Philippines' External Debt Situation

Taking a break from TheEconomizer’s coverage of rising inflation in the Philippines, this post responds to a Forbes.com blog post written by Mr. Jesse Colombo, who is a contributor to Forbes magazine. In that post, entitled “Here's Why The Philippines’ Economic Miracle Is Really A Bubble In Disguise”, Mr. Colombo argued that the Philippines’ recent economic performance, in which the country’s GDP grew—at an average of 7% per year—in some quarters faster than China’s, is traceable to China’s own $586-billion economic stimulus program launched in 2009.

This program, in Mr. Colombo’s telling, “drove a global raw materials boom (and bubble) that benefited commodities exporters such as Australia and emerging market nations.” The resulting bubble also drew air—not to say strength—from the US Federal Reserve’s quantitative easing, which accompanied the fall of short-term US dollar rates to almost zero.

Mr. Colombo argues convincingly and TheEconomizer does not intend to refute him. His post was published on 21 November 2013, and events in the succeeding nine months have proven him to be close to the mark, since the formerly high-flying Philippine economy has seen its year-on-year GDP growth fall to 5.7% in the latest quarter while inflation is creeping up.

However, one of the pieces of evidence he cites in his post (and there are many) is that “[i]nvestors’ insatiable hunger for emerging market debt has caused the Philippines’ external debt to spike in recent years”. Immediately following that line is a column graph showing just such a spike starting in 2011. This chart is irreconcilable to the recent push—well-known to observers and analysts and ordinary newspaper readers alike—by the Philippine government to replace foreign debt with domestic borrowings, including the much-publicized issuance of US dollar bonds in the domestic market almost exactly a year before (in November 2012). Because of this, TheEconomizer proceeded to check publicly available data surrounding the Philippines’ external debt.

Investors’ insatiable hunger for emerging market debt has caused the Philippines’ external debt to spike in recent years:

Source: http://www.forbes.com/sites/jessecolombo/2013/11/21/heres-why-the-philippines-economic-miracle-is-really-a-bubble-in-disguise/

These show that whereas in 1998 and 1999 external borrowings were about 46% and 75%, respectively, of domestic borrowings, by 2007 the figure fell to 36%, before the global financial crisis. In the wake of the financial crisis, external borrowings shot up again, but market conditions soon stabilized that by 2012, at the height of the bubble-causing capital flows already pointed out by Mr. Colombo, foreign borrowing fell to 20% of domestic, and in 2013 fell further to 6%. Granted, there was emerging-market volatility in the summer of 2013 as foreign funds fled from India, which impaired the Philippines’ ability to borrow at a reasonable rate from abroad, but the point that external debt rose starting in 2011 is not backed up by the data. In fact, as a share of domestic borrowing, it was the same as in 2010 and lower than in 2009.

These data can be found on the BSPs website, which is further sourced from the Bureau of the Treasury. The graphs below are drawn to the same scale, for ease of comparison between domestic and foreign borrowings over the past 16 years. The Philippines’ fiscal position has undergone a truly fundamental transformation over this period, and such a description cannot be dismissed as mere hyperbole. From 60% of domestic borrowing in 2001, domestic interest payments fell to 40% in 2011 and 33.7% in 2013, the first and indisputable proof of the enormous, favorable shift in the government’s reputation and credibility in managing the public finances. No longer is government debt issuance seen as the herald of fiscal irresponsibility, but as the sought-after instruments of liquidity, the necessary grease for the national financial machinery. That the fall in borrowing cost was gradual but consistent and that it happened during the years when the government was thought corrupt simply proves that perception most often happens to be at variance with reality. The borrowings themselves show no sign of abating, signifying that a change in presidential administrations portended no fear of deficit spending; rather, the fall in borrowing costs may have even encouraged such spending.

On the other hand, the picture of external interest payments does not reflect this shift in government credibility because of factors unknown to TheEconomizer. But the point here is merely to emphasize that, given the reduction in the government’s cost of borrowing domestically, it is only natural to reach the conclusion that replacing foreign borrowing with domestic borrowing is sound financial practice. Looking at external borrowings at their US dollar value (i.e., without the distortions introduced by the translation to Philippine pesos), one can see that in absolute terms external borrowings in 2013 were lower than 2012, which is lower than 2011, which is lower than 2010. So far, TheEconomizer has found no evidence that external borrowings have been increasing since 2011.

Looking at the source data from the Bureau of the Treasury, one finds a report on outstanding amounts, which does show an increase in debts from foreign sources. In contrast to borrowings which represent flows, the outstanding debt report shows the stock of debt at the end of the reporting period, which in this case is the same as the calendar year. (It is important to note as well that the BTr discloses the exchange rate it used for each year to translate the dollar borrowings into their peso value, which is vital to researchers looking at their data.)

In the years 2010 to 2013, the Philippines’ outstanding foreign bonds were 27, 28, 29, and 28 billion US dollars, respectively, while other direct obligations stood at 19, 20, 19, and 16 billion US dollars. Needless to say, this is the result of the fall in external borrowings in those years. No matter how one looks at the data, it cannot be said that there was an increase in external financing or in the stock of outstanding debt. What can be seen, by contrast, is the increasing confidence of the government to borrow from the capital markets. The year 2003 was significant; before that, bonds took up a proportionally smaller share of foreign debt, and that year it was 50-50; but after that, the greater majority of Philippine foreign debt consisted of foreign bonds, which are subject to all sorts of market forces unlike, say, official assistance from governments and international organizations. In a year such as 2013, when the government issued absolutely no global bonds or “RP bonds” (whatever the BTr means by that), the outstanding debt unsurprisingly fell.

