SPECIAL REPORT: Fake cigarette tax stamps flood market

First of three parts

MANILA, Philippines - Faking of cigarette tax stamps, like counterfeit money, has quietly grown into a major problem for the country, depriving government of much needed revenues.

For instance, the recent raids conducted by the Bureau of Customs (BOC) on the warehouses of Mighty Corp. in Pampanga, General Santos City and Zamboanga yielded over P2 billion worth of cigarettes with fake stamps, or foregone excise tax revenues of at least P1.1 billion.

At P1.1 billion – and just from the three raids alone – Mighty should pay at least P11 billion or 10 times the amount of excise tax due, according to Section 263 of the National Internal Revenue Code or the Unlawful Possession or Removal of Articles Subject to Excise Tax Without Payment of the Tax.

The excise tax amount of P1.1 billion is based on the unitary excise tax rate of P30 per cigarette pack. According to the BOC, there were 62,200 master cases of cigarettes seized from Mighty’s five warehouses in Pampanga; 11,044 master cases of cigarettes in Mighty’s warehouse in General Santos and 400 master cases from a separate raid in the company’s warehouse in Zamboanga last month. Each master case has 500 cigarette packs or an excise tax of P15,000 at P30 per pack.

In all, there were 73,644 master cases from the three raids. Thus, the excise tax loss for 73,644 master cases with fake stamps amounted to at least P1.1 billion.

Mighty is the Bulacan-based cigarette company owned and operated by Caesar and Alex Wongchuking.

Mighty has repeatedly denied engaging in illicit trade, even as it is the only cigarette company that is able to sell below minimum tax cost.

It is able to sell its cigarettes for as low as P32 to P33 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. Mighty spokesman Oscar Barrientos has said they have raised prices.

“It used to be P36 (per pack) but now it’s P42 to P45,” he said in a recent interview, adding that prices depend on sellers’ proximity to Mighty’s factory in Bulacan.

Mighty’s P32 to P33 per pack price – made possible through marked down trade deals such as “buy 10 (packs) and get one free” – is still found in Central Luzon provinces, according to industry data.

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 for P361 or P32.80 per pack.

On the other hand, PMFTC’s (Philip Morris-Fortune Tobacco Corp.) Jackpot sells for P39 to P40 per pack; Fortune for P45 per pack and Marlboro for P60 per pack. Japan Tobacco Inc.’s Winston sells for P51 per pack.

Tax stamps, which the Bureau of Internal Revenue (BIR) introduced in 2014, were supposed to ensure that cigarette companies pay the proper taxes.

However, as shown by the recent raids conducted by the BOC and the BIR on the warehouses of Mighty Corp., cigarettes with fake tax stamps abound.

And not many people know that these are not isolated incidents, according to separate documents from the BIR and IRSIS Corp., the consortium in charge of the supply and delivery of security features and the monitoring system for the tax stamp. IRSIS stands for Internal Revenue Stamp Integrated System.

Faking stamps since 2015

In a Dec. 19, 2016 report on fake stamps submitted to BIR Commissioner Caesar Dulay, IRSIS said Mighty has been producing fake cigarette stamps since 2015.

Based on such information, IRSIS recommended the conduct of raids on Mighty’s warehouses. Fake stamps have invalid quick reference or QR codes.

In layman’s term, a QR Code is a barcode with a unique identifier code (UIC) printed on the tax stamp slapped on every single cigarette pack. A tax stamp has a unique QR code. These QR codes are associated with the cigarette manufacturer or importer who ordered and acquired the stamps where the QR codes are printed.

IRSIS said that fake stamps with QR codes assigned to Mighty were used to create new codes similar to IRSIS format but are invalid.

“These type of fake stamps started from February 2015 stamp orders,” IRSIS said in its report to Dulay.

“As Mighty is the only organization that has access to its ordered and released tax-paid stamps, it can be concluded that Mighty Corp. counterfeits its own tax-paid stamps and uses these fake stamps on illicit cigarette packs,” IRSIS added.

