The antidote to smuggling– Part 3

(A series on how smuggling is done and how it can be solved)

Smuggling comes in many forms. As mentioned in my two earlier columns, smuggling is being done at the Bureau of Customs (BOC) through undervaluation, underdeclaration, misdeclaration and misclassification. All these smuggling schemes are done within the BOC premises, from the time an entry is filed to the time the shipment is released from BOC regulated ports.

But there are other smuggling schemes being done at Customs Bonded Warehouses (CBW).  A CBW is a warehousing facility approved by the BOC where manufacturers store their imported raw materials or intermediate products, less its payment for duties and taxes, to be manufactured or processed into finished products for re-export. As such, the volume of finished products to be re-exported by the manufacturer should be proportionate to its volume of imported raw materials withdrawals from the bonded warehouse, less its approved wastage allowance. Thus, all CBWs are supposed to be guarded 24/7 by Customs officials, and its flow of imported raw materials, both inbound and outbound, closely monitored.

How is smuggling done in CBWs?

Smuggling in CBWs is a scheme that is, perhaps, not getting sufficient public scrutiny because it is being done outside BOC regulated ports and premises. And yet, despite its being a low-profile smuggling scheme, the government is losing hundreds of millions of pesos in duties and taxes each year to smugglers at CBWs.

And the most common forms of smuggling in CBWs are done in the withdrawal of duty-free imported materials from the warehouse and in the formula of manufacture or formula of conversion.

In the withdrawal of imported materials from CBWs, smuggling happens when the BOC official tasked to monitor and regulate the materials withdrawals from the bonded warehouse connive with the manufacturer and allows the latter to withdraw more than its declared volume of withdrawal. This would enable the manufacturer to produce finished products more than what it is supposed to re-export. The rest of the finished products, which the manufacturer would not be accountable for re-export based on its declared raw materials withdrawal, would find its way into the domestic market with unpaid duties and taxes.

Smuggling in CBWs is also being done through the formula of manufacture or the formula of conversion. The formula is about the allowable wastage of imported raw materials in the manufacture of goods and/or commodities for re-export.

This type of smuggling happens when manufacturers and government officials from concerned government agencies tasked to formulate the conversion rate to determine the imported raw materials’ allowable wastages in the production process connive with each other, and the latter gives a conversion formula that would enable the former to have allowable wastages that would be higher than its actual wastage.

I had the chance to engage this type of smuggling when we questioned the unusually high wastage allowance of a tin can manufacturer. This company had an approved wastage allowance of 30% when the industry’s average was only about 3 to 4 percent. Meaning, this company only had to re-export finished tin cans that would be equivalent to only 70% of its total importation of raw materials.  About 27% of its tin can production were being sold in the domestic market with impunity and with untaxed imported raw materials.

Smuggling through consolidation

Another smuggling scheme is through cargo consolidation. Under the law, consolidators are allowed to issue bills of lading and invoices for their consolidated shipment. Smuggling happens when consolidators change the values and sometimes, the volume declarations of exporters (consolidators’ clients) to lower the dutiable values of its consolidated shipment. This would result in lower taxes being collected by the government.  I discovered this type of cheating by some consolidators when, in one of our anti-smuggling initiatives, and after getting a copy of the exporter’s bill of lading (BL), we saw the difference in the values of the consolidator’s issued BL against the exporters declared values.

Incidentally, I partly share with the position of Senator Franklin Drilon that implementing the pre-shipment inspection (PSI) policy in the BOC, where declarations of imported goods will be checked prior to its departure from the port of origin, can help curb the country’s smuggling problem. However, contrary to the earlier proposal to charge the importers for the cost of inspection at the port of origin, the government should pay for the cost of inspection abroad.

After all, it’s the government that would benefit from the implementation of PSI. Thus, the government should pay for its cost as well. Besides, would it not be awkward to let the importers pay for the services of a load surveyor abroad to conduct the PSI on their shipment, when the load surveyor would be checking and investigating their shipment for possible violations of the country’s tariff laws?

 

For my next column, I  will discuss the various solutions or the antidote to smuggling.