Philip Morris HQ Tells Investors Mighty Corp is Dodging Taxes

Source from:  InterAksyon.com 02/14/2014

The word war between a David and Goliath of the tobacco industry is heating up as the parent company of Philip Morris Fortune Tobacco Corp (PMFTC) has openly accused its local competitor of tax-dodging.

In its report and presentation to investors on February 6, Switzerland-based Philip Morris International (PMI) said its local competitor, Mighty Corp, is underdeclaring its production to allegedly cut the excise taxes needed to be paid.

Based on the power point presentation to the media and investors, PMI (NYSE: PM) said it estimates that Bulacan-based Mighty is declaring only half of its production "for tax purposes."

"Retail price of Mighty brand increased to PHP1.50.stick but Marvels brand still sold at price lower than combination of excise tax and VAT [value added taxes]," PMI said.

This downtrading, the cigarette giant claimed, has "impacted" the company market share and profitability. Downtrading means consumers have shifted to lower-priced brands, which have begun to eat away at the market share of the higher-priced brands.

According to PMI's full-year and fourth-quarter earnings press release, the total sales of the local cigarette industry fell 15.6 percent to 86.3 billion units last year. It attributed the decrease to the implementation of the "disruptive" reform in the excise tax system on the so-called "sin products", which are tobacco and alcohol.

The company also blamed the "surge in the prevalence of domestic non-duty paid products," for the drop in the sales.

For the entire 2013, PMI's shipment volume plunged 26.2 percent to 68.5 billion due to the sin tax hike and the "under-declaration of tax-paid volume by PMI's main local competitor."

The report said that PMI's market share was cut by 11.4 points to 79.3 percent, mainly because of the "down-trading to competitors' brands."

The market share of PMI's best-selling brand, Marlboro, dipped 4.2 points to 16.7 percent while Fortune's share also dropped 17.8 points to 31.6 percent, which was partly offset by gains from PMI's other local brands.

"In the fourth quarter of 2013, the total estimated industry cigarette volume of 25.0 billion units decreased by 8.9 percent, reflecting a partial, but insufficient, improvement in declared tax-paid volume by PMI's main local competitor as well as government tax enforcement," the cigarette-maker said.

PMI's shipment during the quarter was cut by a hefty 24.5 percent to 18.1 billion and its market share was whittled down by 14.9 points to 72.3 percent, with Marlboro down by 4.1 points to 16.9 percent. Fortune was also down by 20.5 points to 26.7 percent, partly offset by gains from the company's other local brands.

Earlier, the sin tax supporters said that Mighty has been accused of technical smuggling. Citing a report from the Department of Finance Task Force, the group led by Action for Economic Reforms said there is "substantial unaccounted raw materials" that should have been exported and that there is "potentially huge revenue leakage" that accounted for Mighty cigarettes' low selling price, even below the break-even rate.

In a statement, Mighty said these allegations are part of the "continuous and unrelenting" smear campaign against it by competitors.

"Mighty Corp. continues to be vilified for having stood up to the industry giant. Since last year, the smear campaign has been nothing more than a rehash of the same lies and allegations," executive vice president and spokesman Oscar P Barrientos said.

"It is puzzling and alarming that our critics have resorted to rehashing old issues against us. And we have to ask, why?," he added.
 
The local cigarette firm said its "strong performance" in the past 13 months seemed to have "unsettled" PMFTC ,which used to control as much as 90 percent of the market but dwindled by end-2013.

"Our competitor has thrown everything including the kitchen sink at us and we have just become stronger and better. Obviously Mighty Corp. has proven that even a small local company can go toe to toe with a giant monopoly like PMFTC. But is their smear campaign really just their way of dealing with their failures in the market or is there something more to it?," Barrientos said.

The company official said there might be a bigger agena behind the "anti-Mighty" campaign since PMFTC is known to be against the passge of Republic Act 10351 or the Sin Tax Reform Law since this meant the company would lose its monopoly.

"This could be a reason why they are now trying to pin us down, so that they can say the sin tax law doesn't work," he added.

Earlier, Bureau of Internal Revenue chief Kim Henares earlier said that PMFTC's labor problems would not have happened if the company had agreed from the start to keep the government's original intent of implementing a unitary tax system for the industry.

A unitary tax system means that all brands and price points would have a single rate and thus downshifting by consumers would, in theory, be mitigated. Single-tier advocates say that a single tax rate would discourage the vulnerable consumers -- the poor and the youth -- from buying even the cheapest brand. Lack of price discrimination in taxation could have limited the cannibalization of the middle-market brands by the lower-end brands. Enditem