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By Tess B. Bacalla, Philippine Center for Investigative Journalism
Third of four parts
MARIKINA CITY—As a young boy, Vic Sabiniano
never had to worry about spending money although his family was
poor. If his pockets were empty, all he had to do was go to any
neighborhood shoe factory in Marikina and offer to help—for a
fee, of course.
“Almost every household was into
shoemaking,” recalls Sabiniano. By the time he was a teenager, he
was a shoemaker himself. He was already so good at assembling shoes
at 18 that he began dreaming of having his own shoe factory. He had
no doubt he was going to make it—just like many of his townmates—and
he was able to persuade his father to mortgage their house to
finance his dream.
His company, Tambuli Shoes, became a huge
success. Sabiniano was even able to send himself to college, buy
several pieces of property and, years later, set up two more shoe
factories. At the time, Sabiniano recounts, some of the biggest
department stores in the country were among his clients, each
ordering 6,000 pairs of shoes a year.
Today, however, orders are hard to come by. Just
like hundreds of other shoe-company owners here, Sabiniano, only 42,
has had to lay off many of his workers while one of his factories
has already ceased operations.
Shoemakers here are one in saying technical
smugglers have done in their industry. While some of these
misdeclare or misclassify their goods, the smugglers who resort to
undervaluing imports may be the most guilty of putting the local
shoe industry—and other industries, for that matter—practically
at death’s door.
When importers undervalue their goods, they pay
taxes and duties much lower than what they should really be charged,
thereby enabling them to sell the items cheap. If the items already
cost less than the local versions to start with, there would be no
chance for the Philippine goods to beat their prices at the market.
Tariffs and duties are imposed on imports not
only to generate revenues for the government but to control the
entry of foreign products and give local goods some leverage in the
market. Trade liberalization has taken place in recent years in part
to discourage smuggling, but some sly traders have instead used the
policy and the sheer massive volume of shipments it has encouraged
to sneak in tons of undervalued goods.
‘Grossly undervalued footwear’
Although the Samahan ng Magsasapatos ng
Pilipinas (SMP), of which Sabiniano is president, is seething at
technical smugglers, it nevertheless blames the Bureau of Customs
for allowing the importation of “grossly undervalued footwear”
from China in the first place.
While the average importation value of leather
shoes in 1997 was worth $12.65 a pair, the corresponding value in
2002 was only $0.76, notes the SMP. The industry association
estimates that the government loses an average of P30 billion in
uncollected duties and taxes annually because of this type of
technical smuggling. Sabiniano even says that is a conservative
figure, with the amount going up to as much as P70 billion if
“more realistic values” are applied.
The impact here in Marikina, meanwhile, has been
this: in 1994 the city had a total of 104,799 jobs in 513 registered
manufacturers. By 2003 only 42,311 jobs and 188 registered
shoemakers were left. Shoe production went down from almost 15
million pairs in 1993 to 6 million pairs in 2003.
Between 1999 and 2003 alone, close to 61 percent
of registered shoe companies closed and the number of people
employed by the industry declined by more than 50 percent.
“The trouble with [Chinese] shoes is that
China is overproducing them,” says Rene Ofreneo, an academic and
Fair Trade Alliance executive director, in a paper on smuggling.
“Thus not only are the shoes undervalued, they are sold locally at
giveaway prices because they are surplus being dumped in the
domestic Philippine market—like the wag-wag and ukay-ukay garments
coming from China and other neighboring countries.”
Transaction value
Industry organizations and Customs insiders say
importers can easily undervalue their shipments because of the way
the Bureau of Customs applies transaction value, which is the basis
for computing tariffs.
Transaction value, according to Republic Act
8181, is “the price actually paid or payable for the goods when
sold for export to the Philippines.” In many cases, say bureau
insiders and businessmen alike, the Bureau of Customs does not
question whatever transaction value is presented, although it can
and does at times impose more reasonable values.
Customs “just accepts [any transaction value]
without validating,” says one businessman. Yet it can arrive at a
more accurate and fair value if it wants to, he says, citing his own
experience in importing a product he had bought at a discounted
price of $2.50 a kilo. Customs, he says, balked and assessed the
dutiable value as $3.30. The businessman admits this was “the real
value,” except that his supplier had given him a special price.
With the passage of R.A. 8181, transaction value
effectively replaced the home consumption value—the value or price
declared in the consular, commercial, trade, or sales invoice—as
the basis for computing the dutiable value of an imported commodity.
According to the Fair Trade Alliance, one of the advantages of using
the home consumption value is that “it’s much closer to the
value of the goods being imported than the ‘agreed’ valuation by
the importer-exporter.”
Put more simply, the home consumption value was
less prone to manipulation by greedy businessmen who may ask
suppliers abroad to put on the commercial invoice a lower amount
than what they were actually paid. The economist Nonoy Oplas,
though, says that what drive importers to cheat on their declared
import values and volumes are “corruption and harassment at the
Customs area.”
Many industry organizations agree with that
observation, although they also say that the Customs bureau tends to
be passive when presented with questionable transaction values.
Textile industry insiders, for instance, complain that import
valuation for yarn is as low as $0.54 per kilogram. The valuation
for fabrics is ridiculously low at $0.19 per kilo, while it is $0.12
a kilo for garments.
