OilVoice - Filipino Government Tax Dispute With Shell Ongoing

Filipino Government Tax Dispute With Shell Ongoing

Thursday, February 25, 2010

The Filipino government had become embroiled in a new row with Royal Dutch Shell over taxation of the firm's fuel business in the country. A tax dispute between the Anglo-Dutch major's local downstream subsidiary Pilipinas Shell Petroleum and the Bureau of Customs in the Philippines represents a further deterioration of relations between Manila and international oil firms operating in the country.

The long-running conflict between the state and Shell first reared its ugly head back in November 2009, when Joel Tan-Torres, the new customs director, demanded alleged tax arrears from Shell, to the tune of $160 million. The Bureau has demanded that Shell, which is the only foreign-based refiner operating in the country, pays the treasury taxes on imports of intermediate oil products made between 2004 and 2009.

The refiner, unsurprisingly, disputes the claims, arguing instead that its imports of standard and light catalytic cracked gasoline are exempt from excise duties as they are raw materials used in the production of unleaded premium gasoline.

The imposition of import duty on cracked gasoline, Shell adds, would amount to 'double taxation' as the same product would be taxed when it arrives at the port and when it leaves the refinery. Before the appointment of the new customs director, imports of cracked gasoline were ostensibly excluded from import taxes under the rules set out by the Bureau of Internal Revenue back in 2004.

On February 16, the row came to a head when Shell stopped importing refinery feedstock for its Tabangao refinery - which supplies around 30% of the national market. Shell made the call owing to fears of assets seizures by the Bureau. To prevent a fuel-supply crisis in the short-term, the government agreed not to seize Shell's imports until the Court of Tax Appeals made a ruling on the tax arrears' legitimacy.

This U-turn on excise tax classification is the latest arbitrary government intervention in the downstream oil sector motivated by political gain. In November 2009, President Gloria Arroyo froze fuel prices on the main island of Luzon to help its residents recover from devastating typhoons that ravaged the island in the previous month. Although the measure was soon revoked, the price freeze created an atmosphere of hostility between the national government and the oil companies operating in the region.

With its refining operations in the country already under review, the long-term impact of the ongoing dispute is that Shell could well become the latest foreign company to pull out of the low-margin business.