I’ve seen some very disturbing numbers that Mighty Corp. has to refute far better than it has so far.
Let me start with just one—cost of manufacture. Over the past 11 months since the sin tax increase, Mighty, a small (3 percent of the market at the time) cigarette manufacturer owned by a Mr. Wong Chu King, claimed it could produce a pack of cigarettes and sell it at P14.70 per pack, of which Mighty should pay excise tax of P12 and value-added tax of P1.58, leaving it with P1.12 to cover the cost of raw materials, of manufacturing the cigarettes, of running the business—and making a profit.
How to make a profit when your tax eats up 92 percent of your selling price is something I’m sure we’d all like to learn from Mighty how to do.
Philip Morris, the world’s largest tobacco company with huge economies of scale, imports acetate tow for cigarette filters from the same US supplier as Mighty. It pays $5.36 per kilo of acetate tow while Anglo American, another small local manufacturer, purchases acetate tow from Belgium and pays for it at $6.25 per kilo. Mighty claims to pay only an unbelievable $0.32 per kilo, which would not add much to the cost of a pack (about 11 cents), but how can it be paying only 5 percent of what its competitors are paying? Nobody can do that in any industry, so if Mighty is actually paying what its competitors are paying, which surely it must be, then it adds P2.05 per pack. We’ll use that more believable number.
The industry pays an average of $4.30 per kilo for leaf depending on type of leaf and where it comes from. Yet Mighty claims it pays $0.68 per kilo, no matter the leaf type or country of origin, and that’s some eight or nine countries to choose from. That alone raises serious questions, doesn’t it? How can it buy such a variety all of the same price? The price of P0.68 per pack increases the loss on materials alone to P2.19.
But if it’s paying what others are paying, then the cost of leaf rises to P2 per pack. But let’s pretend their blend is of lesser quality and make it P1.50. So Mighty now suffers losses of close to P3 per pack! On reported tax-paid sales of 520 million packs so far this year, that would be a corporate loss of P1.5 billion. Why would it do that?
That doesn’t even cover the cost of packaging, cigarette paper, ink, ingredients, salaries, electricity, etc. of a manufacturing business, and all the other nasty stuff in cigarettes that kill people. That’s why I don’t buy the statement of Mighty’s lawyer that it can sell at P1 per stick because it carries lower administrative and operating expenses. The numbers already show there is a loss on the materials alone—so claiming lower operating and administrative expenses as a reason it can sell at such a low price is irrelevant.
Mighty also makes the absurd claim that it can produce for so much less because it doesn’t have to pay royalties to an overseas owner, as other manufacturers do (which they don’t, by the way). I think the numbers bring the inevitable conclusion: Mighty must have been selling at a loss, or cheating on its taxes. So it makes Mighty’s press release that it can sell at this price because it has a lower cost base compared to others a complete joke. And essentially, Mighty has now admitted that because on Nov. 13 it raised its prices by a substantial 25 percent to P18.30. There’s been no known cost increase that could account for this, only guilt.
So I’m glad to see that Finance Secretary Cesar Purisima has ordered the Bureau of Internal Revenue and Bureau of Customs to look very carefully into the taxes and duties that Mighty pays. May I suggest that he assign someone he fully trusts as being incorruptible and capable of withstanding unscrupulous pressures to oversee the review, because despite his order nothing has happened yet.
What is so sad about this is that a principal objective of raising taxes on cigarettes (the Sin Tax Law) was to reduce consumption. Consumption has actually increased, not decreased, but this is due to the presence of ultracheap cigarettes that are now 40 percent of the market! Yet the whole idea of the new tax laws was that cheap cigarettes should not even exist at all! The intent was to discourage smoking. Well, Mr. Wong Chu King, my two best friends (one in Australia I grew up with, the best man at our wedding, and one here who’d been a friend for some 35 years) died from smoking your product: cigarettes.
Governments worldwide have agreed with medical proof that SMOKING KILLS, so I wonder how Mr. Wong Chu King lives with that. Why doesn’t he shift to another business that supports life? Oh, he can argue that he is only providing a product people want, and it’s a legitimate thing to do, and indeed it is. But there’s such a thing as conscience. I wonder if he has one. Let’s not be draconian about it: He can take a gradual approach so he and his business can adapt. Pricing his cigarettes correctly and allowing volumes to gradually decline, as the government and we who care about people and their health want, and shift to something else is something he can do if he truly cares.
Now Mighty has said that this is all untrue, and that it is paying its taxes and declaring the correct prices on imports. If so, I ask Mighty to send me proof that my accountant and I can believe. I’ll publish it.