Sin tax sends premium brands beyond poor’s reach

A vendor sells cigarettes at a supermarket in Quezon City. AFP FILE PHOTO

(Conclusion)

The enactment of the Sin Tax Reform Law pushed up the prices of cigarettes made by Philip Morris Fortune Tobacco Corp. (PMFTC)—the country’s largest tobacco firm—beyond the reach of those from the lower economic strata.

With the price of Marlboro cigarettes now retailing more than P50 per pack, it is easy to see why some less affluent smokers migrated to “Mighty Premium Tobacco,” which can be bought for P16 per pack at most supermarkets.

It is, therefore, not surprising that PMFTC has lost revenue in favor of Mighty Corp., leading the joint venture between Philip Morris and Lucio Tan’s Fortune Tobacco Corp. to air their grievances before fiscal authorities.

In a letter to Finance Undersecretary Jeremias Paul, PMFTC president Paul Riley explained the findings of a privately commissioned market study conducted by research firm AC Nielsen.

The findings—which indicated potential unpaid tax levies by the Bulacan-based cigarette maker to the tune of P4.4 billion—were also presented to Finance Secretary Cesar Purisima, who has ordered an investigation of the matter.

Urban areas

The AC Nielsen report was based on a market survey conducted mainly in urban areas where the number of buyers of the low-priced cigarettes was growing.

Data provided to the Department of Finance along with the Nielsen survey results also showed that Mighty Corp. may have been selling its cigarettes at a loss of as much as P4.47 per pack or about 30-percent lower than the estimated break-even price.

Similarly, the report revealed that Mighty Corp.’s imports of acetate tow—a key raw ingredient necessary to produce cigarette filters—totaled 2 million kilos in 2011 and 2.5 million kilos in 2012.

However, data from the Bureau of Internal Revenue (BIR) reveal reexports equivalent to only 999,729 kilos in 2011 and 977,420 kilos in 2012. The gap represented the equivalent of 116 million packs of cigarettes in 2011 and 173 million packs in 2012—cigarettes that were unaccounted for during this period.

Unusual pattern

Another unusual pattern was observed in Mighty Corp.’s declared import prices of raw materials, all of which were significantly lower than those of rival manufacturers, even if they acquired them from the same vendors.

In the case of Virginia tobacco leaves, for example, Mighty Corp.’s prices stood uniformly at $0.68 per kilo, whether they came from Brazil, India, South Africa, Vietnam, China, Argentina or Indonesia.

In contrast, prices from the same sellers declared by cigarette manufacturers like Anglo-American and La Suerte ranged from $3.39 to $6.75 per kilo.

Vulnerable to challenge

The report has, however, been met with some degree of skepticism by fiscal officials who have noted that the method of “grossing up” survey results to arrive at a total figure—while being statistically sound—may be vulnerable to a legal challenge.

BIR Commissioner Kim Henares also believes that questioning Mighty Corp.’s below-cost retail price is a dead end.

“Can we do anything if they want to sell at a loss?” she said in an interview with the Inquirer. “That’s a business decision.”

Import, reexport mismatch

Instead, what interests her is the apparent mismatch between the volume of Mighty Corp.’s imported raw materials and the volume of cigarettes it reexports.

According to information from the Bureau of Customs, the same data indicated that Mighty Corp. imported 10.6 million kilos of tobacco leaves in 2011 and another 15.4 million kilos in 2012, ostensibly to be manufactured into cigarettes locally and then reexported.

However, BIR data showed that the company reexported cigarettes that used 2.2 million kilos and 8.5 million kilos in 2011 and 2012, respectively. The mismatch fails to account for 8.3 million kilos of tobacco leaves in 2011 and another 6.8 million kilos in 2012.

Based on the government-determined conversion rate for leaves into cigarettes, the import-export gap suggests that tobacco enough to make 498 million packs in 2011 and 407 million packs in 2012 may have stayed within the local market illegally.

“We’re taking a close look at these numbers to see if there really are violations,” Henares said, but pointed out that a thorough probe required time.

She said she understood the urgency of the issue, but noted that representatives of PMFTC had also, at one point, called on her every week seeking updates.

“When we are asked to investigate, we try to do a complete job. This can’t be rushed,” she said.

24/7 watch

For now, the BIR has posted personnel at Mighty Corp.’s factory on a 24/7 basis, in response to a suggestion made by its competitors.

The Department of Finance, meanwhile, wants to know if Mighty Corp. is indeed able to undercut its competitors’ prices and still make a hefty profit, by paying less taxes than it should.

The results of the ongoing probe will reveal whether the Sin Tax Reform Law works, or merely solved one problem while creating another.

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