Petron Corporation, the country’s largest oil company, has alleged that about one out of every three liters of gasoline or diesel sold in the Philippines is smuggled. For the government that translates to P30-40 billion in lost revenues a year, said Petron boss Ramon S. Ang. For the company it means fewer profits because smuggled oil can be sold at extremely low prices and undermine Petron’s market share.

But why should ordinary Filipinos, who have been forever abused by Petron and other big oil firms, care? Jeepney, taxi and tricycle drivers, the small fishers and farmers do not mind buying smuggled oil if that’s the only way they can boost their meager income eroded by ever rising fuel costs. They simply can’t empathize with Petron’s predicament of seeing its profits fall to “just P2.3 billion” last year. They can’t appreciate the lost government revenues either since social services are hardly felt anyway. Just ask Kristel Tejada’s parents.

If there is one issue that matters to ordinary folks in the allegation of Ang is the huge tax burden imposed by government on a commodity as socially sensitive as oil. The claim of Petron is that smugglers are using the special economic zones to evade paying the 12% value-added tax (VAT) and the excise tax. This allows some retailers to sell cheap oil.

How much do government taxes add to the retail price of petroleum products?

As of April 2, 2013, the retail price of gasoline in Metro Manila ranges from P48.65 to P54.64 per liter, based on the monitoring of the Department of Energy (DOE). The VAT is about P5.84 to P6.56 per liter (12% of the retail price). The excise tax, on the other hand, is fixed at P4.35 per liter. Thus, the VAT and the excise tax comprise around 20 to 21 percent of the current retail price of gasoline.

Compare it to the percentage of government taxes to the pump price of gasoline in the US which is just about 12% (more details here). The Philippines, in fact, has one of the largest taxes as a percentage of gasoline retail price in the world, together with Hong Kong, Thailand, New Zealand, Cambodia and Singapore (read more here). The same thing is true for diesel, which is has zero excise tax but is also imposed with the 12% VAT.

The country’s oil products carry high government taxes despite the elimination of the 3% import duty on crude oil and refined petroleum by the Arroyo administration in 2010. Refusing to scrap the VAT and the Oil Deregulation Law, it was government’s attempt to mitigate the impact of soaring global oil prices.

But it was a futile move. Pump prices remained high and continued to increase exorbitantly in a regime of deregulated prices. The basic problem of monopoly control, overpricing and speculation remained, which even the so-called Independent Oil Price Review Committee (IOPRC) acknowledged. And compounding the consumers’ predicament is the oppressive 12% VAT on oil, in which government revenues increase as oil prices skyrocket.

Consumers need lower oil prices. Government must find ways to reduce them. One immediately doable step is to scrap the VAT. Government may retain the excise tax or re-impose the 3% tariff (except for the most socially sensitive oil products like diesel, kerosene and LPG) but the VAT should go. Government should also devise tax measures that will make oil firms, especially the biggest and most profitable ones, shoulder more tax burden.

As for smuggling, it must be addressed within the framework of deep reforms in the industry and with the aim of dismantling the oil monopoly and curbing price abuses. The problem of rampant smuggling can only be solved if the downstream oil industry is strictly regulated by government.

One possible measure is a system of centralized procurement wherein the Philippine National Oil Company (PNOC) or any relevant state agency will be the exclusive importer of crude and refined petroleum. Under this system, it will be easier to track or identify smuggled oil, e.g. anything not imported by the PNOC is automatically considered smuggled. It will also help minimize the overpricing of oil companies. (End)