Settlement

The last time government went after a cigarette manufacturer for substantial sum in taxes, the case wound through the courts for over two decades. In the end, government lost its case.

Only the defendant, and the defense lawyers who ministered to the case, benefitted from this long-drawn out strategy.

Today, government has another collection case against another cigarette manufacturer. Calculations of taxes allegedly missed and penalties possibly imposed border on the fabulous. But we may have to wait another two decades to realize that, apart from taking the risk of losing yet another tobacco-related collection case.

Meanwhile, the battle for Marawi City and reconstruction of quake-hit Leyte confront government with unexpected expenditures. In both cases, extensive public works efforts are urgently required. No one wants a repeat of the slow-motion rehabilitation of Zamboanga after the battle there or Tacloban after Yolanda. Government needs windfall revenues right now. This time around, the cigarette manufacturer in question is Mighty Corporation. Tax authorities say the company used fake tax stamps on its cigarettes.

President Duterte earlier announced he would be amenable to settling Mighty’s delinquency for P3 billion – all to be used to modernize three hospitals badly in need of rehabilitation. Revenue authorities apparently succeeded in convincing the President much more was due government than what he is apparently prepared to settle for.

A number of significant corporate developments happened since.

Two international cigarette makers – Japan Tobacco Inc. (JTI) and British American Tobacco (BAT) – initiated moves to acquire Mighty Corporation and settle its tax obligations.

BAT is said to have offered to buy Mighty (along with its tax liabilities) for P32.5 billion. Of this amount, P20.5 billion goes to government in the form of transaction taxes, tax settlement for criminal cases and other tax liabilities.

JTI, for its part, made an even more generous offer. They will acquire Mighty for P45 billion (plus P5.4 billion in VAT) for the transaction. Of this amount, P25 billion (plus the amount for VAT) goes to government. The Wongchuking family, owners of Mighty, will be left with about P20 billion with which to begin another business.

This appears to be the more attractive transaction for all concerned. It will be a win-win solution for all concerned, providing government with an urgently needed revenue windfall. All of Mighty’s tobaccorelated businesses will pass on to a competent competitor with a clear record for tax payments. There will be no disruption in domestic supply.

On July 10, Mighty signified its intention to sell its manufacturing and distribution assets to JTI by way of a letter to the BIR Commissioner and the Secretary of Finance. They committed P25 billion to government in exchange for the settlement of its outstanding liabilities the criminal cases government intends to file against the manufacturer.

As of this writing, the offer awaits final approval of the Finance Secretary. The decision on the matter could be announced during President Duterte’s SONA next week.

To further sweeten the pot, Mighty offers an advance payment of P3.5 billion. This represents the basic excise tax due from the forfeited cigarettes found in three large warehouses raided by tax authorities.

Although new excise taxes on cigarettes were passed in 2012, the previous administration failed to build any case against Mighty. The former BIR commissioner may have some explaining to do over how such massive instances of tax evasion could have escaped official notice.

The raids on the warehouses occurred April to May this year. They found stocks of Mighty cigarettes bearing fake tax stamps said to have been imported from China.

On top of the actual value of fake stamps found, the BIR is auditing Mighty’s tax deficiencies back to 2010. In addition, the BIR is imposing penalties that inflate the total amount due.

Some experts estimate that Mighty’s total liabilities could run up to P38 billion. But that estimate will have to be proven in the tax court. Proving that amount will exercise the talents of government lawyers. The case could run for years.

One option open to Mighty was to tie up the government collection claims in the courts while the company continued its profitable business. That would have been unhealthy for everybody. Government will get no revenue in the meantime. The cigarette company will labor under intense surveillance from the revenue authorities. A large cloud will hang over supply of the commodity.

In the transaction awaiting approval, JTI comes in as some sort of White Knight to give government the revenues it needs, save the owners of Mighty from its predicament and ensure steady supply of the commodity. Everybody, it seems, will benefit from a settlement of this tax issue.

JTI, it must be mentioned, used to be a governmentowned monopoly in Japan. The Japanese government diluted its share of the enterprise some time ago, even as it maintains a substantial holding in it. The settlement precipitated by JTI may be said to have the blessings of Tokyo’s officialdom.

The generosity of JTI’s offer, however, is explainable by the size of the Philippine market. The Philippines is one of the few markets globally where demand for cigarette products is rising – notwithstanding the punitive excise taxes on tobacco use.

The settlement offer is the largest ever made in Philippine history. It will enable our revenue agencies to quickly resolve this matter and take the revenue flow on offer. It will also extinguish Mighty as a player in the domestic tobacco market.

Better a bird in hand than two in the bush.