Purisima Aware of Tax Fraud

The Department of Finance is aware of the tax fraud committed by Mighty Corp. This is the reason Finance Secretary Cesar Purisima issued on Aug. l5, 2013 an “urgent and confidential memorandum” to Customs

Commissioner Rozano Rufino B. Biazon, (resigned last month) BIR Commissioner Kim Jacinto Henares and Jeremias N. Paul, head of the domestic finance group of the DOF ordering them to “submit a written response evaluating the findings (of tax fraud) on or before Aug. 30, 2013, and explore the factual and legal merits of the findings (by the DOF itself).

Purisima said “This memorandum is to transmit to your office an analysis of the trading activities of Mighty Corp. from an industry source, and a preliminary list of findings from the Department’s own analysis of the said companies import entries”.

It has been more than eight months since the memo was issued. Up to this day, Jan. 6, 2014,  none of the three officials is known to have made a report.

According to the memorandum, Mighty Corp. is liable for non-payment of P4.421 billion in excise tax on cigarettes.

The biggest amount of P2.53 billion covers the first six months of 2013, the first year of the effect of the excise tax law on sin products. The balance consists of P1.16 billion not paid for the year 2011 and P821 million for 2012.

Purisima stated in his memo “based from (sic) January-June 2013 Nielsen and BIR removal data, there is a variance of 212 million packs between the company’s estimated volume of removal and the quantity of removals which reflected tax payments. The excise tax evaded from the gap amounted to P2.54 billion”

The memo observed “considering the total manufacturing and material costs plus the amount of VAT (12%) and excise tax (P12 per pack) levied upon its cigarettes, Mighty Corp. is selling P4.47 below the break-even price per pack. How can the company sustain selling at a loss?”

The memo forthwith asks the question “is the company offsetting losses from selling below product costs through the gains from such undeclared removals?”

Purisima practically answered his own question by quoting the findings of A.C. Nielsen saying Mighty Corp. has a production capacity 8-9 times “bigger than what you need.” The memorandum points out “Mighty has a factory 8-9 times bigger than what it needs based on its 2012 declared production/removals from the BIR. The annual capacity of the company is estimated at 1.8 billion packs while its removal (number of packs declared to the BIR are only 213 million packs. The memo skillfully avoided mentioning the actual production and removals for the first six months of last year but said it escaped paying P2.54 billion in excise tax and value added tax.

It turns out that the company uses its capacity to the full. However, according to the findings of A.C. Nielsen, the company declares only 41 per cent of its production to the BIR for tax purposes.

The bigger portion of 59 per cent escapes the tax.

Purisima also noted in his memo “The volume of imported leaf for warehousing from the Bureau or Customs does not match with the volume of re-exports from the BIR, leaving unaccounted tobacco leaf import entries of 6.85 million kg in 2011 and 3.82 million kg in 2012. The excise tax revenue loss from the unaccounted volume amounts to P1.18 billion in 2011 and P598 million in 2012”

Purisima also stated in his memo “The purchase price of imported raw materials made by Mighty is severely undervalued compared to its competitors. In 2012, while two cigarette firms purchased imported (sic) Virginia leaf at a range of $3.39-$6.75 per kilo, Mighty bought it at $0.68 per kg.

“It is also interesting to point out that the leaf price is the same level regardless of country of origin. When it comes to acetate tow (material for cigarette filter)  the company’s purchases are valued at 10 per cent less than its competitors in 2011 and 2012, i.e. $0.30 to $0-.32 per kg vs. $4.93 to $7.45.

Documents obtained by Business Insight from sources in the Bureau of Customs show that Mighty paid only 10 per cent of the correct price of acetate tow, not 10 per cent less as belied by Purisima’s own figure.

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