Breaktime: High-end Mighty

Quietly, without much fanfare, wanting to investigate a little-known cigarette company for smuggling and tax evasion, Finance Secretary Cesar Purisima gave the revenue backbone of the government—the Bureau of Internal Revenue and the Bureau of Customs—an imperative deadline.

He actually issued the deadline more than three months ago, even before the explosive news broke out on the allegedly illegal activities of the company, named Mighty Corp., based in Bulacan, owned by the Wongchuking family.

What do you know—the deadline fell on the end of August, or more than two months ago, and according to word going around in business, Purisima has yet to see even just the shadows of the photocopies of either the BIR or the BOC report until today.

Question: What caused the delay in their investigation?

To think, ladies and gentlemen, all of you who must pay your taxes promptly or else…well, we are not talking here about peanuts. According to data gathered by the DOF from official and independent sources, such as market-surveying private companies, Mighty supposedly already cheated the government of some P5 billion in duties and taxes just in the first half of 2013.

Just imagine how much more revenues from the cigarette company that the government could forego in a full year—perhaps about P10 billion, which is already equivalent to the pork barrel funds that the accused Janet Lim-Napoles allegedly stole from the government in cahoots with some senators and congressmen.

And it reportedly took them a number of years to steal the P10 billion. Uh-oh, it seems that our darling Mighty belonged to the high-end customers of our beloved officials in the BIR and the BOC.

Really, how else can you explain such a glaring misconduct escaping the radar of both the BIR and the BOC, considering that the activity allegedly involves massive smuggling and tax evasion to the tune of billions of pesos, with their DOF boss Purisima even ordering them to “proceed with the appropriate legal action” against the company?

According to reports that came out in the Business Mirror and in this newspaper, our darling Mighty supposedly undervalued its importation of tobacco leaf and acetate tow, which was the main raw material for the production of cigarette filters. Monitoring of its importation of course was the job of the BOC. According to the reports, the company was reportedly able to divert tax-free importation toward its local production with the use of the so-called bonded warehousing scheme.

Bonded warehouses

You see, the law allows this tax- and duty-free importation as long as they are stored in government-certified bonded warehouses. Moreover, the goods must be bound for re-export. If the goods go into local production, or immediate consumption, the importer must pay the appropriate duties and taxes. If not…well, it is smuggling!

From what I gathered—surprise—the DOF found out that the tobacco leaf importation of our darling Mighty, which on paper was meant for bonded warehousing with supervision of the BOC, did not match its volume of exports.

In fact, the DOF arrived at an estimate of the “missing” tobacco leaf imported by our darling Mighty: Almost 7 million kilos in 2011 and more than 3.5 million kilos last year in 2012. For instance, based on preliminary BOC data assembled by the DOF, our darling Mighty imported tobacco leaves of more than 10 million kilos in 2011, all documented as “warehousing entries” with the BOC—i.e. tax- and duty-free.

Now the law also requires bonded warehouse users like Mighty to report their re-export this time to the BIR. Based on data collected by the DOF, the company actually re-exported only a little more than 2 million kilos of the 10 million kilos of tobacco leaf importation in 2011. That should leave the company with more than 8 million kilos of tobacco leaves rotting in its bonded warehouses by this time.

Here is the thing, ladies and gentlemen of the taxpaying public: The Industrial Technology Development Institute of the Department of Science and Technology (DOST) has come up with its own formula to convert a certain weight of tobacco leaf into a certain number of cigarette sticks. What do you know—the missing more than 8 million kilos of tobacco leaves actually could be used to manufacture 498 million packs of cigarettes. That was tax- and duty-free.

But the biggest coup of our darling Mighty involved the “sin tax,” or its ability to avoid payment of the prohibitive P12-per-pack excise tax on its cheaply priced cigarette brand.

The “sin tax” law took effect at the start of 2013, raising across the board the excise taxes on cigarette by more than 300 percent. Our darling Mighty apparently devised a scheme to take advantage of the sudden sizable increase in the excise tax. For its main product line “Mighty,” the excise tax used to be only P2.72 a pack, which starting last January ballooned to P12 a pack, excluding the VAT, which depended on the selling price of its product. According to data gathered by the private firm called Nielsen, which were then shared with the DOF, our darling Mighty sold its brand for only P16 per pack at the retail outlets.

Now minus the margin of the retailers and the wholesalers, and minus the P12-per-pack excise tax and the P1.58-per-pack in VAT, our darling Mighty actually sold its brand for only P1.12 a pack—i.e. ex-factory. In other words, the company only had a little more than P1 per pack of cigarettes it sold to cover for all its costs, including manufacturing and distribution costs—i.e. the costs of tobacco, acetate tow, filter, paper, cartons, plus the fixed manufacturing, transportation and distribution costs, not to mention its own profit margins.

Suspicious pricing

In fact, the Federation of Philippine Industries already questioned such a suspicious pricing scheme of our darling Mighty since it must be operating at huge losses. According to the FPI, the company only had one way to survive such a losing proposition in such a bizarre pricing scheme: It must not be paying the correct taxes.

In the cigarette industry, ladies and gentlemen, the BIR actually assigns its own personnel at the factory sites to monitor the output of the manufacturers so that they could compute the excise tax immediately on what volume of production goes out of the factories.

Question: How much of its actual production is accounted for by the BIR personnel assigned to its factory sites, who obviously could not be present 24-7 to inspect the volume of cigarettes coming of the plants? In other words, based on the data gathered by the DOF, the company was suspected of “under-declaration” in its actual volume production to evade paying the correct amount of excise tax—plus other taxes of course.

One estimate reaching the DOF was that our darling Mighty was able to make a killing in the first half of 2013 alone to the tune of P2.2 billion.

One explanation behind the strangely low pricing scheme of our darling Mighty—one coming from the BIR, of all places—was that the company merely wanted to gain market share. Hmmm.