Figure doesn't lie

What is the true state of government’s excise tax collection efforts on the tobacco industry?

The Department of Finance (DOF) has been insisting that excise tax revenues from cigarettes would only reach P25.8 billion in 2010. But the cigarette sector claims it is much higher.

This is the same figure being quoted by Swiss firm Sicpa in justifying the need for adoption of the so-called stamp trace technology allegedly to curb smuggling and tax leakages in the tobacco industry. According to Sicpa, it will be able to raise P115 billion in just seven years with the use of the system.

A recent testimony in Congress has shattered Sicpa’s claim. The Swiss firm has been citing figures being reported by the DOF, which had been insisting that the tax revenues from cigarettes would only reach P25.8 billion in 2010.

The tobacco industry vehemently disputed the DOF’s figure. Philippine Tobacco Institute (PTI) president Rudy Salanga said the numbers provided by the DOF are inaccurate as the total BIR excise total collections as of November 2010 had already reached more than P27 billion. By yearend, collections totaled P31.6 billion.

Salanga suspects that the DOF is not being transparent with Congress regarding the current excise tax system to prove that it is not working.

This would move lawmakers to amend Republic Act 9334 or the Excise Tax Law on Alcohol and Tobacco Products. The DOF wants to collapse the existing structure into a single tax rate, purportedly for easier administration. But Salanga insists that there is no need to restructure a system that has been providing the government with a steady stream of predictable revenues even more than its projections.

The disagreement on figures between the DOF and cigarette manufacturers ended when the Bureau of Internal Revenue (BIR) revealed in Congress last week that the total tobacco excise tax collection for 2010 surpassed government’s projections.

The dispute between the DOF and PTI was finally settled when a BIR technical assistant testified in a hearing by the House ways and means committee that excise tax collections last year breached the government target of P25.8 billion.

It must be recalled that Congress concluded that Sicpa has failed to substantiate its claim of massive smuggling and tax leakages in the tobacco industry.

Thus, the House ways and means committee in its report found that Sicpa’s claim of massive illicit trade of tobacco products is not verified and that in the absence of any validation conducted by the BIR, the National Economic and Development Authority, and the National Tax Research Center on the assumptions used by Sicpa, the committee cannot simply assume or accept the existence of a tax leakage that will warrant the investment of P18 billion.

Also, a study commissioned by the BIR and funded by USAID did not confirm the existence of tax leakage and also observed “there was not much of a difference between potential and actual collections.” The study conducted by De La Salle University further stressed that the variance “cannot be solely attributed to tax leakage in collection and even granting that it is, the potential contribution is substantially small and no way approximates P115 billion for a period of seven years or P16.4 billion in incremental revenues as claimed by Sicpa.

This confused congressmen who were inquiring on the tax stamp proposal last year. They said it’s simply astonishing that an average of P16.5 billion is lost in excise taxes annually, when the entire tobacco industry can produce only an average of 100 billion cigarette sticks every year.

During the 14th Congress, Rep. Exequiel Javier, House ways and means committee chairman advised then Finance Secretary Margarito Teves to totally shelve the tax stamp proposal after NEDA and the NTRC doubted its viability.

Bad corporate governance?

Speculations are rife in the banking industry on the reason for the unceremonious removal of a ranking official of the Philippine Deposit Insurance Corp. (PDIC) as board member of a sequestered bank sometime last month.

That ranking PDIC official sat on the bank since it was PDIC which gave the bank a lifeline to the tune of P12 billion a few years back to improve its financial standing. To ensure that the bank would be run properly in order to protect its investment, PDIC was given eight board seats during the past administrations.

However, in the current administration, only one seat was given to PDIC.

The ranking PDIC official was said to have been sacked as director through a mere phone call informing him that his seat will be given to another nominee.

Prior to his exit from the bank, the ranking PDIC official was said to be heading an investigation on alleged impropriety in the re-branding efforts of the bank. The bank is now sporting a new look and that its branches are undergoing renovation to reflect the new look of the bank.

But based on anonymous letter sent to the PDIC last year and verified by the bank’s internal audit division, the bank’s rebranding costing P372 million, did not go to the board for approval. Worse, the letter accused a ranking bank official of giving the powers to implement the rebranding scheme to his two consultants – a retired bank executive and a lady executive, the hiring of which were also not approved by the board.

The bank’s internal audit division also found out that the ranking bank official gave the contract to design the prototypes to be used as basis for the rebranding project and to renovate the bank’s main branch to a design firm owned by the said official’s daughter and son without disclosing the same to the board; that there was no actual contract signed with the design firm but the firm just sent billings to the bank and payments were approved by retired bank executive-consultant; and that the bank has already made a partial payment P3.77 million to the design company, representing nine percent of the total cost of P44.22 million when the Architects Code of Ethics allows only a fee of seven percent for project cost of P50 million and less.

The division likewise said in a report that the selection of the design company deviated from the prescribed comparative selection scheme used by institutions, corporations or public agencies in selecting companies; that the retired bank executive was engaged as a consultant in 2008 with a six-figure fee, which is above industry standards and that he was given the power to supervise the Conglomerate Security Group (CSG) which oversaw the accreditation, awarding of contracts and selection of contractors for negotiated projects. The CSG virtually replaced the bank’s bids and awards committee (BAC).

In its recommendation to the said PDIC official, the IAD said the decision the give the consultant the authority to administer the accreditation, bids and awards procedures was “not in accordance with good corporate governance” and that for more transparency in service and purchase contracts, the BAC should be the lead office.

They added that for a major undertaking such as rebranding of the bank, the same should have been submitted to the board for approval.

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