It also said that other counterfeiters in the market do not have access to valid stamps on volume basis and therefore use garbage value or repeatedly use the same value to counterfeit stamps.

Furthermore, IRSIS said that while fake brands are present in the market, these are more prevalent on Mighty brands, accounting for 95.72 percent or 1,363 QR codes out of total invalid 1,424 QR codes captured from a stamp verifier mobile application from a sample of 3,078 codes.

IRSIS also did a physical survey of 923 packs of cigarettes from various locations around the country: Albay, Baguio, Batangas, Camarines Sur, Laguna, La Union, Pangasinan, Rizal, Tarlac and Metro Manila.

Of the 923 packs, 894 samples had fake stamps and their QR codes were associated with Mighty. The stamps also did not have security ink. With such information, IRSIS believes Mighty is faking its own valid tax stamps.

There are several criteria that must be met to determine the authenticity of a stamp. For one, the UIC and QR code values must be valid when verified and checked by IRSIS; the printed UIC should match with the UIC in the QR code or the barcode; the security features are present in the stamp itself; the valid UIC and QR code or the barcode must belong to the correct cigarette company; and finally, the stamp color matches the color assigned to the cigarette brand’s tax class.

Stamps have colors to differentiate whether the cigarettes are produced locally or imported. These colors are applied on stamps during base printing while the UICs and QR codes are applied on base printed stamps followed by the process called “personalization.” Here each and every stamp is created uniquely.

A stamp is verified as valid or invalid through the stamp verifier app and through the IRSIS investigation module.

Raids overkill

Mighty’s Barrientos, the company spokesman, director and executive vice president, vehemently denied that they were faking their own valid stamps.

“We are not doing that,” said Barrientos, a soft-spoken retired judge assigned at the Malolos regional trial court, when asked about the fake stamps.

In a phone interview with The STAR on March 9, he also denied the findings of the BOC and criticized the procedure, saying the BOC’s mission orders did not cover the issue of fake tax stamps.

In fact, on March 6, Mighty secured a 20-day temporary restraining order (TRO) from Judge Tita Alisuag of Manila Regional Trial Court Branch 1, preventing the BOC from conducting future raids of Mighty warehouses for a period of 20 days or from March 3 to 23 this year.

In its complaint, Mighty said BOC and BIR operatives discovered “there were no counterfeit, fake or smuggled goods” in the warehouses but still proceeded with the raid, the conduct of which was not in the scope of their mission order.

Customs Commissioner Nicanor Faeldon said the BOC would abide by the TRO but maintained that the tens of thousands of cases of cigarettes seized from the raids had fake tax stamps.

Faeldon said the operations were carried out on the strength of mission orders and letters of authority he issued.

Furthermore, BIR operatives confirmed that the seized tax stamps were fakes after subjecting them to authenticity tests.

But Barrientos said they were also questioning the accuracy of the BIR stamp-validating device known as the Taggant reader, saying that it was defective because it produced varying results.

Mighty lawyer Sigfrid Fortun said in a separate statement that the machines used for the raid “were unreliable for purposes of assessing Mighty’s liability for tax fraud or deficiency in excise tax payments.”

Despite the TRO, Faeldon was optimistic that after gathering all relevant evidence, the BOC would be able to build a strong case against Mighty.

“We are assuring the public and all legitimate manufacturers and importers of cigarettes or any other product that the BOC will run after illicit traders and smugglers,” he said.

Through the BOC legal service, Faeldon argued that the BOC has exclusive jurisdiction over all seizure and forfeiture cases under Section 202 of Republic Act No. 10863 or the Customs Modernization and Tariff Act (CMTA).

Section 301 of the CMTA further provides that “all goods, including means of transport, entering or leaving customs territory, regardless of whether they are liable to duties and taxes, shall be subject to customs control.”

To be continued