Cash fraud problem
Oh no, our beloved senators already started to use the “F” word.
The occasion had something to do with the “sin” tax law, or RA 10351, passed by Congress in 2012 to overhaul the excise tax system on tobacco and liquor. As our lawmakers revisited the effects of the law, it became certain to lawmakers that some people were getting away with massive cheating in “sin” tax payments. And so some senators uttered the “F” word—yes, the much-dreaded criminal offense called “fraud.”
Early this year, for the sake of the other senators who were busy toasting Vice President Binay, the Joint Congressional Oversight Committee on CTRP (or the comprehensive tax reform program) called for hearings on the “sin” tax. At that time, news reports erupted regarding a controversial memo of Finance Secretary Cesar Purisima, addressed to both the BIR and the BOC, ordering them to investigate a little-known Bulacan-based company called Mighty Corp. for possible cheating in the payment of taxes.
The BOC since then has padlocked the bonded warehouse of Mighty, accusing the company of diverting its importation of tobacco and filter to the domestic market, although the company declared the imports as bound for re-export.
The BIR never submitted any finding to the DOF.
Still, the heads of the oversight committee, namely, Sen. Juan Edgardo Angara and Rep. Romero Quimbo of Marikina, called for a congressional inquiry on the implementation of the “sin” tax law —not the cheating.
About three months ago in September 2014, however, the STSRO (Senate Tax Study and Research Office) submitted an explosive report to the Senate ways and means committee, also headed by Angara, indicating some questionable claims and practices of Mighty.
Perhaps in reaction to the STSRO report, certain senators exclaimed that Mighty could be liable for tax fraud—yes, boss, some bright guys were actually stealing the cash that should have gone to public health care!
You see, the “sin” tax law required that some 85 percent of the “sin” tax collection should be used for our health care. Imagine how many people would be denied health care if cigarette makers would cheat on only 10 percent of their “sin” tax payments. This year 10 percent of the possible “sin” tax collection from the cigarette industry would already amount to P10 billion. And that was only 10 percent cheating!
Anyway, the Tariff and Customs Code specified that the penalty for fraud would be imprisonment of two to eight years, plus payment of fine several times over the amount of the unpaid taxes and duties. Now, the STSRO report said that Mighty declared 99 percent of its tobacco leaf and filter importation for re-export—almost none for domestic use. The STSRO added that Mighty itself, in several official documents submitted to government offices, indicated that it exported only 1.5 percent of its total production of cigarettes.
And it was precisely the scheme that the BOC uncovered when it padlocked the bonded warehouse of Mighty—the diversion of raw materials meant for re-export toward the domestic market. As it turned out in the committee hearings, all cigarette makers in the Philippines must import tobacco leaf that they blend with local tobacco, although they actually bought up all locally grown tobacco leaf, which they then sell abroad to other cigarette makers.
Incidentally, Angara had an interesting observation on Mighty, as he noted that the company continued to produce tens of millions of packs of cigarettes, when the BOC—supposedly—already padlocked its bonded warehouses.
As soon as the STSRO report came out, some news reports quoted some other congressmen who tried to discredit the STSRO report, claiming that it was based on another study conducted by the UK-based Oxford Economics. Well, the Oxford study indicated massive cheating in the payment of the P12-per pack “sin” tax on cigarette last year. Apparently, another cigarette maker—Philip Morris Fortune Tobacco Corp.—commissioned the Oxford study.
And so the PR guys of Mighty went to town to discredit the study as being biased. Even some BIR officials, who were ever supportive of Mighty, chimed in with their own castigating statements against PMFTC.
What do you know—the STSRO report did not use a single data from the Oxford study. As a matter of fact, early in the hearings, both Angara and Quimbo called on the BIR and the BOC to furnish the committee with “complete” data on everything related to the “sin” tax payments of the cigarette industry. The STSRO people made it clear in the hearings that their report used only official data from government offices such as the BIR, the BOC, the Department of Trade and Industry and the National Tobacco Administration.
Anyway, the STSRO report indicated that Mighty could be involved in fraudulent activities such as the undervaluing of tobacco and filter importation to evade customs duties and VAT. For instance, it cited the documents from the DTI, furnished by foreign suppliers of cigarette filters, which showed that they sold filters to Mighty at much higher prices than what Mighty declared to the BOC.
Still, to the guys down here in my barangay, the biggest issue in the “sin” tax scheme remained the alleged massive tax evasion of cigarette companies. The BIR collected the P17-per-pack excise tax on cigarettes, based on the volume of cigarettes leaving the factories of the cigarette makers. Question: Did the companies declare all the cigarettes that went out of their factories?
Reports already indicated that, for some time, Mighty sold cigarettes at prices that were much lower than their cost, plus of course the prohibitive excise tax of P15 per pack (2013) and P17 per pack (2014).
One solution instituted by the DOF was the use of CCTV at the cigarette factories, apparently to tape the activities there, possibly to catch on record any attempt of the companies to sneak out production without paying the excise tax. The problem—regarding ex-factory cash fraud —was that the cigarette companies could still apply all sorts of imaginative schemes to avoid the CCTV detection. Well the cameras were placed somewhere at the corners of the factories.
In Malaysia in comparison, the government installed the CCTV system right at the packing machines of the cigarette companies, allowing the authorities to verify just exactly the volume of production that the companies claimed. Official data showed —although the STSRO did not touch on them yet—that Mighty for instance suddenly went into frenzy in expanding its capacity, by importing lots and lots of packing equipment.
It was estimated that Mighty’s plant in Bulacan would now have the yearly capacity for some 4,350 million packs of cigarettes. Official claim of Mighty turned out to be 680 million packs in 2013, and 200 million packs in the first half of 2014, for which it paid the punitive “sin” taxes.
This mother of all tax cases nevertheless consistently enjoyed some spirited defense from some BIR officials. All of a sudden BIR officials changed their tune, proclaiming that the “sin” tax law was meant to fight one company, referring of course to the dominance of PMFTC in the domestic cigarette market. And we all thought that the law was meant to raise revenues, which would then help finance health care.
By the looks of it, if the BIR officials really would intend to put down PMFTC, which from what I heard already suffered some enormous drop in its income, its stockholders and executives abroad would not just take it all sitting down.
Those stakeholders of course included big-time investment funds and such—you know, some influential groups, so much so that, from what I gathered, some of them already complained directly to our leader Benigno Simeon regarding the, ah, well, raw deal given by the BIR to PMFTC.
In other words, it would become an unruly issue for the Aquino (Part II) administration, because one question remained: Since Wall Street-types already joined the “sin” tax fray, would foreign media be far behind?
