Philippines: Mighty''s Success is A Big ''Miracle''

Source from:  Malaya 01/27/2014

Under the old law when the excise tax on low end cigarette brands such as those produced by the 70-year old Mighty Corp. was P2.72 per pack, the company could hardly ever make a dent on demand. The company's  share of the market never went beyond 3 percent.

Now that Mighty pays 5 times or 500 percent more at P12 per pack, demand for its brands soared to 30 percent. The company insists the reason for the rise is the fact that it does not pay royalty not being a licensee of a foreign owner and that, incredibly, Mighty improved the quality of its cigarettes bolstered by an aggressive sales force.

Philip Morris factory in Tanauan City is owned by headquarters abroad. It does not pay a royalty for the brands that it produces. Mighty's argument in relation  to royalty payments is an insult to the intelligence of a nitwit.

Infrequently its spokesperson and executive official, a retired RTC judge, points out that it has eaten into the market of expensive brands like Marlboro which was paying excise taxes of about P5 to the pack in the old law. It now pays P25 or five times higher.

Ignored by the spokesman who issued a statement that Mighty paid more than P8 billion in excise tax last year is the company's refusal to explain why it is selling at a loss of P4 per pack. If this loss is not covered elsewhere the company will be operating in the red. There is no fool of a businessman who will continue selling his product at a loss for the stupid reason of keeping its 30 percent share in demand.

Producing and selling more is accompanied by an expansion of losses.

Finance Secretary Cesar Purisima wonders how the losses are covered. Based on what Purisima said is information obtained from sources and his department's analysis, the company is covering the loss from sales of cigarettes Mighty does not declare to the BIR.

In his "urgent and confidential memorandum" of Aug. 15, 2013, sent to two of his undersecretaries and to the commissioners of internal revenue and customs, Purisima required a study of how Mighty covers the losses although he himself admitted that, based on the report of AC Nielsen, the company has a very large capacity but reports only 41 percent of production to the BIR.

The foreign research firm points out that the large production capacity is fully utilized but 59 per cent of output is not taxed by simply not reporting it to the BIR. The proceeds from the untaxed sales cover the P4 per pack loss, as suggested by AC Nielsen and practically confirmed by Purisima himself.

Purisima ordered the four officials to submit their respective report on or before Aug. 30, 2013. There is no known compliance with the memo. Purisima does not seem to be irked by the defiance of his order.

In the estimate of AC Nielsen, Mighty did not pay P4.4 billion in excise tax due on the 51 percent of production not declared to the BIR.

The announced payment of P8 billion for the whole of last year approximates the amount that AC Nielsen claimed Mighty did not pay. The claimed payment has not been confirmed by the BIR. Incidentally, BIR Commissioner Kim Jacinto Henares has said that it is not her business to find out why Mighty is selling at a loss under an excessive tax rate.

Customs has not acted on what appears to be technical smuggling of tobacco. I have copies of documents clearly stating that Mighty pays only 15 percent of the average prices of the leaf from about 15 exporters all over the world.

The money saved by under declaring prices is a factor that enables the company to deeply penetrate the market; incurs a big loss that is  covered by the amount saved in tariffs and under-declaration of production.

Purisima also said in his "urgent and confidential memorandum" that there is a wide disparity between the volume of imported tobacco and the volume it exports. If the bulk of the leaf bought at 15 percent of the world price is made into cigarettes and sold locally, the company may well be accused of avoiding tax payments on local sales and technical smuggling.

We must again point out that Mighty is the only cigarette maker that sought and was given a tobacco-to-cigarette formula that allows the company to produce cigarettes declared presumably to the BIR for tax purposes but is left with substantial volume of tobacco converted into cigarettes but not necessarily declared to the BIR.

On the average, the industry uses  seven kilos to produce a case of cigarettes equivalent to 50 reams or 500 packs, At the excise tax of P12 per pack, Mighty should pay P6,000 per case.

How much tobacco is left after producing one case from nine kilos as dictated by the Department of Science and Technology? Nobody really knows. What is clear is the company produces one case from nine kilos. How much more is left from the same nine kilos after producing one case as required by the DOST?

Nobody except Mighty really knows. The volume of leaf left and similarly converted into cigarettes need not be declared to the BIR. This is another source of profits that help covers the loss of P4 per pack. Enditem