Gov’t probes P4.4B in cigarette tax losses

AFP FILE PHOTO

(First of two parts)

Blame it on the law of unintended consequences.

When the Aquino administration pushed Congress to raise the level of “sin taxes” on tobacco products last year, cigarette manufacturers argued that higher levies would create new problems for the government, like smuggling.

According to them, the resulting increase in cigarette prices would give more incentives to unscrupulous parties to smuggle in cheaper brands and meet the demand from less affluent buyers.

Today—almost one year into the effectivity of the Sin Tax Reform Law—their warnings have proved almost prescient.

Information provided by the country’s largest tobacco manufacturer showed that the government may have lost as much as P4.4 billion in tobacco excise taxes in the first semester of the 2013 alone.

Mighty Corp.

The data point to one alleged culprit: Mighty Corp., a large manufacturer of low-priced cigarettes that has managed to stay below the radar for several decades.

That Mighty Corp. stayed out of the mainstream during its 68-year history is partly because the local market had long been dominated by the likes of Philip Morris Philippines Manufacturing Inc. and Fortune Tobacco Corp. (both firms merged to form Philip Morris Fortune Tobacco Corp. Inc. in 2010).

According to its website, Mighty Corp. was founded in 1945 by Chinese-Filipino businessman Wong Chu King to produce native cigarettes. It has since evolved into a fully integrated tobacco firm, with a

9-hectare production facility with three factories in Bulacan. Its current chair and president is Nelia Wongchuking.

The firm’s low-priced products have, for the most part, cornered only a small portion of the local cigarette market, until the Sin Tax Reform Law was enacted last year, pricing many of the more prominent brands out of reach of less affluent smokers.

In a confidential Aug. 15 memorandum, no less than Finance Secretary Cesar Purisima called the attention of Customs Commissioner Ruffy Biazon to the practices of the Bulacan-based firm.

“Considering the total manufacturing and material costs, plus the amount of [value-added tax] and excise tax levied upon its cigarettes, Mighty Corp. is selling P4.47 below its break-even price per pack,” he said. “How can the company sustain selling at a loss?”

Using data from the Bureau of Internal Revenue (BIR) as well as a privately commissioned market survey conducted by Nielsen, the finance chief pointed out that there was a variance of 212 million packs of cigarettes (this has since been updated to 370 million packs) between the estimated volume that leaves Mighty Corp.’s manufacturing facility and the quantity of removals for which taxes were paid.

“The excise taxes evaded from this gap amounted to P2.54 billion (updated to P4.44 billion),” Purisima said in his memo. “Is the company offsetting losses from selling below product cost through the gains from such undeclared removals?”

More importantly, the finance secretary’s memo pointed out that Mighty Corp.’s tobacco leaf imports, as declared with the Bureau of Customs, did not match the volume of reexports accounted for by the BIR. This left unaccounted tobacco leaf import entries of 6.86 million kilos in 2011 and 3.52 million kilos in 2012.

“The excise tax revenue loss from the unaccounted volume amounts to P1.16 billion in 2011 and P598 million in 2012,” Purisima pointed out.

Visual verification

To make sure that taxes on all cigarettes that leave any manufacturer’s factory are paid, the BIR posts examiners on site. Their job is to verify visually that the cigarettes being trucked out of the factory have been levied the proper amount of excise taxes, as evidenced by the tax seals affixed on their packaging.

In the case of Mighty Corp., tobacco industry sources pointed out that, until a few months ago, BIR personnel were present at the factory only for eight hours a day, corresponding with their government working hours.

16-hour gap

That left a 16-hour gap during which the factory gates were unmonitored by state revenue personnel.

At the same time, Purisima observed in his memo that Mighty Corp.’s manufacturing facilities were as much as nine times bigger than what it needed, based on its 2012 production levels, as declared with the BIR.

Contacted for comment on the issue, a representative of Mighty Corp. e-mailed the Inquirer a statement, quoting the company’s lawyer, Miguelito Ocampo.

“It appears that Mighty is being questioned as to how it can sell these cigarettes while other cigarette companies sell their products at P5 per stick,” he said. “Mighty categorically denies underdeclaring its cigarette products.”

Low operating expenses

Adding that it was unfamiliar with other firms’ pricing and manufacturing practices, Mighty Corp. defended the way it sells cigarettes at low prices, saying it had lower administrative and operating expenses.

“Mighty also does not have to pay royalty fees to foreign companies for the use of our brands of cigarettes,” Ocampo said. “Mighty also does not pay service fees or management fees to any foreign company. Mighty also uses more local components compared to its other competitors.”

“Finally, it might interest the public to know that Mighty is not the only company that currently sells one-peso-per stick cigarettes,” he added.

It remains to be seen, however, whether the explanations of the cigarette manufacturer— whose sales have reportedly skyrocketed after buyers migrated to cheaper brands after the sin tax law was enacted—are enough to convince fiscal authorities.

(To be continued on Sunday)

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