New imposition on fuel prices

What is this I hear that DOF is rushing a plan to put an additional impost of at least 10 centavos per liter on all petroleum products? The added burden to consumers is supposed to help government control fuel smuggling.

Because taxes and duties on fuel products are now at least seven pesos a liter, that’s the advantage smugglers have over the oil companies that pay taxes and duties. This smuggling has been going on for so long now.

I have worked over a decade in the oil industry so I know about this problem. Given our so many islands, it is pretty easy to sneak a cargo of diesel, kerosene, or gasoline now and then. The smuggling no longer just happens in out of the way ports, but also in the bigger ports where there are supposed to be better controls.

There was a time when government first tried to curb fuel smuggling by introducing a dye in the products. Surprise inspections are supposed to be done at oil depots and retail stations and those selling products without the dye are presumed to be selling smuggled products.

But the program, from my recollection, didn’t work. After five years, 2009 to 2014, DOF recognized the failure of the program. Government was not even able to get 100 percent compliance from among the oil companies.

I checked with friends in the industry and I found out that only 19 violation cases were established during the program duration, with no prosecution made. Apprehensions were limited to the retail station dealer level and no case was built up against the middlemen/distributors, and definitely none against the principal fuel supplier.

The government monitoring team did not have the infrastructure and logistics support (tank lorries, storage tanks, etc.) to handle apprehended fuels to ensure the integrity of the contested fuel. The integrity of the evidence (apprehended sample fuels) is essential to make the cases stand in court.

This is why oil industry leaders are wondering why DOF is thinking of resuming a failed program. Given the resources and infrastructure constraint in the limited pilot and extended pilot program are the same, a similar failure is likely.

When I was in the old Ministry of Energy, we also tried fuel marking to assure product quality at a time when gas stations of legitimate oil companies were being dumped with smuggled products. Assuring quality of petroleum products was important to us because it affects consumer welfare. Out of specs products can damage engines.

 But if the concern is efficient tax collection, experts tell me the better way is to more strictly implement the VAT system that is now in effect. VAT can provide a more effective audit trail both in the retail and distributor levels in addressing VAT/specific tax leakage on petroleum products. Currently pegged at a rate of 12 percent, accountants say VAT can do more than just increase tax collection.

VAT can be used to properly monitor sales and purchases. Sellers must report their VAT sales, while the buyers, their VAT purchases. Their respective reports must be matched and reconciled, e.g. sales reports vs purchases reports. 

VAT is a mechanism that adds a layer of transparency when the comparison is made between the records of seller vs buyer.  Discrepancies resulting from these report comparisons should spark investigations.

Thus, VAT can be used to curb smuggling.  It just needs proper enforcement: strict registration monitoring thru tax mapping exercise and adequate manpower and technology support to do the reconciliation and audit work needed.

Both Customs and the BIR now have better computer systems that will make the enforcement work easier… definitely easier than trying to physically monitor thousands of gasoline stations and depots all over the country. Sending inspectors out also carries a high possibility of corruption that will defeat the program’s objective.  

I hope this interest in resuscitating a failed program that is likely to fail again isn’t supplier driven. Remember the mandatory drug test required when we renewed our driver’s licenses? Government sanctioned scams!

Government is supposed to handle the bidding for the supply of the chemical dye. We all know what happens when government bids out anything.

I can understand the interest since the 10 centavos a liter cost is big money for rent seeking cronies of public officials. The secrecy surrounding the selection of the chemical is also worrying oil companies because they are not sure if the chemical will not harm end consumers. Who can we sue if the dye causes engine damage?

We really should end this habit of imposing additional costs to the basic prices of fuel products. For example, the fuel ethanol program is adding P2.35 to the per liter price of 91 octane gasoline, but giving less mileage.

The ethanol fuel program was supposed to help our sugar planters, but most of the ethanol being used since it was launched is imported. The local industry was not geared to deliver what our oil industry needed. Yet we continue to burden the consumers by continuing to implement the law.

The oil product consumers are the most punished sector with all the taxes and duties and special imposts on every liter of fuel products they buy. Sure, it is about time government stops rampant fuel smuggling, but it must do so without additional burdens to consumers and with a more effective tool.

Fuel marking is expensive and not the most effective way of stopping fuel smugglers. Let the tax collectors use the tools they have, like VAT, to catch the smugglers instead.

Of course, no rent-seeking merchants of dyes and their corrupt cohorts in government will gain anything if they just use the VAT system. That is exactly the beauty of it. Give the oil consumers, meaning all of us, a break.

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