The Philippines’ competitive ranking globally has been sliding rock bottom in the past years. Nevertheless, instead of treating that as a signal for government to shape up on the policy front, investment prospects are being skewed further because of the State’s proclivity on arbitrarily rule-changing.

Such show of fickle-mindedness on policy enforcement had been most pronounced in the latest ‘double taxation’ hitch being hurled against Pilipinas Shell Petroleum Corporation (PSPC) – supposedly to sanction the collection of alleged back taxes of P7.3 billion for its raw material importation of catalytic crack gasoline (CCG) and light catalytic crack gasoline (LCCG).

In an interview with former Finance Secretary Jesus P. Estanislao, he pointed out  the serious implications of the ‘policy misdirection’ being committed by government, only because of the Bureau of Customs’ (BoC) fixation to twist a corporation’s arm to pay taxes twice for its product imports.

With reference to the Shell case which is still pending at the Court of Tax Appeals (CTA), he noted that there are specific questions that must be resolved: such as: what type of business policy are we following and what type of business climate are we having?  And given that type of decision, what type of manufacturing policy we are going to have?

If the Customs bureau’s interpretation be followed, the former finance chief emphasized that “we cannot be a manufacturing site, because we cannot compete.” Threats on seizure of Shell’s raw material imports were just temporarily settled with the security bond posting it acceded to with government; and subsequently accepted and concurred in by the Court.

And when manufacturing firms will have exodus because the government has been flip-flopping on the policy side, Dr. Estanislao further averred “that the consequences on employment are enormous.”

He thus pointed out that the policy path the government must closely examine shall be that “the cost of importing, which is precisely the whole thing on tariff, has to be as low as possible for one to be able to turn around, and compete either in the domestic market or compete in foreign markets.  The mistake in the past was we taxed people as soon as they bring in the raw materials. That was wrong.”

Further are the viewpoints he shared to energy journalist Myrna M. Velasco about this policy issue, in an interview:

Question: What does a viable taxation policy be able to engender for a country’s overall discipline enforcement among taxable entities?

Dr. Jesus P. Estanislao: This is to encourage law-abiding behaviour on the part of corporations. All citizens, including those who are accountants or officers of the corporation are called upon to alert authorities when there is something illegal being done and therefore, for them to be protected. 

How will you set the demarcation line between what is illegal and arbitrary change in policy? 

JPE: Well, that is something that becomes difficult in the Shell case.  From what I know, looking at it from a distance, I am not connected with Shell, nor am I working with the Department of Finance now, but to tell you frankly, I have exchanged notes with two former secretaries of the Department of Finance -- Cesar Virata, and the guy who succeeded me, Ramon del Rosario.  We asked each other, is this a necessary point of controversy, or this is something that should be avoided?  The three of us have said to ourselves, this is an issue that need not arise; it is a case that need not be brought up because it is a matter for the Department of Finance. At least from my perspective, it should be able to decide because both bureaus report to the Department of Finance.  And both bureaus must be properly coordinated.  They cannot go separate ways -- BIR goes one way and the BOC goes another. 

If you were the Department of Finance Secretary, how would you step into the issue to resolve specific matters?   

JPE: Right now in the United States, as a result of the global financial crisis, there is legislation that is being introduced.  The legislation is to have somebody that worries about systemic risk.  In other words, if there is a threat to the entire financial system, there has to be someone or somebody who will intervene to resolve the issue.  I think that this case is systemic.  In the case of the US right now, the head of that body should be the Secretary of Treasury and is the equivalent of our Secretary of Finance. But here at least in this case, there are two bureaus involved, the Bureau of Customs and the BIR.  Both report to the Secretary of Finance.  There is no question that the Secretary of Finance must come in, especially if there is any disagreement or discrepancy in the original position of both bureaus.  For coordination, the Department of Finance cannot have two bureaus that are contra-purposes.  I understand that the President instructed the Secretary to resolve the issue.  That’s the way it should be.  It is within the prerogative of the Secretary to make a decision. 

What is your assessment as to how the DOF has been handling the issue?

