Philippines: Waiting for Mighty to Explain

Source from:  Malaya 02/10/2014

THE Wongchungking family of Malolos, Bulacan, the owners of Mighty Corporation, have been enjoying, for a few years now, as their market share in the local cigarette market steadily increased. Even after the Bureau of Internal Revenue implemented the new law significantly increasing excise taxes on low-end cigarette brands, which Mighty mostly sells, Mighty was still able to sell cigarettes at only P1 per stick. Thus, their market share continued to expand, from 7 percent to 20 percent in a span of less than a year.

The new excise tax rate on low-end brands alone is already P12 per pack. Mighty, before industry players and the Department of Finance noticed, used to sell a pack at P14.70, then retailers resell them at P16. Thus, ambulant vendors selling a stick at P1 still make a clean profit, from a pack of 20 sticks.

Industry players and the DOF began to wonder how Mighty was able to sell at a loss and still make a profit. At P14.70 per pack, this leaves Mighty with only P1.12 to cover its manufacturing and distribution costs, considering that the excise tax is P12 and the VAT is P1.58 per pack for the company's best selling brands.

When the cigarette industry called the attention of Finance Secretary Cesar Purisima to this incongruity, he quietly ordered a study made on Mighty's sales, import volumes and re-exports.

This was the beginning of Mighty's seemingly endless woes with the taxman.

Among the findings of the study were the following: "The volume of imported tobacco leaf [of Mighty] for warehousing from the Bureau of Customs (BOC) does not match with the volume of re-exports from the Bureau of Internal Revenue (BIR), leaving unaccounted tobacco leaf import entries of 6.86 million kilograms in 2011 and 3.52 million kg in 2012. The excise tax revenue loss from the unaccounted volume amounts to P1.16 billion in 2011 and P598 million in 2012."

The study also showed that for acetate tow, a raw material used for cigarette filters that cannot be sourced anywhere here, Mighty's import volumes and re-exports had similar discrepancies. "Moreover, using the same variables of BOC import entries for warehousing and BIR export data, there is also an unaccounted volume of acetate tow (raw material for cigarette filters) amounting to 1.89 million kilograms in 2011 and 2.16 million kg in 2012.

Computing for the implied number of sticks, data shows that Mighty exported only 2.22 billion sticks out of the 13.79 billion sticks imported in 2011 while in 2012, Mighty exported only 2.18 billion sticks out of the 16.39 billion sticks imported."

These findings were apparently used by the task force created by the BOC in their investigation into Mighty's business dealings. When the task force submitted its initial findings to Commissioner John Sevilla, the newly appointed head of the bureau wasted no time issuing an order padlocking Mighty's customs bonded warehouse in Manila.

"Initial report of [Task Force Mighty] reveals that Mighty Corp. committed serious violations of tariff and customs laws, rules and regulations resulting to huge revenue losses for the government. Consequently, there is a need to suspend the operations of the customs bonded warehouse of Mighty Corporation to prevent revenue leakages while further investigation is being conducted."

A few days later, the BOC published an ad in the country's major newspapers showing details of the tobacco leaf imports of cigarette companies. A simple reading of the numbers published by the BOC again showed several incongruities in the taxes paid by Mighty.

For instance, for Virginia flue-cured leaf, Philip Morris Fortune Tobacco Company (PMFTC) imported 11.27 million kilograms of Virginia flue-cured leaf with a dutiable value of P2.44 billion based on its import price of P216.33 per kg. It paid a total of P131.55 million in customs duties in 2013.

Other cigarette makers such as the Associated Anglo American Tobacco Company (AAATC) priced its Virginia leaf imports at P150.62 per kg and paid P7.6 million in taxes for importing 721,364 kg. La Suerte Cigar and Cigarette Factory reported its value at P202.51 per kg. and paid P3.86 million for imports amounting to 291,634 kg, while Universal Leaf, a top leaf importer, was able to import at P159.92 per kg. and paid P3.57 million for 319,475 kg.

Mighty Corporation imported more than double the amount of Virginia leaf brought in by PMFTC–26.88 million kg, yet its dutiable value was only P980 million because it valued its imports at only P36.46 per kg. Thus, it paid only P68.60 million in taxes last year.

The same absurdity can be seen in its imports of burley leaf. While PMFTC valued its burley tobacco at P163.63 per kg., Mighty quoted a price of only P81.70 per kg. Universal Leaf imported at P150.15 per kg., La Suerte at P180.12 per kg. and AAATC at P112.73 per kg.

With an import value of only P81.70 per kg., Mighty paid only P14.24 million in duties to the BOC for bringing in 2.49 million kg of burley tobacco in 2013.

Tobacco stems also appear to be grossly undervalued by Mighty. PMFTC quoted a value of P57.91 per kg. and La Suerte, P52.15 per kg. Mighty reported that it was able to import tobacco stems at only P26.23 per kg.

Mighty's import values for all raw materials used in cigarette manufacturing are not only way below the average, they are incredible. How Mighty was able to source these materials at bargain basement prices boggles the mind, to say the least.

We wonder what sort of documents and legal defense Mighty's officials will submit to the BOC and the BIR to justify these questionable figures. But, let's wait for Mighty's explanation before jumping to conclusions. Enditem