BOC padlocks warehouse of low-cost cigarette maker
PHOTO FROM MIGHTYCORP.COM.PH
The Bureau of Customs (BOC) has suspended the license of low-cost cigarette manufacturer Mighty Corp. to operate a customs bonded warehouse, which is expected to seriously disrupt its business operations, mainly the importation of tobacco leaves and other cigarette-manufacturing materials.
In a Jan. 16 memorandum, Customs Commissioner John Phillip Sevilla directed Mario Mendoza, customs district collector at the Port of Manila, to “implement the suspension order immediately.”
The move, he said, was necessary to “prevent revenue leakages while further investigation (of the company’s alleged illicit trade practices) is being conducted” by the Department of Finance (DOF).
“The initial report of a DOF task force reveals that Mighty Corp. committed serious violations of tariff and customs laws, rules and regulations, resulting in huge revenue losses for the government,” Sevilla said in the one-page memo, a copy of which was obtained by the Inquirer.
In a statement, Mighty Corp. executive vice president Oscar P. Barrientos on Thursday said the suspension order did not cover Mighty Corp.’s regular importation for the domestic market.
Article continues after this advertisementBarrientos said it was still business as usual for Mighty Corp. “Nothing has changed, and until such time that we receive the final report of the task force, it will be business as usual,” he said.
Article continues after this advertisement“We will continue to cooperate with authorities pending the full and final results of the inquiry being undertaken by Task Force Mighty Corp. We will address these allegations at the appropriate time as soon as we receive the final report on the findings. We have been transparent with the customs bureau, and we will continue to be transparent,” Barrientos added.
The DOF probe team, called Task Force Mighty Corp., was created last Nov. 6 to investigate the firm’s trading activities pursuant to a directive issued last Aug. 15 by Finance Secretary Cesar Purisima.
BOC personnel said the suspension order would compel the firm to declare every single imported item it was supposed to use in the production of cigarettes for domestic consumption and pay the appropriate duties and taxes.
No more exports
The operation of a customs bonded warehouse (CBW) had allowed Mighty Corp. to import duty-free tobacco items, supposedly for reexport to other countries.
Barrientos said the company decided in the latter part of 2013 to fully concentrate on serving the domestic market.
As a result of this strategy, he said the company veered away from exports. Consequently, the company’s CBW is now sparingly used.
Market share expands
Mighty Corp.’s CBW was being operated to store raw materials used to produce cigarettes for export.
Barrientos said the suspension order was most likely procedural and may be for the bureau’s inventory purposes.
The company was founded in 1945 by Chinese-Filipino businessman Wong Chu King to produce native cigarettes, according to its website. It has since evolved into a fully integrated tobacco manufacturer with three factories in Bulacan. Its current chair and president is Nelia Wongchuking.
Mighty Corp.’s product line has no premium brands. For the most part, its low-priced products have cornered only a small portion of the local cigarette market until the sin tax reform law was enacted in 2012, pricing many of the more prominent brands out of reach of less affluent smokers.
Complaints
Last year, Purisima directed the BOC and the Bureau of Internal Revenue (BIR) to look into the alleged technical smuggling and tax-evasion schemes of Mighty Corp., citing complaints from the business community. Both the BOC and the BIR are DOF-attached agencies.
In his confidential Aug. 15 memo to then Customs Commissioner Ruffy Biazon, Purisima disclosed that “excise tax revenues that should have been collected from Mighty Corp. amounted to at least P821 million in 2012 and P2.54 billion in the first half of 2013.”
The DOF head also cited the following findings by an unnamed “industry source”:
— Considering the total manufacturing and material costs plus the amount of value-added tax and excise tax levied on its cigarettes, Mighty Corp. is selling P4.47 below its break-even price per pack.
“How can the company sustain selling at a loss?” Purisima asked.
— From January to June 2013 alone, there was a variance of 212 million cigarette packs between the company’s estimated volume of production and removals that reflected tax payments, resulting in evaded excise taxes amounting to P2.54 billion.
“Is the company offsetting losses from selling below product cost through the gains from such undeclared removals?” Purisima wondered.
— BOC records on the company’s volume of imported tobacco leaves for warehousing did not match BIR records on the volume of reexports, leaving unaccounted tobacco leaf import entries of 6.86 million kilograms in 2011 and 3.52 million kg in 2012.
— There was also an unaccounted volume of acetate tow, raw materials used in the manufacture of cigarette filters, amounting to 1.89 million kg in 2011 and 2.16 million kg in 2012.
“Computing for the implied number of sticks, data showed that Mighty Corp. exported only 2.12 billion sticks out of the 13.7 billion sticks it imported in 2011. The following year, it exported only 2.18 billion sticks out of 16.39 billion imported sticks,” Purisima said.
— The purchase price of the firm’s imported raw materials was “severely undervalued compared to its competitors.”
In 2012, while two cigarette companies purchased imported Virginia tobacco leaves at a range of $3.39 to $6.75 per kg, Mighty Corp. bought it at $0.68 per kg. The firm’s acetate tow purchases were valued 10 percent less than its competitors in 2011 and 2012.
— Mighty Corp. has a “factory eight to nine times bigger than what it needs” based on its 2012 declared production records at the BIR.
Using BOC data, the finance department observed that “unlike other tobacco-importing companies, Mighty Corp. did not record duties and taxes paid for Virginia, Oriental and Burley tobacco even though these products were assessed by type of tax and corresponding duties.”
“Similarly, using 2012 data from the National Tobacco Administration, the price per kg of Virginia, Oriental and Burley tobacco imported by Mighty Corp. was posted at the same price level of $0.68 across all tobacco leaf types,” it said.
Citing these findings, Purisima said “relentless, uncompromised, 24/7 monitoring is the only solution to the problem with Mighty Corp.”
Philip Morris
Paul Riley, president of Philip Morris Fortune Tobacco Corp., the country’s largest tobacco company, earlier reported to the DOF the findings of a market study by the research firm AC Nielsen indicating potential unpaid tax levies by Mighty Corp. to the tune of more than P4.4 billion.
For his part, Jesus Arranza, chair of the Federation of Philippine Industries (FPI), asked the BOC to act on Mighty Corp.’s alleged smuggling practices, citing complaints from some of the association’s 800 members.
In a letter to Biazon, Arranza referred to the firm’s alleged undervaluation of imported raw materials and diversion of imported raw materials under warehousing entries for use in domestic production without payment of duties and taxes, among others.
“If such is the case, these practices are not only prejudicial to the members of the industry who play by the rules, but also inimical to the stability of the country in general,” said the FPI head.
Late last year, a representative of the tobacco company e-mailed the Inquirer a statement, quoting the firm’s lawyer, Miguelito Ocampo.
Underdeclaration denied
“It appears that Mighty Corp. is being questioned as to how it can sell its cigarettes at low prices while other cigarette companies sell their products at P5 per stick,” Ocampo said. “Mighty categorically denies underdeclaring its cigarette products.”
Saying it was unfamiliar with other companies’ manufacturing and pricing 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. It also does not pay service or management fees to any foreign company. It also uses more local components compared to its competitors,” it said.
Mighty Corp. said “it might interest the public that Mighty is not the only company that currently sells one peso per stick cigarettes.”
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