JPE: At the end of the day, if there is any controversy between the Bureau of Customs and the BIR, at least my position is that the Department of Finance must intervene.  From what I know of the case, this was a settled matter as far as the BIR was concerned – that in 2003, this type of importation by Shell was treated as a raw material.  If it is a raw material, according to our Tariff and Customs Code, well, they should not be paying the Bureau of Customs because it is a raw material and not a finished product.  However, the moment it is processed, and it is manufactured to a finished product, then of course the BIR collects the money.  Very clear, your Customs does not collect the excise taxes for imported raw material but when the imported raw material is processed into a finished product, and that finished product is sold to the general public within the Philippine jurisdiction, then of course you have to pay the BIR excise taxes. That’s the way how it has been.  Now, from out of the blue, someone from the Bureau of Customs thinks otherwise and this was already 2008 or 2009.  That cannot be, especially since there has already been a resolution before coming from the BIR that this (imported product) is a raw material or an intermediate product and therefore, Customs should not collect excise taxes.  It is a policy that has already been determined, it is like you are playing basketball and suddenly the rules are changed.  What type of business policy are we following and what type of business climate are we having?  And given that type of decision, what type of manufacturing policy we are going to have? 

Does it mean that the Philippines will no longer be able to manufacture anything?  Because if you import raw material and you tax it, and by the time you manufacture it, you tax it again, who can manufacture in this country? 

So this is a systemic issue with various types of consequences.  It could be any manufacturing activity whether by foreigners or by Filipinos.  You cannot be taxed twice while your competitors who decide to import the finished product without manufacturing here will be taxed only once.  This is not an even playing field. 

At the rate things are going, that there have been policy flip-flopping on the side of both the BIR and BOC, if the Department of Finance would come in, what is the starting point to resolve the issue -- given the premise of conflicting interpretations on the tax policy?

JPE: It is not just flip-flopping, it is a reversal.  So status quo ante (note: things would need to stay as they were before). Before you actually make a change, you really have to determine what is wrong with the original decision made by the BIR, which I understand was made on the basis of a technical determination by the DoE (Department of Energy) that in fact, this particular product is an intermediate product and it cannot be used legally in the Philippines as a finished product because it does not comply with the Clean Air Act. So, who makes that determination? Is it the BIR, the BoC? No. It is a technical matter and it should be the Department of Energy.  After the DoE has made that determination, the BIR or the Department of Finance for that matter should follow the system that the imported raw material is not a finished product.

In the intent of having a policy that would be more sustainable in the future, can it be a case that the President comes up with an Executive Order (EO) or any other form of declaration to clarify? 

JPE: You don’t even need the President for this, and that is against the point that I am making.  I think that it is also the thinking of Cesar (Virata), that this something that the Department of Finance should make a decision on.  Those two bureaus report to the DoF.  To me, it is very clear and it is an unnecessary issue.  It is a big issue, but the systemic impact of that issue is very, very significant.  It boils down to the questions: are we going to be a manufacturing country or not?  If we follow the BoC thinking right now, which was non-existent before, then we can never become a manufacturing country with the consequences of unemployment and other economic factors. 

Who will come here to manufacture anything, if you begin taxing your imported materials? The consequences on employment are enormous. The cost of importing, which is precisely the whole thing on tariffs, has to be as low as possible for you to be able to turn around, and compete either in the domestic market or compete in foreign markets.  The mistake in the past was we taxed people as soon as they bring in the raw materials. That was wrong if anchored on the idea of protecting Philippine industries.  But this one, you are not protecting anyone.  It is a very serious policy misdirection, I think.

We cannot be a manufacturing site if you follow the Customs interpretation, because we cannot compete. 

Aside from the manufacturing sector that could be affected, if we would have to touch on the Shell issue itself, with energy as a backbone of the economy and for Shell not being able to import because of the threat of seizure by the BoC, how will that impact on the economy?

In the 1970s, we used to have energy crisis that was worldwide. You have to line up.  It becomes one more hassle, where am I going to get my energy supply? That’s why we have all these programs which I thought were very good, to tap our geothermal.  But now, here we are cutting our importation of these types of materials and yes, you can always substitute imports for what Shell produces right now.  But that simply means that you are giving advantage to independent oil producers and therefore not creating an even playing field.  What does it do to your competition policy?  What does it do to your industrial policy?  What does it do to your employment policy?  All of that will go haywire.

How do we move forward with this policy question?

For the Department of Finance to make the final determination.  And let him answer all the questions.

How soon should that be? 

Yesterday! I mean, you can have various or different interpretations of the law and the rules, but at the end of the day, it is within his power to do so. Why only intervene after five years, why not on day one.