What can also be seen (particularly in this BTr report) is that responsible and prudent management of foreign debt did not start in the last four years or so; in 2008, there was a slight but perceptible drop in the stock of foreign bonds. Even when comparing 2009 vs 2008, when outstanding foreign bonds increased by US$3 billion, and gross external borrowings increased more than 3-and-a-half times from US$1.5 to US$5.4 billion, the amount raised from global bonds was less than in 2005, at US$3,334 million vs US$3,372 million. Today's prudent management of foreign debt, like the reduction in cost of borrowings for domestic debt, is a continuation—as opposed to an innovation—by today's fiscal managers.

In sum, none of the reports of the Bureau of the Treasury offers evidence of a jump in external borrowings or in the stock of outstanding foreign debt. What the data show is the continuously improving external-debt position of the Philippines, which has been going on for the better part of a decade. 


(CORRECTION: An earlier version of this post indicated that the Philippine government domestic US dollar bond was issued in November 2013. This post has been updated to reflect the correct date of November 2012.)

Inflation (Part II)

The previous post referred to inflation trends as indicated by long-tenor government bonds. There is corroborative evidence, however slight, shown by corporate bonds issuance in the first half of the year. The trend in bond yields is unmistakably upward. 

The chart above shows the coupons on Peso-denominated corporate bonds issued in each month up to June 2014. Not included are subordinated bonds issued by banks, and one bond which had a tenor of 1 year only. What is left are either Senior Unsecured or Unsecured bonds, either unrated or rated PRSAaa, and issued in the domestic market. In other words, they share almost the same credit risk profile, and the difference in their yields at issuance (or coupons) preponderantly accounts for market conditions and not individual credits of the issuers. 

What can be seen in evidence is the jump in yields, particularly among 7-year bonds. Whereas in January a 7-year PLDT bond printed below a 5.5-year ABS-CBN paper, by March, a 7-year paper by MNTC was higher by 43bps compared to ITS OWN 5.5-year callable note. The 5-5-year (apparently a favorite among issuers, as this tenor was the most numerous of all issuances this year) line shows month-to-month volatility, but adding a trend line shows a perceptible rise throughout the first six months of the year, led by the San Miguel Brewery issuance in April. 

That there is a jump in corporate bond yields this year can be clearly seen in the charts, and is even more in evidence compared to government bond yields. That this is caused by inflationary concerns is also not in doubt. What is subject to debate is the cause of inflation: is it a product of too-high GDP growth, or is there another factor that analysts have not yet grasped? 

Looking at the chart from the prior post it can be clearly seen that the fall in GDP growth rates coincides with inflation concerns. At first glance, the data do not show that higher economic growth expectations are leading to higher inflation. In addition -- and more important for analysts -- inflation is not “caused by” higher economic growth. Inflation is caused by too much money chasing too few goods, as the saying goes, but it bears emphasis that it is not only “too much money” that needs to be factored in, but also “too few goods”. If there is too much money but there are too few goods, then there would be a problem of inflation. But if there is high money growth that this is matched by a boost in production, then there would be no inflation. Producing more goods -- also known as economic growth -- would not, ipso facto, lead to inflation; in fact, it dampens inflation.

That is the reason why observers and analysts have to look elsewhere for a cause of inflation. One such possible cause will be explored in a succeeding post.

Inflation for July at 4.9%, the highest in nearly three years

Inflation is a self-fulfilling prophecy. If you believe that prices will rise in the near future, you will buy now before they actually do. Multiply this action by countless other economic actors, and you will have artificially shifted the aggregate demand curve rightward by simply moving or “advancing” purchases across time. The end result is higher prices, and, therefore, inflation.

It is to guard against precisely this development that the governor of the central bank consistently, at the risk of not being taken seriously, assures literally everyone he meets and talks to, that his institution will vigorously fight inflation as soon as he detects the merest hint of it.

So it was that on the morning of the 28th of May, 2014, BSP Governor Amando Tetangco Jr. arrived to deliver the opening remarks at the first Philippine Retail Investment Conference organized by the CFA Society of the Philippines. Governor Tetangco has received numerous awards in his career, among them “Central Banker of the Year for Asia-Pacific” in 2012, given by The Banker; 2012 Emerging Markets Central Bank Governor for Asia, given by Euromoney magazine; and an “A” rating from Global Finance magazine, again for 2012. These internationally reputable magazines have cited his “considerable skill” in managing the monetary policy of the Philippines, and it is no mystery: his task consists of emphasizing and repeating to the public that the central bank – under his direction – will never allow inflation to run out of control.

He began by noting the remarkable economic growth exhibited by the Philippines over the past 2 years, averaging 7 percent and never going below 6 percent in a quarter. This growth, he said, is “underpinned by solid anchors” of “low and stable inflation due to credible monetary policy and a sound banking system maintained through responsive regulation,” even  if the man in charge of managing monetary policy and maintaining the soundness of the banking system does say so himself.

But, the Governor said, this rosy economic picture is threatened by the prospect of higher inflation, already visible in the horizon that morning at the end of May. After a volatile 2013 during which bond yields at first fell due to impressive headline GDP growth and then soared due to Fed tapering concerns, there was a noticeable jump in the 20-year and 10-year PDST-F rates from November 2013 to January 2014 on the back of inflationary concerns. Worse than the rise in government-bond yields is that inflation rose even higher: in the month of December 2013, the year-on-year increase in the consumer price index was 4.1%, but the 10-year PDST-F average for that month was only 3.7% and at year end was only 3.8038% (see chart).

What is tipped to cause this staggering negative return? The BSP Governor could point to only one thing, and that is the “potential increases in power rates and higher food prices resulting from an expected El Niño episode in the second half of 2014.” By August, the news was out that the prior month’s inflation was the highest since October 2011. The inflation rate for July 2014 clocked in at 4.9%, near the top end of the BSP’s own estimates, and confirmed the Governor’s diagnosis of elevated “food and non-alcoholic beverages index” prices.

The likeliest cause of these price rises is a fascinating admixture of bureaucratic corruption and economic mismanagement ... and will be explored in the next post.

