A David-and-Goliath war over cigarettes

Last week, we wrote about the cartel of local flour millers, the Philippine Association of Flour Millers (Pafmil), complaining against the entry of cheap Turkish flour into the country. Although Turkish flour has a measly 7 percent of the Philippine market (Pafmil has 90 percent), local bakers use it for the cheaper breads consumed by the poor masses, such as pan de sal and sliced bread. Pafmil said Turkey, which has 1,200 flour mills all over its territory and is one of the world’s leading exporters of flour, is “dumping” its flour into the Philippines. Both sides have sent their comments on the column; we will publish them side by side in a future column.

Today, we will publish another corporate giant’s complaint against a small hitherto unknown competitor. Philip Morris and Fortune Tobacco Corp. used to dominate the Philippine cigarette market. Not anymore.

The sin tax, which raised the prices of premium cigarette brands, changed the fortunes of Fortune Tobacco and Philip Morris, which have now combined themselves into a single corporation, the Philip Morris Fortune Tobacco Corp. (PMFTC), the country’s largest tobacco firm.

With the prices of premium cigarettes beyond the reach of most Filipino smokers, they naturally looked for cheaper alternatives. That is where Mighty Corp., a manufacturer of cheap native cigarettes, comes in.

It began to manufacture Virginia cigarettes that it sold at very low prices. Naturally, smokers deserted the premium brands and shifted to the cheaper brands manufactured by Mighty. PMFTC began to lose revenues.

Because of the sin tax, the price of Marlboro, for example, catapulted to more than P50 per pack. Mighty Premium Tobacco on the other hand, can be bought for only P16 a pack. PMFTC complained to the Bureau of Customs (BOC) and the Bureau of Internal Revenue (BIR). Mighty Corp. must be cheating on its taxes, PMFTC said. How can it sell its products at such a loss and still survive, PMFTC asked.

PMFTC brands sell for an average P5 per stick; Mighty’s brands sell for only P1 per stick. Finance Secretary Cesar Purisima smelled a rat.

“Considering the total manufacturing and material costs, plus value-added and excise taxes levied upon its cigarettes,” he said, “Mighty Corp. is selling P4.47 below its break-even price per pack. How can the company sustain selling at such a loss?” He ordered the BOC and BIR to investigate.

According to some reports, there was a difference of 370 million packs between the estimated volume that left Mighty Corp’s 9-hectare manufacturing facility in Bulacan and the quantity of removals for which taxes were paid. “The excise taxes evaded from this gap amounted to P2.54 billion (updated to P4.44 billion),” Purisima said in his memorandum to the two tax-collection agencies. “Is the company offsetting losses from selling below production cost through the gains from such undeclared removals?”

Also, the tobacco leaf imports of Mighty, as declared with the BOC, did not match the reexports accounted for by the BIR. Where did 6.86 million kilos of tobacco leaf imports in 2011 and 3.52 million kilos in 2012 go? “The excise tax revenue loss from the unaccounted volume amounts to P1.16 billion in 2011 and P598 million in 2012,” Purisima said.

Customs Commissioner John Sevilla padlocked Mighty’s customs bonded warehouse (CBW) and organized a team, Task Force Mighty, to investigate the corporation. The team recommended the suspension of the company’s license to operate a CBW.

A list of the average prices of tobacco imported in 2013 showed how ridiculously low the declared import prices of Mighty were. For the Virginia variety for example, Mighty priced its imports at only P36.46 per kilo compared to other imports that ranged from a low P116.45 to a high of P216 per kilo. For the Burley tobacco variety, Mighty declared its imports at only P81.70 per kilo with the next lowest at P112.73 per kilo.

Clearly, the government lost hundreds of millions of pesos in duties as a consequence of the undervalued imports.

The BOC slapped additional import duties of P853 million discovered to have been evaded by the company in 2013 alone. Mighty reportedly paid the amount without a whimper.

Purisima has also ordered the BIR to investigate Mighty for underdeclaration of sales volumes, meaning, there is suspicion that some of Mighty’s products may have entered the local market without paying excise taxes.

If the charges are correct, Mighty may have cheated the government much more. However, there is still no news from the BIR on the results of its investigation.