Sink or swim: liberalizing Philippine cabotage

SUITS THE C-SUITE By Stephanie V. Nava

Business World (08/10/2015 – p.S1/2)

Being an archipelago, the Philippines needs an efficient maritime transportation industry to attain inclusive growth and economic progress, since shipping links the islands and connects archipelagic economies to international commerce and trade.

However, the development of the Philippine maritime industry has been constantly challenged by high costs, low quality of service, a poor safety record, as well as policy and regulatory restrictions. Republic Act (RA) No. 10668, signed into law by President Benigno S. C. Aquino III on 21 July 2015, aims to address these challenges principally by giving foreign vessels access to multiple ports in the country for the transport and co-loading of foreign cargoes, thereby lifting the restriction on cabotage prescribed under the Tariff and Customs Code of the Philippines of 1978 (TCCP).

Cabotage is defined as the carriage or transportation of passengers or cargo between two points within a country, by a vessel or vehicle registered in another country. The right to engage in cabotage is generally restricted by countries with coastlines to protect national security and safeguard its domestic shipping industry from foreign competition.

Under the TCCP, the right to engage in Philippine coastwise trade is limited to vessels carrying a certificate of Philippine registry. Foreign vessels are required to obtain clearance and authorization from the Commissioner of Customs for transporting articles arriving through any port of entry to the port of destination in the Philippines or departing through a Philippine port. Thus, only domestic vessels may serve domestic routes or engage in the transport of cargoes from one Philippine port to another.

Consequently, foreign vessels carrying imported goods into the Philippines are required to unload their cargo at the port of entry. The same cargo will be re-loaded onto a vessel operated by a local or domestic carrier for transshipment to their final local destination. This transshipment accounts for additional costs in transporting imported products and raw materials to distribution areas and manufacturing sites, which ultimately increases consumer prices.

With RA No. 10668, foreign vessels can now transport foreign cargo to the final port of destination in the Philippines after being cleared at the Philippine port of entry, as well as carry foreign cargo intended for export from a Philippine port of origin through another Philippine port to its foreign port of final destination. Foreign vessels may also enter into co-loading arrangements with other foreign vessels for the carriage or transportation of foreign cargo within the Philippines. Thus, foreign shippers, importers and exporters are no longer required to engage the services of a domestic shipper for the transshipment of a foreign cargo from one port to another port within the Philippines.

This then enhances the competitiveness of importers and exporters in international trade and reduces shipping costs of imported and exported cargoes for the benefit of consumers. Government agencies, including the Department of Finance (DoF), Bureau of Customs (BoC), Department of Trade and Industry, Bureau of Immigration (BoI) and all Port Authorities are tasked to promulgate the necessary rules and regulations within sixty (60) days from the approval of the RA.

For its part, the BoC is speeding up operations in order to institutionalize and implement the reforms necessary to support this thrust by the government to improve Philippine trade. The issue of port congestion is being addressed through collaboration with various sectors in finding strategic and long-term solutions. At the same time, a BoC Code of Regulations and Manuals compiling various BoC regulations and processes is being drafted for publication to provide stakeholders with a single reference for BoC transactions. Measures are also being undertaken to enhance the use of digital and information technology in Customs offices nationwide.

While efforts are being carried out to ensure the effective implementation of RA 10668, the government should also recognize the pressure that will be placed by the liberalization of Philippine cabotage on domestic shippers who are about to face tough competition from foreign players eager to partake in the domestic shipping market.

To anticipate the consequences of an open cabotage regime, domestic shippers urgently need to modernize their fleets and shipping operations in order to compete with foreign counterparts operating highly-efficient, larger and faster ships equipped with state-of-the-art marine technology.

Prevailing laws grant certain incentives to Philippine shipping enterprises and allied businesses. The acquisition of new vessels, construction of ships of at least 500 Gross Tonnage, manufacture of parts and components thereof, repair of all types of vessels and domestic/inter-island shipping or water transport are included in the list of preferred activities under the 2014 Investment Priorities Plan, which may be entitled to tax incentives under the Omnibus Investments Code.

However, the reality is that the implementing requirements make it difficult for them to claim the benefits. For example, in order to avail of the tax and duty-free importation of capital equipment and spare parts, a BoI-registered enterprise must present to the BoC upon importation, a favorable written endorsement from the DoF. Otherwise the importation of the same shall be subject to full duties and taxes. A DoF Certificate of Endorsement may be secured by submitting a letter of request addressed to the Secretary of Finance including various documents such as an Affidavit of End-Use/Ownership, Import Bill of Lading/Airway Bill, Import Invoice, Bank Transaction/Purchase Order/Telegraphic Transfer, and Certificates of Authority and Registration.

The DoF Certificate of Endorsement is valid only for a particular shipment. This means that the BoI-registered enterprise is required to apply for and secure a DoF Certificate of Endorsement for every shipment of capital equipment and spare parts in order to avail of the incentives on the importation thereof. Similarly, local manufacturers or dealers who sell machinery, equipment, materials and spare parts to a Philippine shipping enterprise are entitled to tax credits for the full amount of import duties and taxes actually paid on said articles. However, they must first obtain a favorable recommendation from the Maritime Industry Authority and the approval of the Secretary of Finance.

An open cabotage regime may be good for the Philippine economy. Hence, the government should vigorously pursue the necessary reforms and speed up the implementation of RA 10668 so as to realize the objectives of the law. Nevertheless, local shipping players should not be left to sink or swim. Positive action, such as the rationalization of the processes for the granting of tax incentives to domestic shippers must also be undertaken by Government to ensure that the local shipping industry is positioned to effectively compete with their foreign counterparts.

Stephanie V. Nava is a Principal of SGV & Co.