Ongoing War for the LRT-MRT North EDSA common station

It seems as though the Ayala and the SM groups are at each other's throats regarding the construction of the LRT-MRT North EDSA common station. 

A few months ago, TheEconomizer came across this article in the Manila Bulletin laying out the writer's suspicions about the strange turn of events attending the bidding for the PPP projects held by the Aquino Administration. The article is copied below for ease of reference; the opening line is its own banner: "Is our PPP program riding down 'Daang Matuwid' or do all roads lead straight to Ayala?" 

Rats in the PPP Center

by Andrew James Masigan
June 29, 2014

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Is our PPP program riding down “Daang Matuwid” or do all roads lead straight to Ayala?

In the case of the recent bidding for the Cavite-Laguna Expressway (CALAX), it seems the PPP Center and the DPWH have gone down the Ayala superhighway again, causing the Filipino people to lose out on P8.45 billion pesos in royalties.

I have no problem with Ayala winning one PPP bid after another, albeit amid questionable circumstances. After all, it is a profit-driven corporation that must leverage whatever advantage it can get. However, I take exception when their victories come at the expense of the Filipino’s best interest.

An MRT train is seen parked at Ayala-owned TriNoma Mall along North EDSA. DOTC would now locate the MRT-LRT common station in the area. (Photo by Michael Varcas)

But I’m getting ahead of myself here.

Last June 2, the PPP Center and DPWH held a public bidding for the multi-billion peso CALAX, a 47-kilometer four-land highway that would connect the Cavite Expressway and the South Luzon Expressway. Four parties participated in the bid, namely the SMC Group (through its subsidiary, Optimal Infrastructure Development, Inc.), the Ayala-Aboitiz consortium, the Metro Pacific Group, and MTD Philippines.

On the day of the bidding, the Ayala-Aboitiz consortium and the c flagged the bidding and awards committee on an apparent error on the SMC bid. You see, public bids of this sort call for a “Bid Security”—a document from a financial institution guaranteeing the availability and accessibility of the amount tendered over a certain period of time. In this case, the time frame required was 180 days, beginning June 2. This meant that the bid guarantee should have been valid until November 29, 2014.

ANZ Bank is the partner of SMC in this particular exercise, and, on its bid guarantee, the date of expiration stated November 25, 2014—four days short of what was required. However, if you review the entire context of the document, it clearly states that the guarantee is good for 180 days beginning June 2. The expiration date of November 25, 2014 was obviously a typographical error.

San Miguel and ANZ Bank quickly rectified the situation by submitting a formal letter to the DPWH and the PPP Center, dated June 4, affirming that SMC’s Bid Security was indeed valid for 180 days, ending on November 29, 2014. It submitted another letter of clarification on June 10 with the same message, upon the recommendation of the DPWH’s lawyers.

Given the pettiness of the issue, SMC should have been allowed to proceed with its bid—perhaps sanctioned with a penalty, at most. However, to everyone’s surprise, DPWH and PPP Center decided to disqualify SMC altogether. The notice of disqualification was handed down on June 13.

When the bids were opened, SMC proved to be the highest bidder, pledging P20.1 billion for the right to build CALAX, P8.45 billion more than the second highest bidder, the Ayala-Aboitiz Consortium, who bid only P11.65 billion.

A DISSERVICE TO THE REPUBLIC

As a tax-paying citizen, I am incensed at how government readily walked away from P8.45 billion in windfall revenues for a simple typographical error—one that had been clarified twice. In perspective, P8.45 billion would have been enough to build 7,000 homes for those affected by Yolanda. Enough to fund a full-blown expansion of NAIA 1…or even purchase a dozen or so new trains for the overcrowded MRT 3. P8.45 billion could have gone a long way towards easing the suffering of our people.

I reckon the DPWH and PPP Center has done a disservice to the nation. The whole point of privatization and public-private partnerships is to raise the most funds for the republic and/or build infrastructure at the lowest cost to government. Isn’t its mandate to serve the best interest of the Filipino?

The PPP Center’s executive director, Cosette Canilao, apparently speaking on behalf of the DPWH, justified their decision by saying that they are just implementing the bidding rules. Not to disqualify SMC, Canilao claims, would undermine the credibility of our PPP Program and the bidding process it is committed to uphold. She further asserted that to not enforce the bidding rules to the letter, no matter how petty, may dissuade investors from participating in future bidding exercises of the PPP Center.

But let’s look at the PPP Center’s track record in enforcing bidding rules…

In April 2012, the DPWH allowed the winning bidder, the Ayala Group, to alter its design for the Daang Hari-SLEX Connector Road. Not only was Ayala spared from disqualification for changing its plans mid-stream, even worse, government agreed to foot the P500-million bill for additional right-of-ways that resulted from the change. This came out of taxpayers’ money.

A second case in point is the recently awarded Automated Fare Collection System (AFCS), which, again, Ayala won over the second highest bidder—the SM Group of Henry Sy. While Ayala’s bid, per se, was P100,000 higher than that of SM, it came with conditions: it would pay government 28 percent upfront, with the remaining 72 percent paid in 2024 and 2025, only if certain conditional volumes were met. On the other hand, SM’s bid was an upfront payment with no conditions attached.

And yet another case: the MRT-LRT common station in North Edsa. This was overseen by the Department of Transportation and Communication. Despite SM having paid P200 million for the rights to name and host the station six years ago, the DOTC reneged on the deal after getting SM’s money and would now locate the station in Ayala’s TriNoma area.

THE REPUBLIC OF AYALA

To Colette Canilao: please don’t dumb down the Filipino by saying that you are just preserving the integrity of the bidding process. The examples above show that you have turned a blind eye to far more severe infractions in the past. If there’s anything that will undermine the credibility of the PPP program, it is the unpredictability of it all.

Is Ayala being favored? It sure looks like it. No wonder Ayala Land’s president for International Sales, Thomas Mirasol, bragged before the Singaporean Press that Ayala Land had become “the de facto Government.”

