Pilipinas Shell and Incumbent Decency (Conclusion)

(This is The Conclusion to a 2 part series. Part 1 of Pilipinas Shell and Incumbent Decency here)

It is incumbent upon government to conduct itself decently. Never mind impending cash flows. Government cannot coerce in the absence of legitimate basis. In the ongoing controversy involving an utter disregard for long-standing statutes simply to augment embarrassing revenue deficiencies, where coercion is employed indecency is an understatement.

Our basis is both ancient and recent. The excise taxes suddenly slapped on the importations of Pilipinas Shell’s catalytic cracked gasoline (CCG) and light catalytic cracked gasoline (LCCG) reveal desperate exigencies from the toxic alchemy of governmental incompetence and avarice that distorts law and logic resulting in rank indecency and recklessness.

The Finance Department recently declared that excises are attached to these imports “as soon as they are in existence, due and payable upon removal from customs custody, regardless of disposition or of distinction, whether intermediate or finished products”.

Invoking Section 131 of the Tax Code they inflict import excises “conformably with the regulations of the Department of Finance and before the release of such articles from the customs house” prior to “the sale and disposition to the consumer”. This junks a 2003 Energy Department declaration to the Bureau of Internal Revenue’s (BIR) Large Taxpayers Service and a BIR memorandum prior to the 2004 importations both declaring un-excisability.

As intermediate products, unusable, even lethal when distributed as final products, LCCG and CCG cannot be applied excises at both the importation-end and final product ends lest multiple taxation, while mulcting billions for a deficit-ridden government, victimizes consumers.

Unless it is exceptionally stupid or disingenuous, government knows it stands on feeble foundations.

Almost a century ago in Asiatic Petroleum Company versus Rafferty (38 Phil. 475 [1918]) the Supreme Court established its doctrine on excise taxation for intermediates declaring “unless excisable products are placed in the market for domestic consumption by the public”, excise taxes do not apply.

Such underlies CCG and LCCG as intermediate products predicating lethal usage if “placed in the market for domestic consumption by the public”.

It’s not rocket science. It is easy enough even for tax collectors, accountants and paid hacks. CCG’s low Reid Vapor Pressure (RVP) prevents adequate vaporization when mixed with air. Maintaining its liquid form it consequently oversupplies fuels to engines leading to improper combustion. Inversely, LCCG, with its high RVP, leads to volatile and premature evaporation even before the fuel reaches the engine.

More important, refinery products contain high aromatics and benzene that, while stable, are environmentally toxic. CCG and LCCG are low in these. Unfortunately, CCG’s and LCCG’s low aromatic content and high olefins (unsaturated hydrocarbons) produce carbon dioxide when oxygen is added. This renders both lethal as final products. Both cause a fuel system’s plastics, tubes, gaskets, rubber and elastomers to expand, crack and deteriorate causing dangerous leaks.

Don’t take my word for it. Authorities should fill up with CCG. But only after strapping the wife and kids in the backseat dressed in asbestos fire-proof clothing.

The 1918 doctrine has since been fortified through direct and indirect legal refinements, first in 1922 and repeatedly in 1982 and 1997 where usage delineates intermediates from final products. Unfortunately modern-day greed is resurgent.

Inflicted against foreign investments, rather than Pilipinas Shell, it is a rogue state that threatens economic sabotage when illegal seizures imperil critical feedstock. Already the shortages of intermediates are eloquent examples of how recklessness bloats pump prices by curtailing supply.

Note recent history. While Chevron owned a cracker it shut down its half-a-century old refinery and downscaled to a finished-product importer. The divestment presented ominous forebodings. Inventories of refined products or intermediates mitigate risks and volatility. Albeit Chevron’s less-than-10% return on assets remain higher than either Pilipinas Shell’s or Petron’s, absent refining goods-in-process and inventory buffers, consumers are left more vulnerable to the vagaries of global oil politics.

As a regional player with facilities in Singapore and Malaysia, Pilipinas Shell imports cracked intermediates. Its competitor, Petron, is a domestic player. Compelled to build its own cracker capitalized initially at US$ 1.5 billion with from US$ 0.6 billion to US$ 1 billion for subsequent phases, Petron needs substantial funding through fixed-rate debt, preferreds and bonds.

With Pilipinas Shell’s regional options, domestic cracking is unnecessary. More when industry internal rates of return (IRR) wallow below 10%. At anemic IRR levels, incremental capital expenditure would be iffy.

Amid these costs, idiotic economic governance is most expensive when it contrives unnecessary charges, doubles taxation and virtually screams to the global investment community the whimsical, if not indecent bane of Philippine financial governance.

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