P30-B SMOKE

By Ehlorra Mangahas, Trainee

NOT enough.

This is how economists and tax experts have described the proposed P30-B settlement by giant cigarette firm Mighty Corporation to the government over its alleged non-payment of correct taxes.

They said the P30-B settlement was comparable to the smoke from the cigarettes sold by Mighty Corporation using fake stamps that subsequently vanished into thin air.   

The observers added the government could have bargained for more from the firm to punish it for its past sins of deliberately refusing to pay the appropriate taxes during its several decades of operations.

 

Major Player      

Mighty Corporation has been in the tobacco industry since 1945, though records from Security Exchange Commission (SEC) showed that their incorporation was only in December 1985.

The company is considered as one of the major players in the industry when it comes to tobacco processing and cigarette manufacturing and has an approximately 25% market share from the industry that rakes about P150 billion per year. 

Conversely, the company is believed to be earning an estimated of P37-B annually. 

 

P18-B Taxes

Documents submitted to SEC by the company show that they paid P18- B in excise tax from 2004 to 2014.  

The biggest was from 2013 and 2014 amounting to at least P 8.25 billion. 

Its latest financial statement for 2014 shows that the total asset of the company is worth P13.17 –B , while its gross profit for the said year was P915.24 -M.

 

Fake Facade

On the surface, it appears that the cigarette firm is an obedient corporate citizen paying its tax obligations to the government dutifully and correctly.

But the company’s fake façade slowly unraveled after the government through the Bureau of Internal Revenue (BIR), Bureau of Customs (BOC) and the National Bureau of Investigation (NBI) decided to launch a vigorous campaign against companies that refuse to pay correct taxes.

Mighty became a primary target after the three agencies trained their guns on cigarette products using fake tax stamps thus robbing the government billions of pesos in potential revenue. 

Since 2014, the BIR has been using Stamps Integrated Systems on tobacco products to ensure that correct excise tax is paid. 

Thus, cigarette tax stamps were coded using three colors: pink for domestic consumption, orange for imported cigarettes, and green for export.

 

Fake Tax Stamps

In its December 2016 report, the BIR said that APO Production Unit, Inc. –an attached agency of the Presidential Communications Operations Office (PCOO)—allegedly overprinted internal revenue stamps being affixed to cigarette packs. 

The problem was compounded after it was determined that a significant number of the printed defective tax stamps could not be accounted anymore, thus raising the possibility that they could have landed in the hands of some unscrupulous cigarette companies.

It was also discovered that from 2014 to 2016, some 13.5 million defective tax stamps were also declared missing although the actual figure could go as high as 37.4 million fake stamps.

 

Baseless and Incorrect

As expected, APO Production Unit Inc. chair Mike Dalumpines had denied the BIR findings claiming that they were baseless and incorrect. 

Incidentally, APO’s silver ink suppliers for the tax stamps’ silver strip and the contract supplier of base printing, Asa Color Trading Corp., and United Graphic Expression Corp., respectively are both Mighty Corp.’s suppliers. 

These tax stamps bear a QR code, a two-dimensional barcode containing a unique identifier code. Hence, a tax stamp ideally bears a unique QR code.

However, in the task force’s investigation they discovered that fake tax stamps bear QR codes that are regenerated or were used multiple times. 

These fake tax stamps with “reused” QR codes are traced and confirmed to belong to only one company, the Mighty Corp.

Coincidentally, in November 2016, BIR and BOC conducted a raid in Bulacan, Pampanga and Pangasinan where they seized cigarette products bearing fake stamps worth more than P1 –B. 

 

Tax Fraud

In January 2017, Commissioner Cesar Dulay said they have been receiving persistent reports about the Bulacan-based cigarette manufacturers’ use of alleged fake stamps on its cigarette products. 

Mighty Corp.’s VP and spokesperson Oscar P. Barrientos however denied the allegations claiming that they are working closely with BIR in ensuring that they pay correct taxes. 

He added that their factories are the only tobacco manufacturer that is fully equipped with closed circuit television (CCTV) as prescribed by the BIR. 

Barrientos also stressed that the company has been subjected to unfair publicity caused by their competitors.

 

Seized Products

Yet, in February and in April this year, BOC seized cigarette packs that bore fake stamps in the company’s warehouses in the cities of Tacloban, Zamboanga, General Santos and in the provinces of Pampanga and Bulacan. 

In Tacloban City, around P6 million worth of fake cigarettes were seized while in Pampanga, 33,140,500 packs of cigarettes with fake tax stamps were also recovered. 

