Case Analysis: Flood Control Project Anomalies, Customs Violations, and Tax Compliance Risks

Background

The Philippine government is intensifying its investigation into alleged anomalies in flood control projects, following public outrage over reports of “ghost” projects and contractor cartels. President Ferdinand Marcos Jr. revealed that only 15 contractors cornered nearly ₱100 billion worth of flood control contracts — about 20% of the ₱545.6 billion allocated since 2022 — with some projects either substandard or never built.

Among the contractors under scrutiny is the Discaya family, whose acquisition of at least 63 luxury vehicles — far more than the 28 publicly admitted — has raised suspicions of smuggling, tax evasion, and illicit enrichment.

In response, Finance Secretary Ralph Recto convened BIR Commissioner Romeo Lumagui Jr. and Customs Commissioner Ariel Nepomuceno to fast-track coordinated enforcement through tax audits, customs fraud audits, and lifestyle checks.

Key Issues Discussed in the DOF Meeting

1. BIR: Fraud Audits, Lifestyle Checks, and RR No. 17-2024

The BIR is conducting parallel fraud audits on flood project contractors, examining underreported revenues, padded expenses, and false invoices. Commissioner Lumagui confirmed that the agency issued Letters of Authority (LOA) to investigate the top 15 contractors, including the Discayas.

Enforcement is guided by Revenue Regulation No. 17-2024, which:

• Requires contractors to secure updated tax clearances before receiving final government payments.

• Suspends disbursements to non-compliant firms.

• Allows the BIR to apply unpaid balances as tax liens to settle obligations.

This ensures that only contractors with accurate and updated tax filings benefit from public funds.

2. BOC: Customs Fraud and Post-Clearance Audits

The Bureau of Customs is reviewing import records of contractors to identify misdeclaration, undervaluation, or smuggling. Under the Customs Modernization and Tariff Act (CMTA):

• Section 1400 (Misdeclaration): Penalizes inaccurate declarations with forfeiture, 250–500% surcharges, and possible criminal liability.

• Section 1401 (Smuggling): Imposes prison terms of 12–20 years for goods valued over ₱50 million, and reclusion perpetua for over ₱200 million.

For the Discaya family, Customs audits will verify whether proper duties were paid on their luxury cars and imported materials. Any irregularity may result in seizure and prosecution.

3. Lifestyle Checks and Broader Accountability

The DOF meeting also emphasized lifestyle audits on both contractors and government officials. Authorities will cross-check visible wealth — luxury cars, properties, lavish spending — against declared income and taxes paid.

This broader crackdown already led to:

• Suspension of DPWH officials linked to anomalous projects.

• Demands for courtesy resignations across the DPWH.

• Commitment to lifetime bans and criminal charges for contractors proven to have engaged in ghost projects or fraudulent imports.

Broader Legal Framework

• National Internal Revenue Code (Sec. 235): Authorizes multiple audits in fraud cases, supporting BIR’s intensified RATE investigations.

• Run After Tax Evaders (RATE) Program: Enables prosecution of willful tax evasion.

• Post-Clearance Audit (Customs): Allows retroactive verification of import declarations, duties, and taxes.

Together, these mechanisms form a dual enforcement strategy: tax fraud is pursued through BIR audits and RATE cases, while smuggling and misdeclaration are prosecuted under the CMTA.

Compliance Lessons

For contractors, suppliers, and high-net-worth individuals:

1. Update tax clearances regularly. Under RR 17-2024, payments hinge on compliance.

2. Declare imports accurately. Avoid misdeclaration that leads to seizures and penalties.

3. Ensure lifestyle matches declared income. Visible wealth without tax support triggers audits.

4. Keep detailed records. Authentic receipts, invoices, and clearances are vital.

5. Conduct internal audits. Identify risks before regulators do.

6. Engage professional advice. A CPA-lawyer can guide customs and tax compliance strategies.

   
   
   
   

Conclusion and Disclaimer

The Discaya controversy illustrates how Customs and BIR are working in tandem to address corruption in flood control projects. By linking tax compliance to government payments and auditing both imports and lifestyles, authorities are signaling that luxury assets and public contracts cannot be enjoyed without accountability.

Disclaimer: This article is for informational purposes only and does not constitute legal advice. For tailored guidance on customs or tax compliance, consult a qualified CPA-lawyer.