“Instead of a scale of increasing value due to
additional processing cost and losses due to processing wastes,”
they note, “these values are accepted by the Bureau of Customs
because they are considered transaction values under the WTO [World
Trade Organization].”
Local tire manufacturers have also noticed that
tires are “coming in with prices below material cost.” In a
letter dated April 12, 2004, the Tire Manufacturers Association of
the Philippines complained to then-Customs Commissioner Antonio
Bernardo that tires from Indonesia had declared the same customs
values for the last six years. The association asked that the bureau
“adjust the values of these imported tires to [an] acceptable
level.”
Misdeclaration and misclassification
Observe the textile industry insiders: “In
other countries . . . goods that are of questionable values are
immediately confiscated by their governments and exporters are
required to justify the values they use.” This has yet to be done
by Customs, they say, even if such acts are clear violations of the
law, making the goods subject to seizure.
Besides undervaluing their goods, technical
smugglers resort to misdeclaration and misclassification of the
products they bring in. Misdeclaration takes place when an importer
uses a product description outside the appropriate chapter heading
under the Tariff and Customs Code.
An example is when an importer declares on his
import entry that he is bringing in apparel on his import entry when
in fact what is shipped in are tires. Both are subject to different
tariffs.
Misclassification, meanwhile, is the use of
another tariff line within the same chapter heading. This happens
when an importer declares, say, slippers when his shipment consists
of leather shoes. Again, the tariffs are different.
Yet case upon case documented by various
manufacturing and agricultural sectors shows that such irregular
transactions are cleared by Customs.
The Federation of Philippine Industries (FPI),
for instance, says it had become common practice in recent years for
garment importers to pass off their shipments as “sacks and
bags.” Customs import entries themselves show that in 2001 and
January to March 2002, imports declared as sacks and bags were found
to consist mostly of garments.
In 2001 only 9 percent of 12.33 million
kilograms of shipments declared as sacks and bags turned out to be
sacks while the rest were garments. From January to March 2002, only
5 percent of the registered 1.416 million kilograms of sacks and
bags were actually sacks; again, the rest were garments. These items
were declared at only $0.20 to $0.23 per kilogram instead of per
piece, significantly bringing down the dutiable value. The estimated
losses in volume and quantity were 2.69 million kilos and $3.575
million, respectively.
The FPI notes that these “spurious
transactions were all cleared” at the port of Manila and the
Manila International Container Port, where the import entries
misdeclaring garments as sacks and bags were filed. The federation
also compiled a list of the top 100 producers of sacks and bags in
the Philippines as of August 2002, and pointed out, “With the
availability of the said products locally, do these importers have
to resort to importation of sacks and bags?”
This practice of misclassifying garment
shipments had been going on for a long time. Although it has been
uncovered by members of the local textile industry, there are fears
that it is still going on. “These nefarious activities of the
importers and brokers with the help of their cohorts inside the
bureau should be stopped,” said the FPI in a report to President
Arroyo.
Industry commodity experts
All these have been happening although the
Philippine Chamber of Commerce has fielded technical experts, also
known as industry commodity experts, or ICEs, in specific ports to
help curb smuggling.
The ICEs, who may work full- or part-time
depending on their sector’s financial state, lend their expertise
in detecting undervaluation, misclassification and misdeclaration
of specific goods covered by their respective industries.
Import entries are supposed to pass through them
for verification; if they detect undervaluation, they can recommend
an acceptable duty. It is still Customs, however, that decides how
much the importer should pay in taxes and duties, and the ICEs as a
rule have no way of knowing how much was actually paid.
Fielding an ICE may also be difficult if the
industry is already in its death throes. The textile industry, for
instance, is barely alive. Before smuggling became rampant, one had
only to go to Baclaran to buy cheap locally made garments, the bulk
of which was supplied by garment makers in Taytay, Rizal. Today
Baclaran is still full of cheap garments, but most of these are from
China; visitors to Taytay, meanwhile, no longer hear the steady hum
of sewing machines.
In 2000 the volume of smuggled yarn, fabrics and
garments was placed at 151,000 metric tons, or 51 percent of the
estimated 300,000 metric tons imported into the country (based on a
per capita consumption of four kilograms for an estimated total
population of 75 million). Ironically, says an industry veteran, the
Philippines once exported fabrics in high volumes. “Textile used
to be the highest foreign-exchange earner in the Philippines,” he
says.
Effects on the textile and garments industry
Today, of the 33 member mills that the Textile
Mills Association used to have, only 7 are left. In the last two
years, 11 have closed shop because, like the rest that had
previously folded up, “they could not compete with the
illegitimate imported textile goods that do not pay VAT [value-added
tax] and tariff,” said the association in an official statement.
Largely because of technical smuggling, the
industry that used to employ more than 2 million people now has only
about a million left. If smuggling remains unabated, that figure may
just get smaller.
Textile and garment manufacturing is
labor-intensive. For a P10,000 investment, say industry insiders,
one can already buy a secondhand machine and employ two people to
work on two shifts and another two to do other tasks such as
cutting, sewing buttons and ironing. If only the textile industry
were not ailing, they say, it could easily contribute to the efforts
to meet President Arroyo’s target of creating 10 million jobs by
the end of her term, says an industry insider.
To be concluded
Part 1 |Part
2 |Part 4 |
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