Revenue leakage persists due to illegal tobacco trade – Tan

MANILA, Philippines - Revenue leakage continues unabated and will remain high unless illicit tobacco trade and smuggling of products abroad are counteracted immediately.

In an interview, LT Group Inc. president Michael Tan said illegal trade in tobacco remains a serious problem that has deprived the government of massive tax revenues and affected legitimate businesses.

Tan, son of taipan Lucio Tan, said all PMFTC wants is a level playing field to ensure that all players are paying the proper taxes and duties.

While the government has exceeded its excise tax collection targets in the past quarters, Tan believes there is much more room for growth if only enforcement action is taken more seriously.

He said illicit tobacco trade by a competitor which kept the price of low-end cigarettes at an economically unsustainable level of P1 to P1.25 per stick, has become a major obstacle to maximizing state revenues.

PMFTC has accused rival Mighty Corp. of selling below cost and even tax, which allowed the Bulacan-based cigarette firm to capture a significant share of the local tobacco market in a short time.

Tan noted that while Mighty was able to enlarge its share to 20 percent from mid-single digits in 2012, its tax payments accounted for only 13 percent of the industry’s total tax payments.

“How could a manufacturer sell below production cost and tax. They’ve been doing it for two or three years now. The government is losing billions of pesos due to undervaluation and smuggling,” Tan said.

Tan said the government should seriously address tax evasion and bring non-compliant domestic players into the tax net rather than “shoot the messenger.”

He said PMFTC remains committed in helping the government curb tax evasion.

The government began to revamp its tax rates in 2013 and this will continue until 2017. The tax changes include an increase in the rate of tax on all cigarettes to a standard P30 per pack to both raise the needed revenue and deter individuals from taking up or continuing smoking.

The sharp hike in indirect taxes prompted PMFTC to raise the prices of its Marlboro and Fortune brands by around 60 to 70 percent, which hurt its sales as consumers shifted to lower-priced cigarettes.

Not a single case has been filed against Mighty nearly more than a year after a Department of Finance task force cited the cigarette maker’s alleged illicit business practices.

Bureau of Internal Revenue commissioner Kim Henares, however, remains silent on the alleged illegal trading practices of Mighty as she  noted Section 270 of the Tax Code which prohibits divulgence of information on taxpayers.

A study done by the UK-based think tank Oxford Economics, together with the International Tax and Investment Center showed that the Philippines has become one of the biggest markets for illegal cigarettes trade among member countries of the Association of Southeast Asian Nations (ASEAN), with illicit consumption almost tripling in 2013.

Illicit tobacco consumption in the Philippines accounted for 34.5 percent of all untaxed cigarettes consumed in the 14 countries studied, the second highest after Vietnam which took up a 39-percent share.

ITIC president Daniel A. Witt said the Philippines now has the fastest growing black market to the extent that one out of five cigarettes sold in the country is illegal.

Illicit consumption across Asia was estimated to have increased by 20.1 percent to 79.9-billion cigarettes, mainly driven by the 198 percent surge in illegal cigarette sales in the Philippines.

Tan said the enormous losses of potential revenues could have been put to good use to bolster government efforts in education, infrastructure development and poverty alleviation.