Philippines: DOF Admits Leaf ''Underpriced''

Source from:  Malaya Business Insight  02/17/2014

The Department of Finance seems to have ignored the fact that Mighty Corp., a small cigarette maker that has become a major player, was practically involved in technical smuggling perpetuated by under pricing imported tobacco leaf to an estimated extent of 85 per cent.

However, the company appears to have paid the correct duty on its imports.

A table posted at the DOF website asked  "What is the average price with which importers have imported tobacco in 2013? "

Mighty imported 26,876,186 kilos of Virginia type tobacco and paid P36.46 per kilo.  Philip Morris Fortune Tobacco (PMFTC) paid P216.33 to the kilo.  Philip Morris Philippines paid P249.36, according to the data from the website of the DOF.

PMFTC imported burley at an average price of P163.63 per kilo; Philip Morris Philippines, P233.34; La Suerte, former licensee of Philip Morris, paid P180.12.

On the other hand, Mighty paid less than half at only P81.70 for burley.

Mighty paid P26.23 per kilo for imported tobacco stems which had an average price of P60.74 per kilo, according to the tax-advertisement of DOF that appears in its website.

PMFTC paid P57.91; Philip Morris, P102.94 and La Suere, P52.15 to the kilo.

Supporters of Mighty claim the company was importing "cheap" leaf price being a producer under the  low-end  or cheap category cigarettes 

The Burerau of Customs suspended last month the license of Mighty to operate a bonded warehouse after seeing the disparity between the volume of cigarettes it exports compared to the imported volume.

However, an insider in Mighty told Business Insight the company has not been using the bonded warehouse for years. The source said Mighty's imported tobacco goes straight to its factory in Bulacan from the piers.  It did not use the customs bonded warehouse. 

The suspension of the CBW license has no effect on Mighty because it was not using the facility.

Finance Secretary Cesar Purisima said he learned from sources, particularly the results of a market survey made by A.C. Nielsen that Mighty might be covering the P4 loss per pack from almost 60 per cent of the cigarette production not declared to the BIR and therefore was not taxed.

Purisima also noted that the volume declared for taxation appears too small for the large capacity of Mighty's machines.  It may have turned out that the capacity is fully utilized but not all of the production is declared to the BIR for tax purposes.

On the other hand, BIR Commissioner Kim Jacinto Henares earlier said she had no business questioning Mighty selling at a loss for as long as it pays the correct tax.  It does on the volume declared which is estimated to be only 40 per cent of production or capacity.

This being allegedly the case, Mighty makes fat profits selling at a loss considering that about 60 per cent of its production volume is not taxed.

Mighty was a nominal player when the excise tax was P2.75 per pack.  After the excise rate was raised about 500 per cent its share of demand increased to 30 per cent from three per cent operating under a law  imposing excessive rate.

The National Tobacco Administration has records showing Mighty pays only 10 per cent of the average price of local leaf.  It pays 15 per cent of the average world price of imported tobacco.

The controversy over cigarettes shifted from British American Tobacco's imported brand notably Lucky Strike.  Th brand was, under the premium category in the old law.  paying P28.30 per pack.

The premium category was deleted in the present law.  Lucky Strike was reclassified under the "high" that  pays  P25 per pack.  On the other hand, the tax rate on local high end cigarettes which paid about P7 in excise tax under the old law is now paying P25 per pack, same as rate for Lucky Strike which was reduced by about 12 per cent.

The brand is sold mostly in the 7-Eleven chains and in the hundreds of outlets of Puregold of Lucio Co. 

The hard pack Lucky Strike is sold at P44.75.  The same hard pack Marlboro is retailed at between P60 to P70 to the pack.  Yet, Lucky Strike is not always available in the two outlets selected by British American Tobacco. Enditem