that decision. They made Esquivias resign and put others (supporting the previous policy) on floating status,” he alleges.
BIR’s Sabariaga, however, disputed the claim. "That's not true. Esquivias voluntarily resigned but he would have also reversed the previous ruling, if that's the issue. Tan-Torres reversed the ruling based on new evidence from the BOC and because he had always been critical of Bunag's position that excise tax should not be imposed on CCG and LCGG. He believes, and so does the agency today, that unleaded gasoline of whatever form and state is subject to excise tax," he said.
"There was no political maneuver of whatever form to favor the BOC's position - then and now. We decide cases based on the merits, solely (and) exclusively based on the merits - without exception. Neither am I aware of any so-called holdovers from the previous administration, who may have influenced any current official of the Aquino administration in its case against Shell.
Any connections or relationships - political or personal - are but incidental to and have no bearing on the case. We urge all parties concerned to focus on issues and not personalities,” Sabariaga added.
(Another revenue official however claims that it was not Tan-Torres but then the more senior Deputy Commissioner Lilia Guillermo who was “next-in-line” to Esquivias at the time of his resignation.)
On 21 January 2010, Shell announced that it would seek the intervention of the Finance Department (parent agency of both the BOC and the BIR) on the matter. The door would later be shut on the multinational by former Finance Undersecretary Estela Sales.
“Our mandate is to collect taxes so we are in consonance with the positions of the BOC and the BIR,” said Sales.
Sales who served as Finance undersecretary under Arroyo was reappointed BIR deputy commissioner by Aquino. Sales and Customs deputy commissioner for assessment and operations Greg Chavez were law partners. Chavez also served in the BOC under Arroyo but as deputy commissioner for the internal administration group.
According to insiders, Sales and Customs collector Juan Tan are also close friends.
On 26 January 2010, business groups Employers Confederation of the Philippines (ECOP) and the European Chamber of Commerce of the Philippines (ECCP) questioned the BIR’s reversal of its previous policy, saying it has a negative impact to policy stability and predictability.
"This reversal has a chilling impact on the financial operations of all companies in the country as it imposes a monetary and criminal liability with a retroactive effect on enterprises that faithfully complied with existing tax policies," said ECOP president Edgardo Lacson.
"The country is discouraging investments in manufacturing because raw materials are taxed and the finished products are taxed again and such double taxation favors traders over manufacturers," ECCP added.
The Philippine Chamber of Commerce and Industry (PCCI) later echoed the sentiment. "What unsettles the business sector is when a new policy that replaces an old one is made to take effect retroactively...It is bound to scare further the few potential investors not yet turned off by other negative news about the country," said PCCI Chairman Sergio Ortiz-Luis Jr.
In less than a month, the Joint Foreign Chambers (JFF) composed of 1,700 multinational companies, the Financial Executives Institute of the Philippines (FINEX), and the Management Association of the Philippines (MAP) would follow suit.
"Double taxation favors trading over manufacturing, which cannot be in the interest of Philippine economic policy makers,” the JFF said.
"If investments are to be attracted, businessmen should be confident that their investments would not be subject to arbitrary and unreasonable regulatory and policy changes,” said FINEX and MAP in a joint statement.
The BIR: naked, arbitrary, and whimsical?
On 27 January 2010, defending itself against attacks from the business sector, the BIR reiterated that its decision to reverse a previous ruling on the Shell tax dispute was within the bounds of law and done in the discharge of its mandate.
But the most damaging blow to the BIR-BOC’s cause was the release of the House ways and means committee’s findings ordering Customs to desist from seizing the company’s P43 billion worth of raw fuel imports, pending the court’s decision on the tax dispute.
According to the committee, the Tan-Torres’ ruling made on behalf of the BIR was "a naked, arbitrary, and whimsical abuse of administrative power ... and a usurpation of the power to tax solely vested in Congress by the Constitution."
