• Government still losing billions in tobacco taxes

    7

    (Last of three parts)

    IN order to prove that Mighty Tobacco Corp. is underpaying its taxes, Philip Morris Fortune Tobacco Corp. turned to forensics.

    The multinational corporation must have built a strong case because the Department of Finance provided its data to both the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) to verify if, indeed, Mighty is not only evading taxes, but is also engaged in tobacco smuggling.

    Thus far, Mighty has not rebutted the arguments presented by Philip Morris, to wit:

    • Mighty Corp.’s factory has a capacity that is anywhere from eight to nine times greater than what it claims to actually produce. Specifically, their machinery in Bulacan comprised of 10 AMF, eight SASIB, two GD, eight HLP (20s), and four HLP (10s) machines have a capacity to produce three billion sticks of cigarettes per month, or 1.8 billion packs a year. For 2012, Mighty declared and paid taxes on 213 million packs of their variants.

    • Based on lowest cost assumptions acceptable to the tobacco industry, Mighty loses P4.47 for every pack of cigarettes sold. The assumptions consider everything that goes into a pack of cigarettes just before it reaches the consumer, including the cost of the tobacco leaf itself plus other ingredients (example: the menthol flavoring), the filter (all imported), the cigarette paper, the liners and the labels. Then there are the variable costs like shipping and distribution, as well as the fixed manufacturing costs. Since every pack of cigarettes must pay P12 in excise tax and P1.58 in value added tax, adding up all the costs under the cost assumptions of Philip Morris shows that the break even price per pack of cigarettes is no less than P19.70. The estimated loss per pack of P4.47 is based on the average wholesale price of P15.23 for dealers. According to Philip Morris, “the numbers do not add up.”

    • Data from the multinational tobacco company also shows that Mighty has not fully accounted for all its imports. Following a formula for conversion supplied by the Department of Science and Technology, and based on import and export data from the BOC and the BIR, Mighty brought in 10,615,789 kilograms of tobacco leaf from various foreign sources in 2011, and 15,443,292 kg last year. Exports, however, were pegged at 2,248,849 kg in 2011 and 8,586,221 kg in 2012. Thus, the unaccounted tobacco leaf is 8,366,940 kg in 2011, or the equivalent of 498 million packs, and 6,857,070 kg last year, good for 407 million packs.

    • Yet another key ingredient in cigarettes is acetate tow, which is the raw material for the filters used in most cigarettes. Acetate tow is not made in the Philippines, and there are only three countries which supply the ingredient. BOC and BIR data likewise show clear variances for 2011 and 2012. Mighty purchased 2.034 million kg of acetate tow, while exporting .99 million kg the previous year, for a variance of 1.034 million kg, equivalent to close to 116 million packs, or 2.3 billion sticks of cigarettes. Last year, Mighty’s acetate tow purchase was at 2.52 million kg, with exports of .97 million kg. The variance last year was therefore1.529 million kg equivalent to 171,513,228 packs, or 3.43 billion sticks.

    Philip Morris also pointed out that Mighty has allegedly been undervaluing its imports of tobacco leaf. Mighty’s figures say they purchase tobacco leaf from seven countries—Brazil, India, South Africa, Vietnam, China, Argentina, and Indonesia—at a price of $0.68/kg. By comparison, competitors Anglo-American and La Suerte purchase their tobacco leaf at much higher prices, from a low of $3.39/kg to a high of $6.75/kg.

    All the figures supplied by Philip Morris have been accepted by the Department of Finance as valid, putting the onus of disproving the data on Mighty.

    Old company reborn

    Mighty Tobacco Corporation was reborn in 2005 from the ashes of a cigar and cigarette company that had been around since the 1940s. That predecessor was best known for its low-priced products like Magkaibigan (AKA) Amigo, La Campana and Campanilla.

    Oldtimers may remember the radio commercials of decades past where a comedian known for his harelip cried “Bataan matamis!”

