Mighty’s tax liability: just the tip of the iceberg

Previously I wrote about two white knights that came forward to rescue a damsel in distress — in this case, the embattled local cigarette manufacturing firm called Mighty Corp. Recently the controversial company received buyout offers from British American Tobacco (BAT) and Japan Tobacco International (JTI).

For the amount of P32.5 billion, the Londonbased BAT proposed to acquire Mighty and pay for its tax liabilities with the Philippine government to the tune of P20.5 billion covering transaction taxes, tax settlement for criminal cases, and other potential tax liabilities.

Geneva- headquartered JTI, which is partly owned by the Japanese Ministry of Finance, offered to buy Mighty for P45 billion, with P25 billion going to the government for the same purposes as those of BAT, plus value added taxes ( VAT) worth P5.4 billion.

It was therefore a nobrainer for the owners of Mighty to choose JTI’s better offer, from which they stand to gain P20 billion versus the P12 billion proceeds out of the proposed tender from BAT.

Last week, Mighty Corp.’s controlling shareholders led by the Wongchuking family signified their intent to sell its manufacturing and distribution business to JTI through a letter addressed to Bureau of Internal Revenue (BIR) Commissioner Caesar Dulay.

At the same time, they requested that the company’s liability from three criminal cases filed by the BIR as well as its tax liabilities from 2010 to 2017 be settled from the P25 billion that would go to the government, along with all transaction taxes.

They also committed to immediately remit P3.5 billion representing the basic excise tax due on forfeited cigarette packs from three of their warehouses that were raided by the BIR and the Bureau of Customs (BoC), which fall under the Department of Finance (DoF).

Mighty has allegedly been manufacturing and distributing cigarettes with fake tax stamps since the passage of the so-called “Sin Tax Law” in 2012. During the previous administration, both the BoC and the BIR failed to secure actual proof of these criminal acts.

But this year alone, BIR-BoC joint operations in Pampanga, Bulacan, and General Santos City yielded rolls of fake stamps purportedly imported from China and about 200,000 master cases of cigarettes with fake stamps found during raids of Mighty’s warehouses in those areas.

Each master case consists of 50 packs, while each pack has 20 cigarette sticks. The total tax liabilities of Mighty from the raids on these warehouses have reached almost P38 billion, stemming from three cases filed at the Department of Justice by the BIR for multiple violations of the National Tax Code, specifically sections 263 and 265c.

In addition to the payment of penalties imposed on violators, each count of violating section 263 would result in imprisonment for two to four years, while section 265c convictions are meted the penalty of imprisonment for four to eight years per count. These penalties are on top of deficiency taxes that must also be collected.

Currently the DoF is studying the settlement offer made by Mighty Corp. President Oscar Barrientos, who said the company is willing to “settle all such excise and tax issues and respectfully offer as settlement of the company’s shareholders’ and its officers’ liability in this regard the total sum of P25 billion.” He made a commitment to retire the operations of Mighty following the conclusion of its deal with JTI.

In a press release, the DoF quoted Mr. Barrientos as saying that “the settlement sum would be funded by means of an interim loan from JTI Philippines and the sale by Mighty and its affiliates of its manufacturing and distribution business and assets, along with the intellectual property rights associated with these assets, including those owned by the company, Wong Chu King Holdings, Inc., and other affiliates to JTI or any of its affiliates for a total purchase price of P45 billion, exclusive of VAT.”

DoF Secretary Carlos Dominguez III clarified that Mighty’s settlement offer for its tax deficiencies is separate from criminal charges that the BIR might file in court against the company.

Aside from being caught with fake stamps, Mighty has pending audits for taxable years 2010 to 2016, which may result in further tax liabilities. It is possible that there are other warehouses containing cigarette packs with fake stamps scattered throughout the country, potentially causing massive tax leakages. Those three raids yielding some P38 billion in unpaid excise taxes might just be the tip of the iceberg after all.