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Untaxed ‘hidden’ income of oil companies

08:01 PM March 29, 2012

Former Budget Secretary Benjamin Diokno proposed a 2-percent reduction in value-added tax—from 12 to 10—to ease rising oil prices. But the government is not sold to the idea, fearing that a reduction in government revenues could affect the delivery of basic services.

In my opinion, the VAT on oil can be reduced to 10 percent without diminishing government revenues.

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Oil companies, whose revenues are in billions of pesos, derive substantial profits not only from selling oil but also from interest on VAT deposits. And this “interest income” comes in hundreds of millions or even billions of pesos.

Few of us realize that the interest the oil companies earn from the banks include the interest on the VAT paid by the consumers. The VAT paid by consumers is deposited in the chosen banks of the oil companies. It is remitted every 20th day of the month. Therefore the VAT, from day 1 to day 19, while in banks, earns interest for the oil companies. However, the VAT remitted by the oil companies to government does not include the interest thereon, which then becomes part of the income of these companies.

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There must be a way to collect from the VAT interest (in fact, not just from the oil companies but also from the other industries): imposing a windfall tax is just one of them and such would be fully justifiable; and the government should not allow the oil companies to pass it on to consumers.

From my past experience working for an oil company, I think the specific tax on oil products would be more advantageous for the government in terms of revenue generation and it will not contribute to increasing oil prices as much as VAT does.

Specific taxes are collected upon the entry of imported oil into customs territory. With refiners, specific taxes are collected upon production. In other words, specific taxes are collected “in advance,” that is, before oil products are sold; in the case of VAT, government has to wait for the sale to be able to collect.

Moreover, petroleum products decrease in volume while in storage or transport because of either evaporation or volume contraction due to drop in temperature. In fact, industry standards consider as normal a volume loss of 0.5 percent for gasoline, and .25 percent for diesel, kerosene and fuel oil. In other words, with specific tax, the government is able to derive revenue from  these volume losses. In plain language, the specific tax is applied on a much bigger volume.

The specific tax form of taxation, aside from its volume advantage, also corrects the present anomaly where the interest income earned from the tax payments of consumers becomes the income of the oil companies.

The Department of Energy should study what amount of specific tax is appropriate, taking into consideration the points discussed above.

—ERNIE ADAYA, [email protected]

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TAGS: letters, oil companies, oil prices, taxes
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