    On Tuesday, this week, the company issued a statement to media saying, “We welcome in particular the orders of the BOC and the BIR to look into our records of shipments and taxes paid.”

    Spokesman and legal counsel Miguelito Ocampo said, “We are not hiding anything. Our operations, from sourcing of raw local and imported materials to manufacturing, withdrawals and marketing, are transparent and are strictly monitored and liquidated by the BOC and the BIR.”

    He also called for the filing of a trust law to protect Filipino consumers, while taking a dig at “some of our competitors” who use “faceless organizations and pseudo economists” to dish out what Ocampo calls malicious and damaging information to the media.

    “Maybe they should look at the supply and demand side and adopt the right marketing strategy” based on the new sin tax law, he added.

    Today, its flagship brand Mighty has been attracting the smoking public for daring to challenge the well-entrenched brands of Philip Morris, which accuses the company of dirty tactics in their ongoing mano-a-mano.

    In presenting their case to the Finance department, Philip Morris effectively hurled the gauntlet at Mighty Corporation. The latter will have no option but to prepare a point by point rebuttal to the serious accusations of the former. Otherwise, the BOC and the BIR can come in and dun heavy penalties on the local manufacturer, strangling the goose that has been laying golden eggs for the company for the last few years.

    With Mighty finally coming out to face its accusers, the battle to control the multi-billion peso cigarette industry has just gone up a notch. Just how ugly it could get remains to be seen.

    As for Philip Morris, the US-based company is expected to continue to aggressively defend its market share.

    Recall that prior to purchasing Fortune Tobacco from Lucio Tan, Philip Morris had lost a big chunk of its luxury menthol market to Fortune’s Hope cigarettes. Philip Morris may have lost the battle back then, but the multinational company ultimately won the war.

    The majority of Filipino smokers still buy their brands.

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    7 Comments

    1. If the numbers don’t add up, then there’s really something fishy going on. Mighty has got a lot of explaining to do because numbers don’t lie. And really a loss of 4.47 per pack is just way too big, no business, no matter how big or small can survive a loss like that.

    2. Juan Crisostomo on

      This is what happens when the government implements laws without considering the effects on the industry. When the STL was approved, smuggling became rampant and local companies took advantage of the inadequacy of the BIR to collect proper taxes, and the BoC’s inability to curb illegal importation.

    3. What’s surprising is that PMFTC is the one presenting evidence of tax evasion, when it is the responsibility of the government agency to do so. The government should be more proactive if it intends to crack down on tax evasion and illegal smuggling, not just rely on companies themselves. If the government remains inutile in the curbing of tax evasion and smuggling, the local tobacco industry will surely suffer and the STL will be counterproductive.

    4. Crispin Basilio on

      The data showing discrepancies between imported tobacco leaves and exported products are enough to merit an investigation. Obviously, Mighty has some explaining to do unless otherwise they ate all those unaccounted tobacco leaves.

    5. Data was provided by the DoF to BoC and the BIR thus these agencies need to investigate. The glaring discrepancies should not be simply overlooked. Mighty may be selling cheap, but are they paying the correct taxes? Are they declaring the correct volume of their manufactured cigarettes? Remember that it is not 24/7 that the BIR can monitor their manufacturing plants. Or are some BIR personnel on the take too?

    6. Obviously, Mighty Corp. has used the very sin tax law in ensuring the increase in its profit by defrauding the goverment, if the allegations were to be believed as it has offered just an alibi in denying these. In the courts, alibis are considered the weakest defense. Atty. Ocampo should offer a clearer rebuttal, otherwise it would be better for him, and ultimately his company, if keeps his mouth shut.

    7. Carlos Quidlat on

      Instead of making allegations, Mighty Corp should come up with data to disprove the accusations, otherwise the public cannot help but believe that it indeed is defrauding the government. It is always to deny any allegation and throw accusations to the other parties. What is hard is disprove a claim when it is true.