Action for Economic Reforms (AER) opposes the insertion of tax exemptions for local oil refineries in the Corporate Recovery and Tax Incentives for Enterprise (CREATE) Bill, which the bicameral conference committee (bicam) ratified on February 3rd. Section 295 paragraph G exempts local petroleum refineries from paying taxes and duties on crude oil imports, while Section 296 inserts crude oil refining in the Strategic Investment Priority Plan (SIPP).
The manner of the provisions’ inclusion in the final version of the CREATE Bill is highly questionable. These provisions were not included in either the Senate or the House versions of the bill; they were inserted at the last minute, bypassing any opportunity for public debate. Last minute insertions made by politicians result in an opaque policy process, as well as misguided, inferior policies. Perhaps the reason why these insertions were not included in either version of the two chambers of Congress is that they would not have held up under public scrutiny.
We disagree with House Ways and Means Chair Representative Joey Salceda, who justified the tax exemptions for oil refineries in a memorandum addressed to President Duterte last February 6. Rep. Salceda argued that the current tax regime disadvantages domestic refiners by imposing higher costs on those who import crude oil as compared to those who import finished petroleum products. Thus, he said that the CREATE provisions are simply leveling the playing field for domestic refiners and direct importers.
The last remaining oil refinery in the Philippines, the Petron refinery in Bataan, has been suffering from weak margins and temporarily closed down in January. Rep. Salceda argued that if the Petron refinery were to close down, our country would be exposed to a national security threat and become dependent on imports.
While the fiscal environment is an easy scapegoat to blame for the refinery’s distress, the reality is that our local refineries are not economically viable. Finance Secretary Carlos Dominguez III previously said that our refineries cannot “compete with larger end-to-end refineries with petrochemical complexes.”
The Philippines does not have the comparative advantage nor the economies of scale to be competitive in oil refining. Petron’s maximum productivity is at 180,000 barrels per day (bpd); in comparison, Singapore’s refineries produce 500,000 to 700,000 bpd; South Korea’s 700,000 to 800,000 bpd; and India’s 1.3 million bpd.
The real constraint that local oil refineries face is the inventory requirement of the Department of Energy, not the tax regime. The input value-added tax (VAT) of an oil refinery is lower than that of an importer of refined petroleum products. Meanwhile, oil refineries are more vulnerable to price squeezes because the DoE’s inventory requirement is 60 days’ worth of product, while an importer of refined petroleum needs to maintain an inventory of only 14 days. (In reality, the inventory for local oil refiners is around 40-45 days). Furthermore, as oil is a commodity, it is subject to price volatility.
As taxes are not the main factor behind the closure of local refineries, the misguided insertions for Petron will not make its refinery more efficient or scalable, nor are they likely to keep the refinery open in the long run.
Keeping our remaining oil refinery is more of an emotional reaction than it is a sound economic policy. Framing this as an issue of national security is a tired argument. Oil is almost absolutely scarce in the Philippines; we import 99% of our crude oil and even Petron imports its crude oil.
We must think long term and realize that the world is moving away from oil, as it should. Demand for petroleum was significantly reduced due to the COVID-19-induced lockdowns in 2020. But in the long-term, more and more countries are committing to lower their carbon footprint and shift towards renewable energy. New Zealand, for example, has already converted its sole oil refinery into an import terminal, rendering it completely dependent on imports for any of its oil needs.
Providing tax breaks for oil refining may benefit Petron’s bottom line in the very short term, but it is a futile policy which ultimately contradicts the country’s strategic investment priorities.
We call on President Rodrigo Duterte to exercise a line-item veto to remove the provisions exempting local petroleum refineries from duties and taxes and inserting crude oil refining in the Strategic Investment Priority Plan (SIPP) from the CREATE Bill.