For a surprisingly long time, the Philippines has relied on the use of tax credit certificates as incentives to export firms in the hope of enhancing national competitiveness in an increasingly market-driven global economy. Although TCCs are refunds—instead of returning cash—the government, through the Department of Finance (DOF) issues certificates that applicant firms can use to pay their liabilities, including taxes or debts to creditor firms. TCCs are as good as cash. What makes the scheme unique is that TCCs are transferrable to other users.
Now, the Commission on Audit is being accused of failing to audit all issuances of TCCs between 2008 and 2014. On May 3, at least 21 employees of the One-Stop-Shop Inter-Agency Tax Credit and Duty Drawback Center (OSS-Center) filed three petitions for certiorari and prohibition against COA before the Supreme Court. In their 168-page petition, they asked the SC to stop COA from its unrestrained issuance of Notices of Disallowance (NDs), an act which they claimed had no legal basis and authority.
The petition stemmed from the COA’s special audit report, where it ruled that 3,250 tax credit certificates (TCCs)—involving P11.19 billion—issued between 2008 and 2014 to 33 Board of Investments (BOI)-registered textile and garment firms were all declared to have been issued without any legal or factual basis. Since the 2018 release of the special audit report, at least 578 NDs were issued in nine batches to eight of the 33 firms.
According to the OSS Center petitioners, COA had deviated without reason from the original objective of conducting a “sectoral performance audit,” as it audited only 3,259 TCCs issued to 33 firms out of the total 8,792 TCCs, representing only 33 percent of the issued TCCs. Moreover, the special audit report covering 2008-2014 came out in 2018, or more than three years after the supposed completion of the audit, raising confusion. It was unclear whether the unaudited firms would have to return the amounts in their TCCs.
COA has allegedly failed to audit the transfer and use of some P8.65 billion worth of TCCs issued to eight firms: namely, Phoenix Petroleum which had the biggest amount of transferred TCCs at P2.87 billion; followed by Therma Luzon, a subsidiary of Aboitiz Power, at P2.339 billion; Steel Asia Manufacturing, at P1.98 billion; Scandinavian Motors had P556.89 million, and Therma South, another subsidiary of Aboitiz Power, had P467.09 million.
DOF insiders told BusinessWise that Finance Secretary Sonny Domiguez is taking special interest in the petition. For one, the finance secretary is not too sold on exports as a way to economic progress. He is said to lean more toward import substitution or substitution industrialization, an economic theory resorted to by developing countries or emerging market nations that seek to decrease dependence on developed countries. This approach promotes the protection of newly formed domestic industries and nurturing them to become fully developed sectors so that local goods are kept competitive with imported goods. Under the ISI theory, the process makes local economies, and their nations, self-sufficient.
The OSS-Center has long been suspected of being embroiled in corruption, but no one in the DOF has so far offered concrete proof. In 2014, news of “speculative nature” broke about a “massive scam” in the OSS-Center. DOF officials, however, could neither identify nor file court charges against the yet-unidentified parties. This was what was claimed to have prompted the DOF to urge COA to conduct an audit in 2015 that lasted for three years.
The OSS-Center petitioners have also alleged that the COA special audit team committed fraud by altering the actual provisions of Article 39 (j) of Executive Order 226, or the Omnibus Investment Code—of which the Center is one the implementing agencies—and the contents of an OSS-Center executive committee resolution (ExCom) passed on October 18, 2020. The twin moves have appeared to fit the desired conclusion of the audit team that the subject TCCs were all issued without legal justification.
There is basis though for some people in the DOF to believe that corruption in the OSS-Center exists. Recall that, during Bobby de Ocampo’s time as the DOF secretary in the Fidel Ramos administration, the Center became enmeshed in the so-called tax credit scam when some P8 billion vanished into thin air.
In 1998, then DOF Chief Edgardo Espiritu ordered a top-to-bottom revamp of the agency. The overhaul proved effective for some time. Established in 1992, the OSC-Center underwent five special audits between 1998 and 2009. During the first four audits, COA didn’t find anything amiss in the Center’s systems and operations. For some unexplained reasons, the fifth audit took more than three years (2015-2018). It was the 2018 or fifth special audit report that became the basis for 21 employees and officers of the Center to file before the SC the certiorari and prohibition.
Speaking through their lawyer Marlon Mercado, the OSS-Center officers and staff said they were prompted to file the petition because COA had answered only two of the 11 petitions for review. They claimed the answers were insufficient to the points they had raised in their petitions.
According to the petitioners, the 578 NDs cover 18 percent of the total NDs issued. Also, eight of the 33 firms represent only 24 percent, with 25 firms or 76 percent of the total number of firms not having been issued any NDs three years after the release of the special audit report. Moreover, the 578 NDs issued to the eight firms constitute only 50 percent of the NDs issued to them.
Despite official communications by the special audit team that the audit would cover 33 firms involving P11.19 billion, the petitioners claimed, COA only conducted a partial audit of eight firms involving P2.21 billion. Moreover, they alleged that the special audit report has reflected COA’s unfamiliarity with the TCC environment.
In their letters to COA Chair Michael Aguinaldo in September 2019, the OSS-Center workers cited evidence to support their claim of “fraudulent representations” in the 2018 special audit report, which became the basis of the issuance of NDs. Through his October 21, 2019 letter to the OSS-Center employees, Aguinaldo reassured them the COA special audit team members were “required to file Answer addressing the issues raised in the appeals including the alleged fraudulent misrepresentations.”
More than 19 months have passed, however, since Aguinaldo’s letter, but the special audit team has not responded to the allegations, including the issue of fraudulent actions they allegedly committed in the conduct of the audit. Mercado noted that such nonresponse could only mean the contentions raised by the OSS-Center workers were “valid.” Mercado said the Center is petitioning for the Supreme Court to intervene so that “the grave abuse of discretion being committed by the audit team” would be addressed. He expressed the hope that it would not take another 16 years before the COA would be able to resolve the issue.
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