Supposedly, the ruling reversed the BIR’s previous policy based on “recent findings” by the BOC but was nevertheless unable to controvert the DOE’s technical studies on CCG and LCGG.
The committee said that while there may indeed be exceptions to the no-retroactive rule, "these exceptions may not be invoked as the material facts on which the rulings of previous Commissioners were confirmed by the DOE that CCG and LCCG are raw materials, in contradistinction to finished products."
The committee report was signed by 38 of its members and its chairman Antique Rep. Exequiel Javier, a recognized taxation expert and law professor at the Ateneo.
The unheeded former President
On 09 February 2010 however, the CTA voting 2-1, granted the BOC authority to seize Shell’s raw fuel imports. Justices Erlinda Uy and Esperanza Fabon-Victorino decided in favor of the BOC with Presiding Justice Ernesto Acosta, the most senior member of the division, as the only dissenter.
Acosta served as tax counsel for Shell from 1975 to 1981—a connection that would be the basis for the BOC, through the Office of the Solicitor General (OSG), to file a motion for Acosta’s voluntary inhibition on April 7. He would voluntarily inhibit himself from the Shell case on April 30.
On 15 February 2010, six days after the CTA had granted the BOC authority to seize Shell’s imports, the company was able to secure another 20-day TRO, this time from the judge Ruben Galvez of the Batangas City Regional Trial Court Branch 84.
The OSG countered that the Batangas Court had no jurisdiction on the matter, but would not pursue its objections following Malacañang efforts at mediation pending a final decision by the CTA.
But observers say that even former President Gloria Macapagal Arroyo’s word did not suffice in establishing a middle ground on the issue even among members of her official family. In a special meeting involving perceived Shell sympathizers Trade Secretary Peter Favila and Energy Secretary Angelo Reyes on one side; and BOC allies Finance Secretary Margarito Teves, Customs Chief Napoleon Morales, and Presidential Adviser on Revenue Enhancement Narciso “Jun” Santiago on the other, Arroyo allegedly told her men: “Can you change policy and collect retroactively? Ayusin n’yo yan. (Have that fixed).”
Unanswered questions, uncertain future
The issue would not find resolution until the end of Arroyo’s term. Three main points of contention remained unanswered: (1) Are CCG and LCGG raw materials or finished products? (2) Will it constitute double taxation should the BOC be authorized to collect excise tax on imports even as the BIR already does so on refined products? (3) Is government justified in this case to retroactively implement “new”policy?
And because these have been left with no definitive ruling, the dispute has grown from tax evasion to technical smuggling under the new administration. The contested figure has ballooned from P7 billion to P24 billion.
If sources are to be believed, this is all because Shell had first acceded but later refused to pay half-a-million pesos in monthly unrecorded “overtime fees.”
Responding to government’s onslaught and in what others perceive to be a display of corporate arrogance, Shell now threatens a complete shutdown of its operations in the Philippines.
One of Shell’s senior officials told the Manila Standard Today that the Philippines represents but a negligible portion of Royal Dutch Shell Plc’s global operations, which may easily be shutdown should the environment become untenable from its mother company’s point of view.
Shell, one of the country’s largest investors and second biggest oil company, employing close to 20,000 nationwide, has a 30 percent market share in the retail fuel market; supplies another 30 percent of the country’s power plant fuel requirement, close to 20 percent of the aviation fuels market, nearly a fourth of the marine transport market, and 70 percent of bitumen requirements for roadworks and infrastructure.
The Aquino administration and the Energy Department in particular have yet to make their positions known on this possibility. Should the case be pursued and should the oil giant stop its Philippine operations as a result, jobs will be lost and investor confidence will decline.
How will all these fit into the administration’s bid to generate local employment, and encourage investors to work in tandem with the Philippine government while running after tax evaders and pursuing the so-called straight and narrow path?
How the Aquino administration ends up untangling this mess is the bigger story worth watching out for.
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