Financial Transparency Coalition

The Philippines has made significant progress on its quest to confront corruption and tax evasion under the guidance of President Aquino. However, a new report by Global Financial Integrity shows one important—and growing—component of the problem is trade mispricing, specifically import under-invoicing, and its role in facilitating tax evasion in the Philippines.

In June 2010, Benigno Simeon Cojuangco Aquino III assumed his position as the 15^th President of the Philippines. As a Senator, before his election to the Presidency, Aquino pursued an anti-corruption agenda. For example, Aquino contributed to the Preservation of Public Infrastructures bill—which raised standards in public infrastructure construction by penalizing contractors involved with faulty and low-quality construction—and the creation of a Congressional Oversight Committee to ensure the proper use of intelligence funds.

Since assuming the presidency, Aquino has pursued an agenda of economic growth and anticorruption. As part of this agenda, Aquino has also aggressively gone after tax dodgers and appointed the ruthless Kim Henares to head the Bureau of Internal Revenue. Henares has sent federal prosecutors after actresses, a doctor, and other auspiciously-wealthy individuals.

In fact, one of the Philippines’ most common forms of corruption is tax evasion. The government estimates that each year its residents fail to pay about $10 billion in tax revenue—or about four percent of GDP.

A new report by Global Financial Integrity highlights one important part of this problem—tax revenue loss from trade misinvoicing. Unlike many other countries which have problems with tax evasion on illicit outflows, the Philippines has a problem with tax evasion on illicit inflows—mostly in the form of import under-invoicing.

Here’s how it works: Suppose a Philippine electronics company wants to evade some taxes. The company chooses to import $100,000 worth of televisions from the United States. Instead of reporting the full $100,000, the electronics company reports only $50,000 to the authorities, and pays taxes on that amount.  The company’s U.S. trading partner takes $100,000 for the televisions, reports the $100,000 on its own invoice.

But the $50,000 discrepancy is also reflected in the difference between what the United States says it exported to the Philippines and what the Philippines reports it imported from the United States. Trade data is bilateral, which means that we can compare what the Philippines says it exported to the world against what the world says it imported from the Philippines. GFI uses this feature of the statistics to estimate the magnitude of trade mispricing between countries.

In this report, going beyond its traditional analysis, Global Financial Integrity also calculated the effective tax revenue loss on these figures. The study’s authors found the Philippines is losing an average of $1.46 billion in tax revenue to trade misinvoicing every year. This equates to roughly 25 percent of the value of all goods imported to the Philippines, which means that one out of every four dollars went unreported to customs officials.

Clearly these figures are huge and deserve significant attention from President Aquino. Fortunately the Philippine President has already proven he’s willing to go after this insidious form of corruption. Let’s hope he can be as ruthless toward importers as he is with the conspicuously wealthy.