While in San Ildefonso, Bulacan, some 536,000 cigarette packs in 1, 072 master cases with fake stamps were also discovered. 

Per BIR report, Mighty Corp.’s inventory showed that in 33,140,500 cigarette packs seized in Pampanga, 87.5% bore fake stamps with an estimated amount of P 28.9 million. 

The fake tax stamps did not contain one of the multilayered security features of a valid internal revenue stamp.  

Furthermore, these stamps were not affixed in the company’s production plant in Barangay Tikay, Malolos, Bulacan, as required by law.

Also, there were no official delivery receipts for the Pampanga warehouses indicating the cigarette packs found there did not come from the Bulacan plant.

 

P37.9-B Complaint

Considering the fake tax stamps’ impact, especially in excise tax collection on tobacco products, a very clear disparity in tobacco tax collection is shown. 

As per BIR preliminary reports, that from 2015’s collection of P99.5 billion, it declined to P91.6 billion in 2016. 

Several raids and seizures of cigarette products with fake tax stamps prompted the BIR to file the tax evasion case before the Department of Justice (DOJ) versus the Mighty Corp. and its officials for the alleged use of counterfeit tax stamps.

Subsequently, the BIR filed a number of complaints against the company.

In March this year, a P9.6 –B complaint in unpaid excise tax was slapped against it.

A separate complaint for the nonpayment of excise taxes worth P P26.93 billion was also filed and another P1.39 billion tax evasion case was slapped against the tobacco firm.

The total amount the BIR wants to recover from Mighty amounts to P37.9-B.

Respondents in the complaint were Mighty Corp.’s owner Alexander Wongchuking, the company’s vice president and assistant corporate secretary; president Edilberto Adan, a retired Army general; executive vice president Oscar Barrientos, a former judge; and treasurer Ernesto Victa.

Mighty and its officials were charged with unlawful possession of articles subject to excise tax without payment of the tax, and for possessing false, counterfeit, restored or altered stamps, in violation of Sections 263 and 265(c) of the National Internal Revenue Code of 1997, as amended, or the Tax Code.

In their separate counter affidavit, Wongchuking and his coaccused maintained their claim of innocence as they denied violating Republic Act No. 8424, or the National Internal Revenue Code of 1997.

 

Tax Settlement Offer

The Mighty Corp. tax evasion case is considered the biggest in the Duterte administration. 

President Duterte, in an earlier interview, said that he is willing to let Mighty Corp. “off-the-hook” if they are to pay P3-B or double the amount of their tax liabilities. 

He also said that if someone might pursue the case, he can pardon Wongchuking. 

Justice Secretary Aguirre said there was no reason to arrest Wongchuking as he suggested for him to meet with BIR, DOF, and BOC officials for a possible compromise agreement.

On March 7, Wongchuking appeared before the DOJ and told him that he was amenable with Duterte’s proposal and would double the amount of their alleged tax deficit.

But Finance Secretary Carlos Dominguez burst the bubble when he said last July that President Duterte has ordered that Mighty Corp. should instead pay P25 billion in tax settlement. 

As Duterte pointed out that civil settlement will spare the government from a“long-drawn out court battle that could take years to resolve” Finance secretary Carlos Dominguez noted. 

 

JTI Acquisition

This prompted the company to open talks for their asset sales to Japan Tobacco International (JTI). 

The possible sale of Mighty Corp.’s assets and distribution network worth P45 billion to JTI will be subjected to Philippine Competition Commission (PCC) approval. 

PCC is a quasi-judicial body created by law to promote and maintain market competition and a level playing field for business by keeping in check anti-competitive practices.

DOF through the BIR already accepted the P3.44 billion initial payment from Mighty Corp. and JTI.

The remaining P21.5 billion will be funded from JTI’s acquisition of Mighty and will make the local manufacturer out of tobacco business for good.

DOF stressed that the estimated P 25 billion tax settlement could go up to more than 30 billion, once the value-added tax (VAT) and other fees are included in the final computation.

Dominguez, however, stressed that the tax settlement offer does not mean that the company is already “off-the-hook” adding that the acceptance of tax settlement does not preclude the cigarette firm from other criminal charges the BIR might file against them. 

 

Lessons Learned

Indeed, there are some lessons to be learned from the experience of Mighty Corporation and as what former US President Richard M. Nixon once said, ‘make sure you pay your taxes; otherwise you can get in a lot of trouble.’

And trouble surely has hounded Mighty Corporation people after it was learned that they are tax evaders after all. 

 

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