The worst nightmare of government and sin tax reform advocates is beginning to happen.
The Bureau of Customs and the Bureau of Internal Revenue are now separately investigating reports that a local cigarette manufacturer cheated government of at least P5 billion in excise taxes alone in the first six months of 2013.
The illegal activities of Mighty Corporation, which produces low-priced cigarette brands in Malolos, Bulacan, has also caught the attention of the six tax advocates who fought for higher excise taxes on cigarettes and alcohol. These are the Action for Economic Reforms (AER), FCTC Alliance of the Philippines (FCAP), Medical Action Group (MAG), Philippine College of Physicians (PCP), and the Woman Health Philippines.
They succeeded with their lobby efforts in the passage of the new law mandating higher excise taxes on cigarette products despite concerns raised by some sectors that raising the taxes would encourage smuggling.
And now, they are worried that all their efforts will turn to naught.
This group led by the AER has lauded the BIR for investigating Mighty’s alleged tax evasion. It said that accusations that Mighty Corp. has not been paying the proper taxes is credible since its products are sold at a very cheap and artificial price, a price that is below production costs.
“The artificially depressed price of Mighty Corp. cigarettes undermines both the revenue and health objectives of the sin tax law. Consumers, especially the poor, have shifted from the higher-priced bands to the cheap Mighty products. As a result, Mighty’s market share has significantly increased,†they added.
Meanwhile, the BOC, acting on orders of Finance Secretary Cesar Purisima, sent last October 21 an audit notification letter to Mighty, giving it 15 days to respond to allegations regarding its involvement in technical smuggling activities which include underdeclaring its factory removals, making illegal withdrawals from its bonded warehouses and undervaluing the prices of its imported raw materials.
Purisima’s directive was prompted by reports that Mighty Corp. could have resorted to technical smuggling practices to defraud the government and evade the payment of the correct taxes and duties.
In 2011, Mighty imported tobacco leaf totaling 10.616 million kilograms which were documented as “warehousing entries†when these were submitted for inspection at the BOC. Mighty’s “warehoused†tobacco leaf entered the country tax-and duty-free as provided under the law. The Tariff Code allows this tax- and duty-free importation of articles in whole or as part of a finished product if they are stored inside bonded warehouses and immediately re-exported. But once these articles are withdrawn from the warehouse and used for local production or consumption, the importer would have to pay the appropriate duties and taxes levied on these goods.
Discrepancies in entries in 2011 obtained from the BOC and the export data of Mighty Corporation submitted to the BIR during the same year shows that of the 10.616 million kg of tobacco leaf it imported, only 2.249 million kg were re-exported by Mighty as finished tobacco products. Of this volume, 1.887 million kg were exported by Mighty as finished cigarette products, while 361,615 kg were cutfillers. This leaves some 8.367 million kg of tobacco leaf unaccounted for.
The unaccounted amount of tobacco leaf could be used to manufacture 498 million packs of cigarettes.
This covers only the 2011 period and only one kind of raw material. What about Mighty’s other imports and the years that followed?
Another irregular aspect of Mighty’s business practice is its P1-per-stick cigarettes. Mighty’s trade price for a pack is only P14.70, which then allows retailers to sell it at P16 a pack.
With an excise tax of P12 a pack and VAT of P1.58, Mighty is left with only P1.12 to cover the cost of the materials and expenses related to manufacturing a pack of smokes. With the cost of the materials alone at P4.28 per pack, Mighty is undoubtedly selling at a loss. Despite the high excise tax regime, Mighty is still in the market.
One possible explanation to this puzzling business strategy is the report brought to the attention of the DOF. The report noted that in January this year, Mighty’s reported number of withdrawals to the BIR (or the number of cigarette packs that left its manufacturing plant) was only 11 million packs. But a separate market research by Nielsen, a global marketing research leader, indicate that Mighty’s withdrawals were actually 74 million packs in January. Adding up the rest up to June 2013, the variance amounts to 370 million packs that Mighty did not report to the BIR.
This translates to a total estimated excise revenue loss for the government of P4.9 billion in the first half of 2013 alone based on an excise tax rate of P12 per pack and a VAT of P1.58.
Mighty has also reportedly resorted to undervaluation. It imported Virginia tobacco leaf last year at a price of $0.68 regardless of the location and quality of leaf. Leaf imported from Brazil, India and Indonesia were all priced the same. In contrast, the Associated Anglo-American Tobacco Corp. priced its imported leaf at $4.37 per kg from Brazil, while La Suerte got theirs for $6.75 per kg. Imported leaf from India was priced at $3.39 per kg by AAATC and $4.90 by La Suerte.
In the Philippines, the lowest-quality tobacco was sold at P46/kg or $1.10/kg, still higher than Mighty’s quoted $0.68 for its imported leaf.
Mighty also allegedly grossly undervalued the import price of its acetate tow, which it reported at only $0.30 to 0.32 per kg.
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