Business World, 14 April 2013

(with Loreli Cataylo-de Dios*)


Until recently, there was a tendency to throw the government’s two main revenue-collecting agencies into a single (rotten) pile. The slow but steady gains in credibility, policy, and ultimately revenue at Kim Henares’ BIR, however, have cast a long shadow on its Customs cousin, whose leadership by contrast has been plagued by reports of heedlessness and rank amateurism, if not indeed outright corruption. The pot appears finally to have boiled over with the uproar over the continuation of oil smuggling, with the swine, rice, garlic, and onion producers chiming in. (If egg producers had also complained it might have been called the tosilog coalition.)

Beyond their common mandate of revenue collection and association with corruption in the public mind, however, the two agencies each have their idiosyncrasies. These differences affect the nature and extent of internal corruption in each and should be considered in any project to reform them.

The first and biggest difference has to do with the timing of the transactions involved. Paying an income tax or filing VAT returns is mostly a paper transaction that records business done ex post, or after the fact. The filer has already made the money and is only deciding whether to state the amount truthfully or not. By contrast, the entire Customs process — from lodging an import-entry declaration to the release of the cargo — is an ex ante transaction before the cargo in question can be used to generate income. This implies that the potential to hold the taxpayer hostage is greater at Customs than at BIR.

An income-tax dispute is a long-drawn out affair that almost always winds up in court. Even as the case is pending, however, the business can still operate normally and need not pass up any opportunities. By contrast, a dispute with Customs leads immediately to a hold-up of the shipment. (Even a quick “tentative release” is a discretionary affair.) For a business, however, the failure to have a shipment released will almost always disrupt current operations and cause delays, leading to foregone profits (not to mention incurring storage fees). On a peso-for-peso basis, therefore, a corrupt Customs bureau can probably harm business more than a corrupt BIR can. The ability to impose large potential losses via a “hold up” increases the bargaining power-and therefore corruptibility-of Customs officials, as well as the private sector’s willingness to accommodate them.

Moreover, the ex ante nature of corrupt transactions at Customs, together with the large amounts involved, makes smuggling more akin to an investment decision under uncertainty. (In contrast, gains from tax evasion at the BIR are more like windfall profits in the course of normal business, or maybe something like an illegal tax incentive.) The natural response of business to uncertainty, however, is to try to reduce it. It should be expected, for this reason, that no large-scale smuggling would even be attempted without a reasonable assurance that the corrupt deal is secure even before the shipment arrives. This makes it likely that payoffs are made all the way up the chain. The image of boats off the coast on a  moonless night may be romantic, but is hardly the modern paradigm of smuggling. More like paying everyone off and breezing through the customs gates in broad daylight with an escort.

A second difference has to do with the number of actors involved and frequency with which they transact with the agencies. Unlike at the BIR, the authority to transact with Customs is effectively monopolized by a “guild,” namely licensed customs brokers. Congress has even foolishly passed a law cementing that monopoly. The Customs Brokers’ Act (2004) mandates that only licensed customs brokers can act as “declarant.” Before this, anyone could fill out and sign his own import entry declaration, just as anyone could file an income tax return in one’s own name.

In the law and in practice, therefore, a small-numbers problem exists on both sides at Customs, with a club of brokers dealing with their counterpart club of Customs officials. Add to this the almost daily frequency with which brokers must transact business with customs agents (unlike at BIR where contacts between filers and collectors are annual or at most quarterly), and you have a heady brew of familiarity that fuels corruption. Reliable suki systems are formed between brokers and examiners, which is also why hefty protests are raised when transfers occur. Indeed, familiarity and regularity are so entrenched that many Customs employees can even afford to delegate their official work (and unofficial corruption) to paid surrogates (a.k.a. hao-shao), since the employees themselves presumably already find themselves on the backward-bending portion of their labor supply curves. This is an economic phenomenon that occurs only at high levels of wealth.

Finally, consider that BIR dealings are almost exclusively financial and paper-based. This makes it possible to audit someone’s returns, impersonally, even if separated in space and time. In contrast, BoC transactions inherently involve not only paper documents but also the examination and movement of goods and materials. This has three consequences: first, there is an irreducible minimum of face-to-face contact between Customs people and importers. Among the weakest links in the current system is the lack of concordance between records on paper and the tete-a-tete facts on the ground. (The billions spent on episodic “computerization” have not solved this, the data from Customs itself being tainted; meanwhile dubious IT contracts are themselves an issue.) An obvious measure is a closer monitoring of examiners’ behavior. Beyond this, however, what clearly is required is a system of post-audits using third-party data external to BoC itself. It may not be a bad idea, for example, for Customs to use BIR and SEC data to check on prices paid and the legitimacy of consignee firms, or for the BIR to audit brokers and their clients as cross-checks on customs valuation.

A second consequence is that while key BIR personnel consist almost exclusively of accountants and lawyers shuffling documents, at Customs one has a plethora of differently skilled people involved in different stages of processing goods: from appraiser or examiner, to crane operator, warehouseman, wharfinger, and X-ray operator, down to Customs guard. Each of these, in his own sphere, is a mini-autocrat who can singlehandedly inflict costs and delays — and who therefore becomes entitled to a cut of corruption rents. This multiplicity of actors, complexity of processes, and overlapping jurisdictions make Customs corruption both more costly (read Shleifer and Vishny) and less amenable to direction from above-more of a homeostatic organism with differentiated parts.

A third consequence of the physical nature of customs transactions is that physical conditions and premises do matter. Border corruption is facilitated by weak controls over the movement of goods, a challenge not present at the BIR. For this reason, even a security guard position at Customs is a coveted plantilla item; not so at BIR. The government makes it harder on itself, therefore, by dispersing bonded warehouses throughout the metropolis — an absurd invitation to physical smuggling and plain theft. If only port operators and shipping lines agreed, then a single commodious international seaport (rather than three) on the west Luzon coast could have prevented the thousands of container vans mysteriously disappearing in the course of being “transhipped” from Manila to Batangas. If only brokers and importers had cooperated, how much easier would it be if all bonded warehouses were in one huge and secured lot. Or if only Customs and Coast Guard worked as one and were properly equipped with seaborne assets and detection equipment, what might they not have accomplished in deterring physical smuggling (not to mention poaching and intrusion in Panatag Shoal and Tubbataha Reef).

The full implications for policy reform of the foregoing are too long to discuss. The only point is to suggest that Customs may in some respects be a tougher governance nut to crack than BIR. So it may be unseemly to expect the same smart results. On the other hand, this also implies that turning that agency around may call for leadership of a far, far higher calibre than has so far been available.

It is telling, perhaps, that while one can cite (a few) BIR heads who in the past cracked down on corruption and raised revenue effort, one is hard put to name a Customs commissioner who did both. Indeed what comes to mind are the many who did neither.


*L.Cataylo-de Dios conducts research on trade and investment facilitation.