Malaysia: Cigarette Firm Sells at a ''Loss''

Source from:  Malaya Business Insight  03/10/2013

On the face of it, Mighty Corp., a modest size local cigarette maker, seems to be selling its products at a huge loss. Some observers familiar with the excise tax law might suspect, however, that the company is doing something that does not really mean a loss.

Categorized under a low tax tier, Mighty pays an excise tax of P12 per pack. Its retail selling price is P7 per pack. After deducting the 12 per cent value added tax and the excise tax, the company is left with a negative P7.75 per pack

The net retail prices of Mighty brands as declared by the Bureau of Internal Revenue (BIR) in a memorandum circular issued on Dec. 27, 2012, are remarkably lower than the prices set by the BIR based on its own old survey done in 2010. 
 

The company's retail selling price (RSP) of P7 per pack still does not cover the excise tax before 12 per cent VAT.  The "loss" mounts after deducting the VAT.
 
Mighty is fighting it out with its smaller competitors in the low category of cigarettes. It is taking a huge loss in the process.
 
At least two of its competitors are now quietly asking the BIR to look into how Mighty can possibly sustain operations selling its cigarettes at what clearly appears to be a big loss.
 
One suspicion is that the company may not be paying the correct excise tax of P12 per pack under the new law, although there is no evidence to prove that since the BIR has not done any inquiry on the matter.
 
Another suspicion is that Mighty may not be declaring to the BIR the correct volume of cigarettes it sells.
 
Under-declaration is made easier with the failure of BIR to make operational volume-counting machines it earlier ordered. These machines are supposed to automatically count the number of packs of cigarettes declared to the BIR.
 
The counting device has a display window that tells anybody who cares how many packs are produced by a cigarette machine. These numbers are to be declared to the BIR for tax purposes.
 
British American Tobacco, being in the "high category," sells its old stock at P29 per pack after paying the old rate of P28.30 under the old law. (One sale transaction at a 7-Eleven outlet indicates that it pays the P25 excise tax as required by the new law.)
 
The latest retail price of P29 minus the excise tax of P25 leaves a gross margin of P4 per pack.  There is still the 12 per cent VAT to reckon with.  Applied on the net retail price (not declared by the BIR) of P29, the excise tax and VAT amount to P28.48 per pack.  Retailed at P29 to the pack, British American Tobacco is left with a gross margin of 52 centavos.  It may not exactly be in that amount since the retailer – in this case 7-Eleven – also has to make a profit.
 
Adding costs of sales, salaries and other variables may not leave BAT with any profit from that selling price.  In fact, like Mighty Corp., it may also be selling its Lucky Strike brand at a loss.
 
BAT has obviously sold its old inventory of Lucky Strike at P29 per pack on which the old excise rate of P28.30 was paid.  Otherwise, it would not be selling presumably fresh stocks at the same price of P29 but with a lower excise tax of P25.
 
The BIR has not declared the net retail price of Lucky Strike. Why it sells at a incredibly low margin -- if not possibly a negative margin -- puzzles its competitors.  They talk of two possibilities.  Maybe, they say without proof, BAT is not paying the full excise tax of P25.
 
Maybe, just maybe, the BIR does not really know whether or not the volume declared is correct or not, according to our sources.  They say that BIR relies completely on the sworn statement of the exporter which happens to be an affiliate of BAT in Malaysia as it completely relies on similar statements submitted by local cigarette makers and other importers.
 
James Lafferty, manager of BAT's Philippine operation earlier said his company will sell at least 150 million sticks, or 7.5 million 20-stick packs, this year.
 
He boasted that what his company failed to sell in one year will be sold in just one month.
 
The owners of two competitors of Mighty also said that the BIR should look into how BAT is able to retail Lucky Strike for a minimal gross margin.
 
The suspicion here also borders on declaration of the number of packs to the BIR.
 
Lafferty has said that Lucky Strike is made by an affiliate of BAT in Malaysia using Philippine leaf, with the final product then exported to the Philippines.
 
The sources said there is no way of knowing whether or not the volume declared is correct or not. Again, they said the suspicion can be avoided if the BIR has made operational the automatic volume-counting machine although the machine may not necessarily be used to count the number of packs imported into the Philippines.
 
The word of the exporter is taken as gospel truth.
 
The problem that the sources say is a cause for suspicion is the fact that BAT is importing from itself since the Lucky Strike it brings to the Philippines is made by a BAT affiliate.
 
The sources would not admit possible collusion but they point out it is always possible. More so, they said, considering documented reports that BAT is one of the biggest illicit traders of cigarettes in the world as discovered by two independent researchers both commissioned by the Cancer Institute of the United States.  Enditem