Sometime in the early 1990’s less than a handful of industrialists and investment bankers mulled the establishment of a petrochemical complex to service the downstream industries of imported intermediate petroleum products. I was included in that endeavor and the lessons learned were invaluable.
Among the prospective industries would have been a petroleum cracking plant to upgrade lower-end intermediates necessary for consumer-end plastics, solvents, fuels and other final-form petroleum-based products. The anchor-project was to have been a naptha cracking facility. Naptha is feedstock for producing high-octane gasoline.
Cracking is the process of breaking down the long, large and heavier crude oil molecules and creating from those consumer-useable plastics and lighter or higher-octane fuels. It is achieved through thermal processes, hydro-cracking for aviation gas or catalytic processes using acid catalysts for gasoline and LPG.
In the excise tax issue between finance authorities and Pilipinas Shell, one of two remaining oil refiners, catalytic cracked gasoline (CCG) is at the center of the controversy.
Intermediate cracked products when blended with domestically refined fuels upgrade the final product to statutorily-accepted standards. This is important in making distinctions among consumer product standards before and after the Clean Air Act of 1999 (CAA) that requires higher fuel grades under Chapter 3, Article 1, Sections 26 and onwards.
After 1999 refiners hustled to comply using cracked intermediate products blended with domestically refined fuels. Note the timeline. Crackers were mulled long before the CAA. Cracked products as intermediates was a classification consistently upheld by at least three Bureau of Internal Revenue (BIR) commissioners until the fiscal deficit recently broke through the Php 300 billion ceiling with revenues trailing pathetically.
Misconceptions have been spawned, some from ignorance, others sparked by greed and salivated on seemingly because of attendant bounties that lather over logic and decency.
While greed is an unfortunate par in commerce, when it slithers from behind the woodwork of government veneer, it reeks of indecency. In all its actions, policies as well as decisions, it is incumbent upon the state to be decent. More considering the tremendous powers vested in it.
Government cannot act like a rogue. It cannot surrender to myopic minutiae. It cannot be mercenary or pursue policies when those are clearly wrong despite prospective rewards.
In this issue, while government had long held CCG as intermediates not subject to excise taxes on its importation fiscal needs seem to have over-ridden propriety and the issues now redound to the correctness of imposing excises on goods not subject to excise.
For one, there is a vast difference between import tariffs and an excise on importations. Tariffs are due on all importations. On Pilipinas Shell’s CCG, tariffs were paid. What is contested is the sudden imposition of excise taxes at the importation stage.
Excise taxes are applied on final products not on intermediates. While CCG may be used as a final product (albeit, violating CAA requisites) actual usage determines between intermediate and final forms.
These distinctions are critical to appreciating how the state had stepped into this mess and how, had it been more decent, it might have avoided international embarrassment on one end and global condemnation on another.
Pursuing accountabilities should not be based on rewards or blinding billions. Under the tariff code the rewards applicable to tariff deficiencies are so great these blind even the most honest. Under the tax code, bounties on excise deficiencies are finite.
Prices are not only a function of supply and demand, they must first hurdle costs otherwise it would be foolhardy to continue operating a business. It is the margin that surrenders to supply and demand. Intermediate products form part of costs and are not subject to final excises as final prices would inordinately carry double-taxation.
Double-taxation, bloated pump pricing, and inordinate state revenues victimize consumers if excise taxes are applied on intermediates at the importation-end and then again at the final product-end. As final excises are applied on previously imposed excises, the effects are exponential. This helps us understand hidden agenda where expenditures and deficits loom and overshadow revenue-earning competence.
It must tweak curiosity as to why these taxation issues seem applicable only to Pilipinas Shell and not to the Big Three. Is the company being singled-out and is this another example of indecent governance? The answer is in the negative. The full answer lies in competitive refining capacities, capital expenditures and the sourcing of intermediate CCG – aspects we will tackle next week in the second of our two-part series on this issue.
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Yeah,
next they will be taxing books . . .
You know,
this whole fiscal operation reminds me a lot of those machines held together with gum and bailing wire, where some yahoo in a reeking straw hat raises his head from ‘neath the hood, spits a big chaw of tobacco juice over the fender, wiping the spittle from his chin and says, in a kind of GW Bush drawl, “they’ll never notice.”
You and Shell can scream until the yahoo’s cows come home, and the tax cronies know they can just shrug, for deceits and obfuscation and oily dodging are top-rung skills in this particular neck of the woods. This country lacks a good legal advocacy arena, eh? Them judges and attorneys have a good crust of spittle on their chins, too, you betcha . . .
Joe
Dear Joe,
I love that “yokel-speak”.
Not to mention your rootin’-tootin’ home-cooked cat sense and reductio ad absurdum.
Dean
Joe,
Books are taxed!
uh,
MB,
that’s my sarcastic point, as only unenlightened nitwits tax books.
Joe
Dean,
On a related matter, what was the problem between Petronas and the gov’t of FVR? Didn’t that have to do with a naptha cracker plant also?
I remember the Petronas chairman complaining to FVR and asking him for help with GMA regarding their huge investment in Bataan, I think, because their British partner had withdrawn and they were going to be left holding the bag for hundreds of millions of dollars. Was the Petronas downstream plant ever constructed and/or if not what happened there if you know
Dear MB,
It was the Petronas plant that I was working on in Bataan. The British partner was British Petroleum. They had already sunk in some money and when they left, they left the money they sunk in.
A cracker plant was eventually built to service Petron only. It’s in Batangas. Believe it or not, the refining volume for oils is too small to be viable. Had the new oil players set up a refinery, then cracked gasoline would probably made it worth while specially after the CAA was passed. Ang kaso, these guys who came in are simply traders and blenders.
As it is, our diesels are relatively dirtier and could use some blending. That’s why you can still see bright new Fortuners and Pajeros being pulled over by the DENR anti-smoke belcing brigades.
Even when we throw in all the downstream plastics, pails, buckets, batya and all those plastic grocery bags, the volume is still too small for one plant to be viable. Lalo na kung dalawa pa.
Dean
Dean,
So what was the screw up in Bataan? And why was Petronas bitching about being left holding the bag for something like $200M? I heard stories that the Bataan plant project failed because it was in the wrong place but FVR insisted it be built there to accomodate an ally. My facts are kind of hazy on this but I got the distinct impression that Petronas was not too happy with what they got from FVR. Do you have anything on this?
“For the lack of better term. Greed is good. It works”; stated Gordon
Gecko of the movie “WallStreet.” It is the mantra of corporations.
U.S. or Philippines.
Equalizer,
Greed is the engine of capitalism and its successful enrichment of the nations that deploy it well. Those that deploy it poorly find themselves eating their own, in cannibalistic style.
Joe
“For one, there is a vast difference between import tariffs and an excise on importations. Tariffs are due on all importations. On Pilipinas Shell’s CCG, tariffs were paid. What is contested is the sudden imposition of excise taxes at the importation stage.”
“Excise taxes are applied on final products not on intermediates. While CCG may be used as a final product (albeit, violating CAA requisites) actual usage determines between intermediate and final forms”
Was Shell importing CCG for further processing or simply for final sale with little or no processing?
Deregulated markets mean that if the price for producing here is higher ( Platts benchhmark they can import final product. )
I remember there used to be a tax called “Advance sales tax”, which was paid on importation of raw materials that are used in production of articles subject to manufacturers’ sales tax. The tax was paid on top of the tariff and customs duties. The present “excise tax” on importation of petroleum products under Sec. 130 of the NIRC which is paid at time of importation seems to be reimposition of the old tax, except that no recoupment is required at the time of final sale.