Filipinos are no longer willing to look the other way. Resentment is festering. The rats have definitely come out of the woodwork.

Andrew is an economist, political analyst and businessman. He is a 20-year veteran in the hospitality and tourism industry. For comments and reactions, e-mail andrew_rs6@yahoo.com. More of his business updates are available via his Facebook page (Andrew J. Masigan). Follow Andrew on Twitter @aj_masigan.

TheEconomizer cannot vouch for the character of Mr. Masigan, but today this blogger came across this article in the Philippine Star that was published two weeks ago. It reports that the Pasay City court has rejected the petition for TRO by the SM Group regarding the North EDSA terminal, but that the trial on the merits will continue. What is striking about the article is that it lays out very well the position of the Ayala Group, but that of the SM Group gets (relatively) short shrift. It may just be the native paranoia of this blog, but "methinks the gentleman doth protest too much." 

Pasay court rejects SM Prime bid for TRO on MRT-LRT common station

By Marianne V. Go and Lawrence Agcaoili (The Philippine Star) | Updated July 2, 2014 - 12:00am

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MANILA, Philippines - The Pasay City Regional Trial Court (RTC) has denied SM Prime Holdings Inc.’s (SMPHI) petition for a temporary restraining order (TRO) that would have prevented the Department of Transportation and Communication (DOTC) and the Light Rail Transit Authority (LRTA) from “performing acts inconsistent with the terms of the memorandum of agreement (MOA) dated Sept. 29, 2009 for the construction of the LRT1-MRT3 and MRT7 common station in front of SM City North Edsa.”

According to SM Prime legal counsel Ryan San Juan, the Pasay RTC decision is “regrettable” and that SM Prime intends to pursue its case.

“To be clear, the TRO is merely an incident to the main case for Specific Performance. Trial on the main case will continue. DOTC has asked for an extension of time to file their answer,” he said.

“SM Prime will now focus on its main and more important case for specific performance, where it seeks to enforce its rights under the valid and legally binding MOA, the existence of which has been duly admitted by both DOTC and LRTA in court, and which MOA has neither been cancelled or terminated by the parties.”

SM Prime is questioning the decision of the DOTC and LRTA to renege on an earlier agreement that would locate the LRT1-MRT3-MRT7 common station in SM North Edsa.

Business ( Article MRec ), pagematch: 1, sectionmatch: 1

SM Prime had paid P200 million to assist in the construction of the common station as well as for naming rights.

Instead, the DOTC-LRTA decided to locate the common station at the Ayala-owned TriNoma Mall   following  technical evaluation that the station would be better  located at that area.

Reacting to the current dispute with  SM Prime over the common station,  Ayala Land Inc. (ALI) president Bobby Dy told The STAR that there appears to be  a misperception that the Ayala Group is trying to wrestle the project away from the SM Group.

On the contrary, Dy said the Ayala Group was initially approached by the LRTA consultant for the LRT1 North Extension- MetroLink JV, as far back as Aug.  13, 2007 for a North Terminal station of the LRT1 at TriNoma.

The Ayala Group, through a letter dated Sept. 4, 2007  by the  North Triangle Depot Commercial Corp. (NTDCC)  to the LRTA, expressed agreement to the proposed location of the terminal station of the LRT1 North Extension project at TriNoma.

The LRTA acknowledged the NTDCC letter in March 14, 2009, whereby LRTA expressed appreciation for the agreement of the NTDCC to the location of the station at TriNoma.

However, Dy said that on March 30, 2009, the Ayala Group was surprised by an LRTA letter instructing MetroLink JV to stop work on the TriNoma LRT1 station and to transfer the location to SM North Edsa.

On April 15, 2009, MetroLink JV wrote a letter to contractors of LRT1 North Extension Project to cease work on the TriNoma LRT1 station and transfer the location of the station to SM North Edsa.

Dy stressed that the Ayala Group was approached first for the station and was surprised by the announcement that the SM Group had entered into an agreement with the DOTC-LRTA regarding the planned station.

He added that the Ayala Group is relying on technical experts to decide on the best location for the common station.

Inflation Sources

These are collections of sources from the Internet about the Philippines' surging inflation:

With Inflation Surging, Philippine Bank May Need to Tighten Policy

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Roadwork in Manila

 

Bloomberg News

Inflation in the Philippines spiked to a 30-month high in May, approaching the top of the central bank’s target range and raising the odds of further tightening steps ahead.

The consumer price index rose 4.5% on-year in May, its quickest pace since November 2011, on higher prices of food and other commodities, as well as housing. Economists were expecting a reading of 4.2%, while the central bank had forecast a reading between 3.9%-4.7%.

While CPI remains within the bank’s 3.0%-5.0% target range for the year, Bangko Sentral ng Pilipinas Gov. Amando Tetangco Jr. said the data confirm what the central bank has been saying for months: Quick gains in prices are narrowing the room to keep interest rates at record lows.

“We will not hesitate to adjust policy settings should the inflation target be at risk,” Mr. Tetangco said.

The Philippine economy has been among the fastest-growing in Asia, but some worry it’s at risk of overheating.

At its last two meetings, the BSP has raised banks’ reserve requirements by one percentage point each time, seeking to slow money supply that has grown more than 30% from a year earlier in every month since last July.

Mr. Tetangco said the central bank will look for signs that inflation in food and other commodities is driving up prices of other items, and will watch what other central banks in Asia are doing.

The BSP has held its benchmark repurchase rates at record lows of 3.5% for overnight borrowing and 5.5% for overnight lending since October 2012.

Many economists now think the BSP will raise repo rates by one-quarter percentage point at its June 19 meeting, with a similar increase later in the year. That would seek to ensure that inflation next year stays within the 2015 target of 2.0%-4.0%.

