Misdeclared

“Misdeclared” is not a proper word in the English language – at least as far as my word processor’s spell checker in concerned. But it is a word every Filipino knows in relation to the rampant smuggling that has been going on for decades.

The preferred synonym these days is “trade misinvoicing” – the practice of undervaluing imports in order to lower the amount of taxes and duties paid on them. Another cumbersome phrase used interchangeably is “technical smuggling.”

Mandy Anderson, chief of staff to Customs Commissioner Nicanor Faeldon, gives us some staggering figures. “Misinvoicing” accounts for, on the average, a 25% undervaluation of imports.

Using that formula, he calculates that between 1969 and 2011, at least P12.32 trillion in potential revenues was lost due to “trade misinvoicing.” That is nearly four times the current national budget. Imagine how much infra could have been built and how much social services could have been delivered over the years if the revenues were not lost.

The annual losses were probably higher in the 2011-2016 period. This was the Golden Age for smugglers. This was the period where everything from construction materials to agricultural products entered in much larger volumes. Misdeclaration was conducted with such impunity.

The revenue loss estimated above does not even include outright smuggling: goods that entered our economy with no documentation at all. They came in through isolated beaches in the dark of night or right under the noses of Customs officials through the ports in the brightness of day.

The loss had devastating long-term effects. There was massive underinvestment in education and public health. Chronic budget deficits forced us to forego vital infra projects, causing the primitive national logistics system that discouraged investments. It contributed to the debt crisis we had to work down over the years with great sacrifices.

Just this week, the Bureau of Customs (BoC) uncovered a syndicate operating within the agency. That syndicate is said to generate P120 million a week for its principals from payoffs made by smugglers.

Today, we have the opportunity to finally make a dent on rampant smuggling and improve collections.

The Customs Modernization and Tariff Act (CMTA) has been passed. Consultation are now underway for the implementing rules and regulations consistent with the new law. This is a chance to dramatically improve collections efficiency in an agency that gained such notoriety for corruption.

The CMTA will enable the BoC leadership to undertake dramatic reforms in the administrative procedures of the agency to make its internal governance compliant with global best practices. These reforms will include electronic processing of all documents, forms and receipts; streamline methods for examination and valuation of imports and exports; and a simplified process for seizing and disposing illegal goods.

The envisioned administrative reforms will, hopefully, be put in place quickly. The tax reform package being fashioned by the new administration will lower personal and corporate tax rates, reducing government revenues by about P170 billion annually. To offset that, government looks to improve collection efficiency in both the BIR and the BoC.

In the context of the tax reform effort, the commitment to raise investment in infra and improve the public sector pay scale, the BoC’s ability to dramatically increase collections is vital.

There is much on Commissioner Faeldon’s plate. We can only wish him the best. 

Contracts

Among Faeldon’s first acts as Customs chief was to suspend two orders issued by his predecessor in the dying days of the previous administration. The orders allowed foreign cargos to be handled at the North Harbor and sought to establish an Authorized Customs Facility (ACF) in the said port.

North Harbor heretofore handles only domestic shipping. It is also under the control of the Philippine Ports Authority (PPA).

On the assumption that the North Harbor handles only domestic cargo, the PPA entered into a contract with a private corporation – the Manila North Harbor Port, Inc. (MNHPI) – to operate and upgrade that facility. The concession fees agreed upon in that contract are based on the premise the facility handles only domestic cargo.

The PPA immediately objected to the BoC orders that Faeldon suspended. Those orders infringe on the PPA’s control of North Harbor and impair the contract entered into with MNHPI.

The bases for Faeldon suspending the orders issued by his predecessor had clear administrative and legal bases. It respected the PPA’s mandate and it upheld the cardinal rule regarding non-impairment of contracts.

Early on President Rodrigo Duterte declared: “I order all department secretaries and heads of agencies to refrain from changing and bending the rules of government contracts, transactions and projects already approved and awaiting implementation. Changing the rules when the game is ongoing is wrong.”

That declaration resonated well with the business community, constantly concerned that a change in administration would result in changes in the rules of the game. Recall that when Noynoy Aquino became president in 2010, several contracts were unilaterally rescinded. This not only resulted in arbitration cases filed but also in diminishing business confidence in the sanctity of contracts in our economy.

By suspending the orders issued by his predecessor opening up North Harbor to international shipping, Faeldon send a good signal to the business community. Under the new management, existing contracts will be respected to the letter.

That is the sort of reassurance we direly need if we want to attract long-term direct investments into our economy. There might be pragmatic reasons for impairing existing contracts, but the long-term costs in business confidence will be great.