Mighty exec: We are not Recto

Conclusion

MANILA, Philippines -  Mighty Corp., the Bulacan-based cigarette company now at the center of a multibillion-peso fake tax stamp issue, has repeatedly denied producing fake stamps.

“We are not Recto,” Ernesto Victa, Mighty’s head of Finance said in a Feb. 21 meeting with The STAR, referring to the decades-old bootlegging industry along Claro M. Recto Avenue in Manila that produces anything and everything fake – diplomas, passports, marriage contracts, receipts, land titles and what-have-you.

“What’s being imputed is that we have a machine that produces fake stamps. There are no fake stamps for Mighty,” he added.

More recently, in a mobile interview with The STAR on March 9, Mighty spokesman Oscar Barrientos also categorically denied that the company was engaged in the production of fake stamps. How then can Mighty – owned by the Wongchukings – sell its products at below-tax cost?

At present, its cigarettes are the lowest priced in the market, down to P32.86 per pack, which is below the minimum cost of roughly P34 per pack comprising excise tax of P30 and value added tax of P4, according to industry data.

Barrientos has said they have already raised prices and are now selling at P42 to P45 per pack. He said prices in the different areas depend on the area’s proximity to their factory in Bulacan.

While it is true that the invoice price of Mighty’s cigarettes is now higher, the prevailing actual price can still go down to P32 to P33 per pack because of trade deals such as “buy 10 (packs) and get one free.”

Under one trade deal, Mighty sells one ream of 10 packs for P361 and gives a “bonus” of one more pack, effectively selling 11 packs at P32.8 per pack, below the tax cost of P34.

Mighty’s price is still lower than Philip Morris-Fortune Tobacco Corp. (PMFTC)’s lowest-priced brand Jackpot, which sells for P39 to P40 per pack; Fortune, P45 per pack; and Marlboro at P60 per pack. Japan Tobacco Inc.’s Winston sells for P51 per pack.

No other player in the market is able to sell cigarettes below the tax cost of roughly P34 per pack, according to industry data.

Barrientos explained that Mighty could sell lower because as a Filipino-owned company selling Filipino brands, it does not pay royalties. While true, it still does not explain how the company can sell its products at below the basic tax cost.

In any case, a foreign executive working for a multinational cigarette company operating in the Philippines said that royalties for foreign brands represent a very insignificant amount – below P1 – of the price per pack.

For years now, Mighty’s name has been dragged in tax evasion and smuggling issues.

Just last Feb. 7 and 8, prior to the recent raids, Bureau of Internal Revenue (BIR) examiners in Cebu confiscated and seized 82,902 packs of Mighty cigarettes with fake stamps during an inspection.

The Metro Retail Stores Group Inc., the listed mall operator of the Gaisano Group, reported to the BIR that 82,902 cigarette packs bearing fake tax stamps recently found in its Super Store mall in Mandaue, Cebu were purchased directly from Mighty and not from any other supplier. It cited Mighty’s taxpayers’ identification number.

On this issue, Barrientos, a retired judge, said it is easy to cite the company’s TIN because it is public knowledge. He maintained Mighty has been a victim of “trial by publicity.”

In the Feb. 21 meeting with The STAR, he said that no case has yet been filed against them. This, he said, shows that they are not guilty of the issues raised against them.

But industry sources said that under the previous administration, the BIR simply chose to look the other way.

System of stamp monitors

Chief Presidential Legal Counsel Salvador Panelo also said on Tuesday that during the time of BIR commissioner Kim Henares, the tax agency ignored the issues raised against Mighty.

Sought for comment on this, Henares said the public should not forget that it was during her time that the tax stamp system was implemented, although this has been in effect since 1998.

“The system’s objective is to monitor and detect and provide evidence of cigarettes introduced into the market without the proper taxes being paid.  And this is precisely what it is doing now – telling the government when taxes are not paid and who are not paying,” Henares told The STAR.

“Any system is always subject to attack that is why the agreement we entered into with APO (Printing) requires that the design be changed every three years or sooner if there is evidence of 10 percent fraudulent stamp in the market,” she said.

She stated that on June 22 last year before the end of her term, she issued Revenue Memorandum Circular 68-2016 mandating a change in the tax stamp design effective Sept. 1, 2016. This did not happen.

On her past actions on Mighty, Henares said the complaint the BIR received against the company was based on an “extrapolation of a market survey, which is not evidence that can be used in court.”

“We also audited Mighty and assessed their deficiency taxes,” she said.

Industry sources also said that there was lack of proper monitoring at Mighty’s manufacturing plant because Henares refused to put a third-party monitoring system.

To this, Henares said a third-party monitor would be infringing on the jurisdiction of the BIR.

Instead, she said the BIR required the use of CCTVs inside Mighty’s plant. However, she said the CCTVs were not inside the actual production lines, hence making actual monitoring technically challenging. The use of “high resolution” system would require additional cost.

Documents obtained by The STAR showed Mighty had been deficient in its payments of duties and taxes during the previous administration.

Records showed that from 2010 to 2012, the BIR National Investigation Division found Mighty deficient in taxes by as much as P508 million.

The price of Mighty’s raw materials for cigarettes was valued at $0.68 per kilogram or way below the actual price of anywhere from $1.75 to $6.75 per kg.

Documents from the Department of Finance also showed that from January to June 2013, there was a variance of 212 million cigarette sticks between Mighty’s estimated volume of removals or withdrawals from factory and the quantity of removals, which reflected tax payments.

Henares also said no charges had been filed against Mighty despite the deficiencies during her time because the BIR never found Mighty to be producing or in possession of fake stamps.

In all, the estimated excise tax revenue lost to illicit trade amounted to P12.72 billion in 2016 from an estimated 10.18 billion sticks of cigarettes, according to industry estimates and Nielsen Retail Trade data.  

President Duterte has ordered Mighty to pay P3 billion as compromise settlement for tax evasion and later modified the amount to P5 billion.

But Finance Secretary Carlos Dominguez III said the government is still intent on filing a case against Mighty despite the President’s settlement offer.

Dominguez also clarified that the government cannot agree to a compromise settlement with Mighty since the BIR has yet to determine the firm’s actual tax liabilities.

Mighty’s Barrientos said they would wait for the BIR’s assessment and pay up. He said this was not a sign of guilt but just “for practical reasons.”

Cases that may be filed against Mighty are tax evasion or economic sabotage or both. Whichever, it would be the first tax case under the new administration.

It is now up to the Duterte administration to fully investigate the matter and file appropriate charges against the cigarette company.