Glenn Maguire, ANZ’s chief economist for Asia Pacific, said the BSP’s patience “must be waning” for just tightening liquidity via reserve requirement ratios. That would make adjustments to repo rates or special deposit accounts – a money-market tool the central bank uses to siphon liquidity from the system — more likely.

Possible tightening via special deposit accounts “is now surely in play. The timing of a repo rate hike could now potentially be brought forward,” Mr. Maguire said.

Michael Wan, an economist at Credit Suisse, said the BSP is likely to raise reserve requirements by another full percentage point later this month — to 21% — and predicted a half-percentage-point increase in special deposit account rates in the second half of the year.

The central bank estimates that its two recent increases in banks’ reserve requirements siphoned some $2.7 billion from the system — compared to around $11.4 billion released into the system last year, when the BSP limited access to its special deposit accounts. Another hike in the reserve ratio would siphon off some $1.3 billion of liquidity.

Trinh Nguyen, an economist with HSBC, said it’s almost certain the BSP will have to tighten policy soon “to temper inflationary pressures.” She expects overnight borrowing rates to rise to 4.0% in the second half of the year, and banks’ reserve requirement ratio to rise to 21%.

Comment:

• 1:01 am June 28, 2014
• WISEGUY wrote:

The surge in inflation is self inflicted. Requiring new accreditation for all importers or lose of import license has caused many importers to stop all importation until their accreditation is approved. This has resulted in short supply of many items but most prominently in food. The price of garlic is just a reflection of what is too come.
The government blames hoarders and profiteers i.e. business. It should blame itself with misguided and utterly senseless policies!

BIR issues guidelines for importer, broker accreditation

portcalls.com/bir-issues-guidelines-for-importer-broker-accreditation/

Liza Almonte

THE Bureau of Internal Revenue (BIR) has set the requirements and guidelines for the accreditation of Philippine importers and brokers.

Under Revenue Memorandum Order No. 10-2014, dated February 10 and signed by Internal Revenue commissioner Kim Henares, importers and brokers need to seek an Importer Clearance Certificate (ICC) and Broker Clearance Certificate (BCC) from the BIR as the first stage of accreditation process that will enable them to import and transact business with Customs.

In the second and final stage of accreditation, importers and brokers will present the ICC and BCC to the Bureau of Customs (BOC) to be able to enter the customs premises.

The BOC has yet to issue a Customs Memorandum Order on the rules and regulations covering the second stage.

The accreditation of importers and brokers was imposed by the Department of Finance, the mother agency of BIR and BOC, under Department Order No. 12-2014 as part of the revamp of the customs bureau. The function was previously exercised by the BOC’s Interim Customs Accreditation Unit (ICARE).

The Accounts Receivable Monitoring Division (ARMD) of the BIR will receive all applications and supporting documents required by the BIR, according to the guidelines.

The ARMD will verify the accuracy of documents, determine the applicant’s compliance, find out if the applicant is using the Electronic Filing and Payment System or Inter-Active Forms system of the BIR in filing tax returns and paying taxes and has resolved tax cases; and monitor the accredited importers and brokers.
All applications for accreditations will have to be filed directly with the ARMD with applicants appearing personally at the unit.
Processing of application will take 15 working days. Once approved, the ICC and BCC will be valid for three years, unless revoked or cancelled earlier.
The ARMD will conduct periodic verification of compliance by accredited importers and brokers on a semestral basis or more often if necessary, RMO 10-2014 said.
BIR’s Systems Development Division (SDD) will develop a script for the regular extraction of data from existing BIR information technology systems to facilitate the ARMD’s conduct of the periodic compliance verification and tracking of, among others, data that will be transferred to the Data Warehouse Systems Operations Division (DWSD).
The DWSD will then check and accept the script developed by SDD for the regular extraction of tax compliance data of taxpayers who are applying for accreditation or who have been accredited after complying with the existing issuance on script turnover procedures and requirements.

Requirements under RMO 10-2014 are almost the same as those of the ICARE, such as a mayor’s permit and a certificate of good standing with the BIR.

The accreditation and disaccreditation of importers and customs brokers will be approved by the chief of the ARMD.
Disaccredited importers or brokers can file for a reaccreditation one year after being disaccredited. They can also file for reconsideration with the Internal Revenue commissioner on any decision of the assistant commissioner for Collection Service.
The ICC and BCC may also be cancelled or revoked by the BIR upon discovery of any valid or compelling causes or reasons to do so.

Valid accreditation certificates issued by the BOC’s ICARE unit prior to the order took effect will remain valid until their expiry dates, and must be renewed three months before the expiration.

Pending applications filed with ICARE will be transmitted to the BIR and be prioritized, but will be covered by the new accreditation policies and procedures.

Renewal applications submitted to ICARE that were pending when the DO No 12-2014 was issued will still be processed by the BOC, while applications for renewal will be treated as new applications by the BIR. –– Roumina M. Pablo

February 18, 2014

Customs suspends 115 importers, brokers

 (philstar.com) | Updated March 7, 2014 - 4:26pm

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MANILA, Philippines - The Bureau of Customs suspended the accreditation 115 of importers and customs brokers who have repeatedly violated Customs policies and procedures in filing import documents as part of continuing efforts to reform the agency.

Seventy (70) companies or entities and 45 customs brokers had their accreditations suspended for non-compliance with the BOC’s policies on disclosure of detailed product descriptions for goods imported—the first time in recent history that a big batch of accredited importers and brokers were sanctioned for non-compliance with this policy.

Customs Commissioner John Sevilla said that the importers and brokers suspended will no longer be allowed to file import entries and will therefore lose the privilege to import goods.

“The importers and brokers we suspended habitually failed to provide detailed information about the goods they imported. Ang hindi paglalahad ng kabuuang detalye ng inangkat na produkto ay limit na palusot para mapababa ang customs duties and taxes nadapatbayaran. Simple lang ang ibigsabihin nito—ito ay mistulang technical smuggling. Hindi na namin papayagan pa ang lantarang pagsuway sa batas dito sa Bureau of Customs.”

