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DE RUEHML #3387/01 2840808
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O 110808Z OCT 07
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8565
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
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UNCLAS SECTION 01 OF 03 MANILA 003387 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EAP/MTS, EAP/EP, EEB/IFD/OMA 
STATE PASS EXIM, OPIC, AND USTR 
STATE PASS USAID FOR AA/ANE, AA/EGAT, DAA/ANE 
TREASURY FOR OASIA 
USDOC FOR 4430/ITA/MAC/ASIA & PAC/KOREA & SE ASIA/ASEAN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV PGOV RP
SUBJECT:  Subic Freeport Fuel and Vehicle Smuggling 
 
SENSITIVE BUT UNCLASSIFIED 
 
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Summary 
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¶1.  (SBU) Lack of political will and weak law enforcement has 
allowed wide-spread smuggling of refined petroleum products and 
second-hand vehicles through the Subic Freeport, seriously hurting 
legitimate businesses.  The Government is also losing badly-needed 
revenues (equivalent to between 4%-5% of tax collections and at 
least 0.6% of Gross Domestic product during 2006).  We are exploring 
ways to assist the American Chamber of Commerce and U.S. companies 
to advocate for a determined anti-corruption campaign targeting 
smuggling.  End Summary. 
 
--------------------------------------------- ---- 
Car Manufacturers Up Against Used-Vehicle Imports 
--------------------------------------------- ---- 
 
¶2.  (U)  Foreign automobile manufacturers in the Philippines 
complain that they were enticed to invest here with assurances of 
market protections, such as a general prohibition on entry of 
second-hand vehicles.  However, vehicle importers in the Subic 
Freeport (a former U.S. naval facility) challenged this restriction, 
arguing that the freeport is not part of the Philippine customs 
territory under the Bases Conversion Development Act (Republic Act 
7227) and that second-hand automobiles could legally be brought into 
Subic and sold in the domestic market, provided appropriate taxes 
and duties are paid. 
 
¶3.  (U)  Philippine lower courts ruled in favor of Subic?s 
used-vehicle importers.  The Supreme Court subsequently ruled in 
February 2006 that second-hand vehicles could be imported into Subic 
but that it would be illegal to move them out of the freeport.  The 
Supreme Court upheld its decision in August 2006 in response to a 
motion for reconsideration.  The Department of Finance instructed 
the Bureau of Customs to issue a Customs Memorandum Circular to 
implement the Supreme Court decision since court procedures do not 
allow a second reconsideration.  However, the vehicle importers then 
filed a "motion for clarificatory ruling." 
 
¶4.  (SBU)  According to officials from the Car Manufacturers 
Association of the Philippines (CAMPI), this latest motion merely 
repeats the used-vehicle importers? arguments.  However, because the 
Supreme Court allowed the parties to comment on the motion, the 
Customs Bureau has delayed implementing the earlier Supreme Court 
ruling on the matter. 
 
Converted Vehicles Illegally Sold in Domestic Market 
--------------------------------------------- ------- 
 
¶5.  (U)  Car manufacturers also stressed that most used vehicles 
enter the Subic Freeport with right-hand drive (mostly from Japan), 
then are converted to left-hand drive and auctioned.  Republic Act 
8506, issued in February 1998, prohibits the importation of 
right-hand automobiles, mainly for safety reasons.  However, a 1999 
Department of Justice (DOJ) opinion declared that it was legal to 
import right-hand drive vehicles into the country's freeports, 
provided that they are re-exported. 
 
¶6.  (SBU)  The re-export requirement has been poorly enforced and 
many converted vehicles are illegally smuggled into Philippine 
customs territory.  A 2005 Senate hearing estimated that only about 
130 (0.1%) of about 90,000 right-hand drive vehicles that entered 
the Subic Freeport from 2001-2003 were re-exported. 
 
¶7.  (SBU)  Car manufacturers here estimate that roughly 70% of 
foreign-origin used vehicles flow through Subic.  The Port of Irene 
in the Cagayan Freeport Zone (about 600 kilometers north of Manila) 
is another major entry point of converted right-hand drives 
illegally sold in the Philippine market. 
 
Vehicle Manufacturing Weakest in South East Asia 
--------------------------------------------- ---- 
 
¶8.  (SBU)  Ford Motor Philippines officials told us that the illegal 
sale of converted, second-hand automobiles is their priority issue. 
They expressed alarm that the second-hand vehicle "gray market" has 
grown to about as large as the sum of local manufacturing and 
legally imported finished automobiles.  They noted the large 
discrepancy between new vehicle registrations with the Land 
Transportation Office (174,108 units in 2006) versus legal sales 
 
MANILA 00003387  002 OF 003 
 
 
(99,541 units), attributing most of that difference to used-vehicle 
imports.  The Ford officials estimated that the Philippine vehicle 
manufacturing industry is operating at only 30% capacity. 
 
