Mighty suspicious

Reacting to a news item (“BIR probes cigarette maker Mighty Corp.,” The Philippine Star, Oct. 25, 2013), a civil society coalition that supported the passage of the sin tax reform law issued a call for the Bureau of Internal Revenue (BIR), headed by commissioner Kim Jacinto-Henares to pursue an investigation of a suspected anomaly in tax payments.

The coalition is made up of the Action for Economic Reforms, FCTC Alliance of the Philippines, Medical Action Group, Philippine College of Physicians, and WomanHealth Philippines.

The issue springs from the flooding in the local market of suspiciously low-priced cigarettes sold at P1 per stick, the retail price of which is barely enough to cover for the government-mandated tax valuation as specified by the new reformed sin tax law passed last year.

The anti-smoking coalition echoed concern that the low priced cigarettes is undermining the government’s health and revenue objectives and making taxpayers compliant to the new tax laws.

False alarm on cigarette smuggling

Even after the passage into law of a reformed sin tax structure, opponents were still active in undermining the new law. Thru press releases and column feeds, the group raised alarm about the threat of smuggled cigarettes. They reiterated the “I told you so” message that smuggled cigarettes would prevent the realization of P-Noy’s objective of raising more revenues from cigarettes for funding of health and tobacco farmers’ assistance programs.

However, official statistics show that the government met its revenue objectives from sin taxes and that tax collection from “sin” products may breach the P100 billion mark for the first time. Furthermore, market data shows that there is no evidence of massive entry of smuggled cigarettes, a situation that would not escape the attention of market watchers.

What evidently was happening in the marketplace is the emergence of the “Mighty” issue.

Absurdly cheap

During the past months Mighty Corp.’s absurdly cheap cigarettes have reportedly influenced around 25 percent of the premium and sub-premium smoking segments to switch to the one-peso per cigarette stick brand.

The coalition reiterated suspicions that had been raised against Mighty Corp. for not paying the right amount of taxes on their manufactured cigarettes.

The Filipino-owned Mighty Corp. issued a statement saying that it is able to sell its cigarettes at P1 per stick because it does not pay royalty fees to foreign companies for the brand use, has lower overhead costs, and uses more local components compared to other existing brands.

This was met with protests from other local industry players including the Fortune Tobacco half of the Philip Morris Fortune Tobacco Corp. (PMFTC) monopoly that controls more than 90 percent of the local tobacco market.

Other industry players contend that it was statistically improbable for any cigarette manufacturer to price its product at one peso per stick, and still pay the correct amount of tax.

Unraveling the ‘Mighty’ puzzle

While the BIR is investigating complaints against Mighty Corp. by comparing production volumes and declarations made by the cigarette manufacturer, there are suggestions to also look at the whole manufacturing process for aberrations.

Another issue that is being brought out for investigation is the allegation of technical smuggling, specifically covering the imported tobacco components used by the company. Reports in media indicate that Mighty Corp. may have resorted to undervaluation of its imported tobacco leaves and other raw materials used as cigarette filters.

With the escalating noise about the “Mighty” issue, Senator Miriam Defensor was also prompted to seek an inquiry into these allegations by filing Resolution no. 250 in the Senate.

Perhaps, a more detailed investigation by the Food and Drug Administration and the Department of Health of the tobacco content of the brand would be in order. In due course, the “Mighty” puzzle will hopefully be unraveled.

Real threat to sin tax law

While government authorities are looking into all the allegations against the business operations of Mighty Corp., there is a looming threat that could definitely undermine the objectives of sin tax law.

The flooding of the cheap one-peso cigarette stick has caused a major shift in market consumption, with daily average consumption now at 14.13 sticks per smoker in the second quarter of 2013, as against 13.53 sticks per smoker in the first quarter.

The anti-smoking coalition is particularly alarmed over the possibility that new or existing cigarette companies may introduce, no matter how absurd the economics, one-peso brands that would compete against Mighty Corp. and protect their own market shares.

There are reports that a major player of the cigarette industry has started the motion for the introduction of re-branded cigarettes that would fall under the low level of tax classification by filing an application with the BIR. The plan is to sell these re-branded premium cigarettes at prices that would enable the cigarettes to be classified at a lower tax classification same as the Mighty Corp. cigarettes.

The coalition is concerned that if the BIR approves the re-classification of a premium cigarette brand name into a lower tax classification it would only encourage more people to start or continue smoking, which ultimately would increase the number of Filipinos with health problems related to smoking, as well as raise the cost of public health care delivery services.

Previous studies have repeatedly pointed out that majority of those afflicted with chronic smoking-related diseases are those who can ill-afford to pay for medicines and hospitalization, and therefore pose the biggest burden to date on the government’s allocated health care budget.

This I believe is the real threat that would undermine the objectives of the reformed sin tax law. This ploy is so obvious and should not be discounted the P-Noy administration.

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