Something scary about tax evasion

There was this news report last Friday here in PhilStar Business that scared me about its political implications. The government has supposedly lost an estimated P15.6 billion in taxes last year, the report said, due to illicit tobacco trade in the country.

Wow! If that report is correct, the next president could be elected by someone or some people who evade taxes or break even more serious laws. It only takes P5-6 billion to elect a president. It takes even less than that to buy other bureaucrats as well as judges and justices to get favorable rulings.

It has happened in other countries. In Latin America, the narcotics trade has spawned narco politics. The illicit drug trade is known to fund national and local politicians. That’s a scary scenario anyway you look at it.

Here, it could be tobacco today and something else more sinister soon. If they own the president and can buy off regulators and judges, they could do almost anything else from drugs to human trafficking and contract murder.

Just imagine that the failure of government to curb smuggling and tax evasion could be something more than depriving the national treasury with funds for the country’s development needs. It could be a serious security threat and may end democracy as we know it.

It is a big problem even now. Jose Alejandrino who used to be the presidential assistant for economics of FVR posted on Facebook IMF findings on how bad our smuggling situation is.

According to IMF trade statistics Joe posted, smuggling during the period July 2010 to June 2012 of the Aquino administration hit $19.6 billion, as compared to $3.8 billion during the period February 2001 to June 2010 of the Arroyo administration. This totally betrays gains we have imagined for Daang Matuwid.

US think tank Global Financial Integrity managing director Tom Cardamone thinks this surprisingly big figure is a conservative estimate and that actual values are much higher. He estimates 25 percent of the value of all goods imported into the Philippines goes undeclared.

What’s going on here? $20 billion here and P15 billion there and in the meantime the BIR wants to collect taxes from jeepney drivers and sari sari store owners and picks a fight with doctors.

This failure to collect taxes and duties has other negative effects in our economy. For instance, a recent article in the Wall Street Journal wondered why the peso has been among Asia’s weakest currencies this year when we have one of the strongest government balance sheets in Asia?

The WSJ’s answer: “One reason could be a smuggling problem that has resulted in significant irregularities in the country’s trade data. Some analysts say a proper accounting might show that the country’s current account is actually in deficit – at a time when skittish investors have been punishing developing economies that are too dependent on foreign funding.”

The WSJ pointed out that a recent report from Deutsche Bank shows a wide gap between Philippine imports and the value of exports reported by its trading partners – a gap that has grown significantly over the past two years.

According to the WSJ, Deutsche analyst Diana del Rosario sees “the Philippines’ current account posting deficits in some periods since 2012, contrary to the steady surplus suggested by data from Philippine authorities.”

A concrete example cited is trade data with China: “Philippine imports from China last year were a full 60 percent lower than Beijing’s reported exports to Manila, according to Deutsche Bank. That’s far more than can be explained by factors like valuation, timing or currency conversions, the bank said.”

Another banker cited by WSJ, Credit Suisse economist Michael Wan, reveals that while smuggling isn’t unique to the Philippines, a comparison to similar economies like Thailand and Indonesia suggests Manila’s problem is much more acute.

Mr. Wan said an accurate accounting would probably show a much smaller surplus, around two percent of GDP. The most recent government data showed a surplus of 4.96 percent as of last Dec. 31. “People who haven’t caught on to the discrepancy in the trade balance could be surprised by that,” he said. “There could be some impact on sentiment.”

The PhilStar news item on tax evasion in the illicit tobacco trade is based on a report by UK-based Oxford Economics and US-based International Tax and Investment Center. Since the study was commissioned by Philip Morris, there is a need to validate the findings by commissioning an independent audit by a reputable audit firm.

Adrian Cooper, chief executive officer at Oxford Economics, who briefed media last week, explained that the P15 billion that the BIR has not been collecting in the form of tobacco excise tax, represents what could have been a surge of 497 percent or almost sixfold from the P2.6 billion estimated in taxes lost to the illegal trade of tobacco products.

“While the administration can be pleased they have achieved a 114-percent increase in tobacco excise revenue in 2013 as a result of the new tax regime, one cannot ignore the tax foregone as a result of this very rapid growth in the illicit cigarette trade,” Cooper said.

One out of five cigarettes consumed in the country last year were illegally traded, Oxford Economics’ Cooper said.

“Without appropriate safeguards put in place… there’s a danger that the scale of tax evasion we’ve seen right now could further escalate,” Cooper said, although he declined to name brands thought to be responsible for the illicit trade of cigarettes.

Latest data from the BIR showed excise tax collections from tobacco products rose 14.22 percent to P11.34 billion in the four months to April from the same period a year ago. This figure exceeded the P10.85-billion target for the period.

The Management Association of the Philippines, the Makati Business Club and the various local and foreign chambers of commerce have also expressed concern over this problem and asked Finance Secretary Cesar Purisima for an independent audit.

The business groups are worried about unfair competition. They emphasized that “ensuring the proper implementation of our tax laws across all manufacturers is critical to the sustainability of a competitive industry, and to ensure security for the livelihoods of the more than 2.9 million individuals dependent on the tobacco sector. Given the high demands on the public sector today, we humbly suggest that this could be achieved via a third party monitoring group, working closely with the Department of Finance and its officers.

In any case, P-Noy should look into these reported evasion of taxes not only because he owes it to all the taxpayers who are paying their share. More importantly, his Daang Matuwid demands that no one is given the opportunity to buy the next election or his successor.

P-Noy should also worry that this kind of big money from someone or some people who are able to evade paying the proper taxes or duties will taint his legacy of clean government. Since the Liberal Party is the one in power, his close partymates will be suspected of benefiting from the situation.

 The sooner P-Noy cleans the air on this uncollected taxes and duties, documented by the IMF and other international bodies, the better it will be for his cherished legacy of incorruptibility.

Then again too, since the complaining party is Philip Morris, a pretty influential American firm, lack of credible action will also affect bilateral relations with the US somehow. This could end up being an unfair trade issue that will cause us damage in the eyes of our international trading partners as well as sanctions.

I can’t help being amused by this situation. The local partner of Philip Morris is Fortune Tobacco of Lucio Tan, long accused by the BIR of shortchanging government of rightful taxes. Now Fortune through Philip Morris, is obligated by US laws to play it straight and presumably, is already paying the right taxes.

But they know how the game is played. The authorities must listen to them now because they know and monitor the industry well. It must pain them to see competitors doing what they have been accused of doing in the past… and seemingly getting away with it.

Property sale

Rumor has it that another senator implicated in the Napoles scam has reportedly sold his brand new house in a plush subdivision. Smart move before Sandiganbayan attaches it.

Fairy godmother

A man asked his fairy godmother to make him irresistible to women.

She turned him into a credit card.

Boo Chanco’s e-mail address is[email protected]. Follow him on Twitter @boochanco