In 2013, the Bureau’s Interim Customs Accreditation Registration (ICARE), suspended the accreditation of 26 importers and one broker for violation of customs rules and regulations.

Customs Administrative Order (CAO) No. 8-2007 and Customs Memorandum Order (CMO) 28-2007, which state that the imported articles must be described in sufficient detail for proper valuation and tariff classification. Importers and brokers are therefore responsible for enumerating details such as specific product description; make, model, variant and brand; and retail packaging or stock-keeping unit (SKU) in the import entries filed with the Bureau.

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The suspension of erring importers and brokers comes in the wake of the implementation of Customs Memorandum Order (CMO) 04-2014, issued last February 21, 2014. Section 3.5 of the  CMO states that “the existing accreditation of an importer or customs broker may be suspended, revoked or cancelled” if there are violations of the “Sworn Undertaking to strictly abide with existing rules and regulations on the Statement of Full Description of Imported Articles covered by entry declarations.”

Recommendations for suspension, revocation or cancellation shall be filed with the Legal Service Division of the BOC, subject to the approval of the Deputy Commissioner of the Revenue Collection Monitoring Group.

All suspensions, revocations and cancellation of accreditation, on the other hand, are acted upon by the Account Management Office (AMO).

“Let this be a warning to our stakeholders that we have zero tolerance for wrongdoing. They must do their part in helping reform the Bureau of Customs by complying with the law,” added Sevilla.

Last month, the BOC implemented new rules on the accreditation of importers and customs brokers, requiring applicants to secure clearance first from the Bureau of Internal Revenue (BIR) and get the necessary BIR Importer Clearance Certificate (BIR-ICC) or BIR Broker Clearance Certificate (BIR-BCC).

The new rules emanated from a recent order from the Department of Finance (DO No. 12-2014), as part of a holistic drive to thwart smugglers and are aligned with Revenue Memorandum Order (RMO) No. 10-2014 issued by the BIR which prescribes the guidelines and procedures for the issuance of BIR-ICCs or BIR-BCCs.

Meanwhile, Globe Telecom through its customs broker REQ Brokerage Services filed a motion for reconsideration Friday to lift the suspension order issued by the Bureau of Customs (BOC).

To date, neither Globe nor its broker has received the official order from the BOC pertaining to the suspension.

Atty. Froilan Castelo, Globe General Legal Counsel, clarified that the issue is a misinterpretation of the BOC administrative order that required brokers to describe imports in detail.

“The issue emanates from the limited number of characters (26 characters) provided in the online form that is supposed to describe the goods imported. This is why we always submit supporting documents as separate attachments because it is impossible to put all item descriptions in the online form,” Castelo said.

Castelo also revealed that all importations of telecom equipment, parts and accessories pass through the National Telecommunications Commission (NTC) for the issuance of certificate of import and permit to purchase with supporting documents itemizing all goods to be imported. 

Castelo added that Globe secures the Department of Finance (DOF) Endorsement Duty Free Exemptions under RA 7229 where the supporting documents include the NTC import permit and complete shipping documents detailing the imported items.

DOF easing importer accreditation procedures

by Raymund F. Antonio
April 30, 2014

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Importers and customs brokers hurting from stricter accreditation procedures could see some reprieve with the Department of Finance (DOF) moving to extend the deadline for accreditation.

BOC Deputy Commissioner for Assessment and Operations Coordinating Group Agaton Uvero said the DOF is planning to revise Department Order 12-2014 that transferred the accreditation system of the Bureau of Customs (BOC) to the Bureau of Internal Revenue (BIR).

“The deadline is going to be moved. It’s going to be a year round thing with BIR and Customs,” said Uvero.

The DOF might release the amendments to DO No. 012-2014 that will allow importers and brokers leeway to secure accreditation next week, he said.

Under the new rules, applicants seeking to register as importers with the BOC need to pass through stringent verification procedures by the BIR to get the necessary Importer Clearance Certificate (ICC).

Importers were given 90 days to submit their BIR clearance certificate within the date of application. Accreditation will automatically expire upon the lapse of the period.

The many requirements, however, are making it hard for importers to meet the deadline.

Only four importers were able to comply with all the requirements set by the BIR so far. There are 16,000 importers and brokers transacting with the BOC for their shipments.

“The issue for most brokers and importers is the short time for everyone to be accredited,” Uvero said.

BOC Commissioner John Phillip Sevilla earlier confirmed that the new accreditation system at BIR has been marred by complaints from importers.

He said importers are complaining about the “stricter” verification and accreditation procedures in the agency.

The DOF transferred BOC’s accreditation functions to BIR so the agency can use its extensive taxpayer database and information technology system to accredit importer-applicants.

Disaccreditation of importers

SUITS THE C-SUITE By Stephanie Vicente-Nava

First Published in Business World (06/09/2014)

A GREAT deal has been said about the new accreditation process imposed under Department of Finance Department Order (DO) No. 012-2014, dated Feb. 6. It would seem that there is a growing awareness among importers of the two-phase process for accreditation, the documents required to apply for a Bureau of Internal Revenue Importer Clearance Certificate (BIR-ICC) and a Bureau of Customs Importer Accreditation (BoC-IA), as well as the deadline to comply with the new accreditation rules. Most importantly, stakeholders now realize that their respective importer accreditation shall be deemed automatically canceled for failure to comply with the new accreditation rules on or before the scheduled deadlines, which may seriously disrupt business operations and cause large scale revenue loss.

While undergoing this new process, some importers have encountered various issues related to the preparation of the required documents, such as the processing time for securing a Certificate of Good Standing from the Securities and Exchange Commission, certified true copies of the Annual Income Tax Returns from the BIR’s District Offices and a National Bureau Investigation Clearance. Multinational foreign-owned corporations found it difficult to arrange for the personal appearance of their responsible or ranking officers, which is required by the BIR upon filing of the application for a BIR-ICC. Other importers are still coping with the challenges of satisfying the BIR’s criteria for accreditation prescribed under Revenue Memorandum Order (RMO) No. 10-2014, dated Feb. 10.