¶9.  (U)  Other industry sources noted that in 2006, vehicle 
production in the Philippines was less than 10% of Thailand's, and 
less than 15% of Indonesia and Malaysia?s production volumes.  They 
noted that these countries have been more effective in implementing 
restrictions on second-hand vehicle imports. 
 
--------------------------------------- 
Fuel Smuggling: Another Serious Concern 
--------------------------------------- 
 
¶10.  (U)  Chevron Philippines executives noted that Republic Act 
8479 (the Downstream Oil Industry Deregulation Act) opened the 
downstream oil industry to greater competition in the mid-1990s. 
The law attracted investments from both foreign and local companies 
in oil refining, fuel storage, distribution infrastructure, 
transport and marketing.  However, smuggling of refined oil products 
creates unfair competition for legitimate refiners and importers. 
Although the Subic Freeport is the focal point of smuggling, the 
problem also exists in a number of other ports in the country. 
 
¶11.  (SBU)  The Chevron executives observed that Subic imports far 
more fuel than it consumes.  Much of the fuel is improperly declared 
in terms of volume, value, and/or fuel type to avoid the appropriate 
duties, value-added and/or excise taxes, and then enters Philippine 
customs territory.  Fuel also leaves the Subic Freeport for other 
tax-free export zones managed by the Government's Philippine 
Economic Zone Authority, but the products are diverted to retailers 
instead. 
 
Fuel Statistics Reveal Smuggling 
-------------------------------- 
 
¶12.  (U)  Citing data from the Philippine government's Land 
Transportation Office, Chevron officials told us that vehicle 
registrations over the last ten years increased by nearly 7% 
annually; on the other hand, gasoline demand expanded by only 0.6% 
per year.  They also said that oil fuel sales declined by an average 
7.7% over the past two years according to Philippine Department of 
Energy data while the Philippine economy averaged 5.8% real Gross 
Domestic Product (GDP) growth. 
 
--------------------------------------------- --------- 
Smuggling Robs the Government of Badly-Needed Revenues 
--------------------------------------------- ------- 
 
¶13.  (SBU)  In addition to harming legitimate businesses, fuel and 
used-vehicle smuggling are robbing the government of badly-needed 
revenues.  The car manufacturing industry estimates the Philippine 
government lost 5-10 billion pesos in taxes during 2006 on smuggled 
cars.  The Petroleum Institute of the Philippines (an organization 
of downstream oil companies) estimates that fuel smuggling deprived 
the Philippine government of nearly 30 billion pesos in revenues 
last year.  The combined revenue loss from used?vehicle and fuel 
smuggling equaled about 0.6% of Philippine GDP and more than 4% of 
tax collections.  The Federation of Philippine Industries estimates 
that the Government could be losing well over 100 billion pesos 
annually from smuggling in general. 
 
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Still a Question of Political Will 
---------------------------------- 
 
¶14.  (SBU)  The joint foreign chambers in Manila and affected 
industry groups have intensified efforts in recent months to urge 
the Philippine government to enforce laws and regulations to curb 
the illegal sale of converted second-hand vehicles and smuggling of 
fuel products, especially through the Subic Freeport.  It remains to 
be seen whether the newest anti-smuggling task force, headed by a 
new anti-smuggling czar, will yield better results.  Despite 
frequent industry and business chamber representations with senior 
Philippine government officials, including President Gloria 
Macapagal-Arroyo, political will seems to be lacking.  Lack of more 
rigorously-estimated business and revenue impacts makes it difficult 
to determine whether the situation has worsened or improved through 
the years.  Nevertheless, legitimate businesses consider smuggling a 
major challenge and feel that anti-smuggling campaigns have not been 
pursued with vigor. 
 
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MANILA 00003387  003 OF 003 
 
 
Comment 
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¶15.  (SBU)  The persistence of smuggling in the Philippines not only 
hurts legitimate businesses and cuts into much needed revenues for 
the Government, but also casts a cloud over the investment climate 
and calls into question the Government's sincerity to fight 
corruption.  We will continue to work with the American Chamber of 
Commerce, other business and industry associations, and affected 
U.S. companies to keep government attention on the problem of 
second-hand vehicle and fuel smuggling and to advocate for a 
determined anti-smuggling campaign in the Subic Freeport.  We are 
also exploring ways to use the U.S. technical assistance projects to 
keep pressure on for a more sincere and vigorous anti-smuggling 
drive.  End Comment. 
 
Jones