EXTENSION OF PERIOD TO COMPLY

In order give importers ample time to prepare and comply with the new accreditation requirements, DO No. 033-2014, dated May 21, was issued extending the period to file the proper applications with the BIR and BoC from the original deadline of May 22 to June 30 for importers with valid and existing accreditations.

To implement the above DO, the BoC issued Customs Memorandum Order (CMO) No. 11-2014, dated May 22, which contains a table of deadlines for compliance as follows:

· New applicants and those with I-CARE accreditations that expired before March 1 may apply for a BIR-ICC and BoC-IA any time before transacting with the BoC;

· Importers with I-CARE accreditations expiring between March 1 and May 31 must comply with the new accreditation process by May 31;

· Importers with I-CARE accreditations expiring between June 1 to 30 must comply on or before the expiration date of their existing I-CARE Accreditation; and

· Importers with I-CARE accreditations expiring from July 1 onwards must comply by June 30.

According to the CMO, the BoC will cancel all existing accreditations issued to importers who fail to meet the above deadlines effective July 1, or the date of the expiration of the existing accreditation.

PROVISIONAL BOC ACCREDITATION

The CMO also provides that an importer may secure a provisional or temporary BoC accreditation by submitting either of the following: 1) proof of application for a BIR-ICC consisting of the official receipt and the follow-up stub issued by the BIR Accounts Receivable Monitoring Division (ARMD); or 2) a provisional BIR-ICC, which is valid for a period of three months unless revoked sooner. As of the date of the drafting this article, the BIR has not released guidelines on the issuance of a provisional BIR-ICC.

While most importers are occupied with issues relating to accreditation, it is likewise important to understand the grounds for the disaccreditation of importers and its consequences.

ONE-YEAR BAN ON IMPORTING GOODS

The BIR’s ARMD is tasked with conducting a periodic verification of the compliance of importers issued with BIR-ICCs. In case of any findings of non-compliance with any of the BIR’s accreditation criteria, the ARMD, after due notice to the concerned importer, may cancel and revoke an importer’s existing BIR-ICC. The cancellation or revocation of the BIR-ICC has the effect of also canceling the BoC-IA since the latter is valid only for the same duration of the BIR-ICC. In this case, the concerned importer may file a request for reconsideration with the Assistant Commissioner of the BIR’s Collection Service and the Commissioner of Internal Revenue.

Another option for a disaccredited importer is to file a new application for accreditation with the ARMD when the circumstances that lead to the cancelation or revocation of the BIR-ICC have been rectified. However, the new application for a BIR-ICC may be filed only after the lapse of one year from the effective date of the disaccreditation. This means that the disaccredited importer will not be able to import goods into the Philippines for an entire year, which may cause severe supply shortages, slowdowns and eventually cessation of operations.

Hence, notwithstanding that the BIR-ICC is deemed valid for a period of three years, every importer should regularly perform a tax compliance review to ensure that the criteria for accreditation are continuously satisfied.

AUTOMATIC AUDIT BY THE BIR

The BoC may also suspend or cancel the accreditation of an importer for any inaccuracy or false information submitted in the application for a BoC-IA, non-compliance with the annual reportorial requirements, failure to report fraud upon customs revenue, and any violation in the sworn undertaking to abide by the regulations on the statement of full description of imported articles or the Tariff and Customs Code of the Philippines. In this case, the concerned importer may file for a request for the activation of his previous registration, which will be subject to the approval of the Deputy Commissioner of the Revenue Collection and Monitoring Group of the BoC.

The BoC-Accounts Management Office shall provide the BIR with a list of importers whose accreditations were suspended and canceled, as well as those disqualified for accreditation. The BIR, in turn, will endorse the list to the National Investigation Division for purposes of determining if there is tax fraud or evasion or the Revenue District Office or the Large Taxpayers District Office having jurisdiction over the concerned importer for the purposes of conducting a regular tax audit.

Hence, an importer who is disqualified or disaccredited by the BoC will be subject to an automatic audit by the BIR for potential deficiency internal revenue taxes. Such being the case, it is likewise important for importers to evaluate customs practices and procedures, review compliance with documentation, reportorial and other administrative requirements of the BoC. Doing so will not only to avoid possible exposure to deficiency duties and taxes, but also to ensure the uninterrupted right to import goods into the Philippines and avoid unnecessary disruptions to trade or business.

Stephanie Vicente-Nava is a senior director of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Importer, broker accreditation extended

portcalls.com/importer-broker-accreditation-extended/

Liza Almonte

Long queue of importers and customs brokers trying to beat the accreditation deadline at the Bureau of Internal Revenue. Photo courtesy of the Philippine Exporters Confederation.

The Department of Finance (DOF) has extended the accreditation period for Philippine importers and customs brokers with valid and existing accreditation by another month to July 31 from June 30.

Department Order (DO) 046-2014, dated June 26, 2014 and signed by Finance Secretary Cesar Purisima, said the extension was granted to give all concerned additional time to comply with all documentary requirements.

The order took effect immediately.

Under DO 046-2014, “Failure to file the proper application with the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) by the date stated in the immediately preceding paragraph (July 31), and in the manner prescribed by the pertinent rules, shall result in the automatic cancellation of the existing accreditation, if any, effective 1 August 2014 or the date of expiration as indicated in the original BOC accreditation, whichever is earlier.”

The extension comes amid much complaint over the BIR and BOC’s inability to process the deluge of importer and broker applications. The BIR and BOC are attached agencies of the DOF.

Before the issuance of DO 046-2014, all importers and customs brokers must respectively secure the importer clearance certificate (ICC) and broker clearance certificate from the BIR and another set of accreditation from the BOC by June 30.

Barring so would have meant that importers and customs brokers, one month from the June 30 deadline, would be delisted from BOC Client Profile Registration System. That means their import shipments will not be processed by the BOC.
Brokers’ strike
Some brokers’ groups began a strike on June 26 with the intention to carry the activity through June 30, in protest of the new DOF, BIR and BOC accreditation regulations.

As of press time, the Customs Brokers Council of the Philippines, Professional Customs Brokers Association of the Philippines, Inc (PCBAPI) and Aduana Business Club, Inc have yet to decide on whether to push through with the June 30 strike, according to Rey Soliman, executive vice president of PCBAPI, considering a one-month extension has been issued.

Soliman told PortCalls their groups are not budging from their position calling for the recall of all DOF, BIR and BOC orders on the new accreditation process.

He described the one-month extension of accreditation to July 31 as a “temporary relief… to lessen collection impact” at the BOC.
The groups along with the Chamber of Customs Brokers, Inc. (CCBI) were called to a meeting by Finance Undersecretary Carlo Carag on Friday.
Samson Gabisan, CCBI executive vice president, told PortCalls in a phone interview CCBI members are not joining the brokers’ holiday.
In the Friday meeting with the DOF, Gabisan said CCBI requested the accreditation extension be moved to December 31.
CCBI also asked for the “synchronization” of BIR and BOC requirements for accreditation to avoid redundancies.
Slow application

The importer and customs broker accreditation regulations have sowed confusion in the trading community, with complaints of long queues and ill-informed staff at the BIR and the BOC. There are also reports that the BIR can only accommodate 300 applicants every single day.

According to BOC Deputy Commissioner for Assessment and Operations Coordinating Group Atty Agaton Uvero, there are about 15,000 importers and customs brokers previously accredited by the BOC. All of these have to secure new accreditation from both the BIR and BOC.
As of June 17, Uvero said only 600 applicants have been processed by the BIR (see related story below).

On the other hand, BOC public information and assistance division chief Charo Logarta-Lagamon told PortCalls that as of June 25, the BIR has already denied 7,000 applications.

Request for extension

Even the BOC office that processes applications of importers and customs brokers recommended an extension in accreditation period. On June 20, the Account Management Office (AMO) sent a letter to Customs Commissioner John Phillip Sevilla seeking extension of the accreditation for two months or until August 31, due to clamor from stakeholders.

AMO chief Atty Jemina Sy-Flores noted that as of June 20, only less than 800 importers and brokers have complied with the accreditation.
Moreover, Flores said AMO received letters from stakeholders who fear non-processing of their shipments because the importer/customs broker was not able to comply with the deadline due to lack of requirements.

During a June 17 meeting with AMO officials, the Portusers Confederation said importers and brokers may not be able to comply due to delays in accreditation processing at the BIR.

- June 27, 2014

Importer, broker accreditation extended by another month

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Details

 

Category: Banking & Finance

27 Jun 2014

The Department of Finance (DOF) has extended the accreditation period for Philippine importers and customs brokers by another month, to July 31 from June 30.

Finance Secretary Cesar V. Purisima signed Department Order 046-2014 dated June 26, 2014, giving all concerned additional time to comply with all documentary requirements

The order took effect immediately, according to a statement released on Friday by the DOF.

Under DO 046-2014, “Failure to file the proper application with the Bureau of Internal Revenue [BIR] and the Bureau of Customs [BOC] by the date stated in the immediately preceding paragraph [July 31], and in the manner prescribed by the pertinent rules, shall result in the automatic cancellation of the existing accreditation, if any, effective
on August 1, 2014 or the date of expiration as indicated in the original BOC accreditation, whichever is earlier.” 

The Philexport News and Features also reported the extension comes amid much complaint over the BIR and BOC’s inability to process the deluge of importer and broker applications. The BIR and BOC are attached agencies of the DOF.

Under the previous rules, all importers and customs brokers must respectively secure the importer clearance certificate (ICC) and broker clearance certificate from the BIR and another set of accreditation from the BOC by June 30.

Barring so will mean that importers and customs brokers, one month from the June 30 deadline, will be delisted from BOC Client Profile Registration System. That means their import shipments will not be processed by the BOC.

A strike by some brokers’ groups is ongoing with the culminating activity scheduled on June 30, in protest of the DOF, the BIR and the BOC accreditation regulations. A DOF official will meet brokers’ groups on Friday to address their concerns.

The accreditation regulations have sowed confusion in the trading community, with complaints of long queues and ill-informed staff at the BIR and the BOC. There are also reports that the BIR can only accommodate 300 applicants every single day.

According to Customs Deputy Commissioner for Assessment and Operations Coordinating Group lawyer Agaton Uvero, there are about 15,000 importers and customs brokers previously accredited by the BOC. All of these have to secure new accreditation from both the BIR and the BOC.

As of June 17, Uvero said only 600 applicants have been processed by the BIR.

On the other hand, BOC Public Information and Assistance Division Chief Charo Logarta-Lagamon told PortCalls that as of June 25, the BIR has already denied 7,000 applications.

The Account Management Office (AMO), tasked to process applications of importers and customs brokers at the BOC, on June 20 wrote a letter to Customs Commissioner John P. Sevilla seeking extension of the accreditation for two months or until August 31, due to clamor from stakeholders

AMO chief, lawyer Jemina Sy-Flores, noted that as of June 20, only less than 800 importers and brokers have complied with the accreditation.

Moreover, Flores said AMO had received letters from stakeholders who fear non-processing of their shipments because the importer/customs broker was not able to comply with the deadline due to lack of requirements.

During a meeting on June 17, the Portusers Confederation raised the concern that importers and brokers might not be able to comply due to delays in accreditation processing at the BIR.

Flores said some have contended that automatic expiry of accreditation after the lapse of the prescribed period “will have an enormous negative impact on their business and the BOC collection.”