A most disturbing development that will affect revenue collection and even the credibility of the tax reform is the Department of Justice’s (DoJ) dismissal of the tax evasion cases against Mighty Corp. The DoJ justifies the dismissal in light of the Bureau of Internal Revenue’s (BIR) withdrawal of its complaints against Mighty.
Mighty was caught using fake tax stamps three times. A tax stamp is a marker that proves that the excise tax on the cigarette pack has been paid.
The total tax liabilities of Mighty for the three cases amount to P37.88 billion. In one raid of a Mighty warehouse in San Ildefonso, Bulacan, the authorities discovered that all the 530,000 packs they inspected had fake stamps. The warehouse itself was not legally registered.
The BIR thus filed civil and criminal cases against Mighty. Which is of course the right thing to do. But Mighty has strong political connections.
In late 2016, the House of Representatives railroaded the passage of a weak tobacco tax bill that favors Mighty. The bill contradicts the present law that has moved to a unitary tax rate. In other words, regardless of the prices of different brands, they are taxed the same rate. This Mighty bill reverts to two rates for manufactured tobacco, in which the lower-priced bracket enjoys a lower tax rate.
Mighty was deliberately but artificially pricing its products low to grab market share. But it turned out that Mighty was not paying the right amount of taxes. In this regard, the two-tier system served the Mighty business model that was predicated on tax evasion.
That such a bad bill got the easy approval of the House of Representatives suggests the strong political lobby exercised by Mighty. And now, despite being caught for massive tax evasion, Mighty is getting a slap on the wrist.
Mighty finally decided to cease operations and sell its assets to Japan Tobacco, Inc. (JTI) in the aftermath of the series of tax evasion charges it faced. From the proceeds of the sale, Mighty made a deal with government, settling for P25 billion. The government claims that this has been the biggest tax settlement in history.
But the manner of the tax settlement is discomforting.
To repeat, Mighty’s settlement amounts to P25 billion, but its tax liabilities reached P37.88 billion. Also note that the settlement is way below the revenue earned from the Mighty sale, amounting to P46.8 billion. We can grant for the sake of argument that government wants to settle to avoid a long court battle. In this case, the settlement of the civil case is arguable.
What is plain wrong is for the government, particularly the DoJ and the BIR, to drop the criminal case. It sends a signal that government is prone to compromising tax evasion; that it protects certain vested interests.
One main reason why the Philippine tax effort is low is rampant tax evasion. This has led some quarters to criticize the tax policy reform. They argue that no new taxes are necessary; just run after the tax evaders and improve collection. Sounds nice. But it is a wrong argument. Indeed, government must catch and punish the tax evaders, but this does not cancel out the need for tax policy reform.
In fact, reforming the tax structure like broadening the VAT base and rationalizing fiscal incentives is a means to plug the loopholes that engender tax evasion. Add to that the fact that financing development is huge, in which tax administration alone will be inadequate to cover.
But this bad compromise with Mighty gives critics ammunition to target government’s hypocrisy. On the one hand, the government is relentlessly pushing for new taxes, which I welcome. But on the other hand, its laxness in dealing with Mighty is undermining the credibility of the reform.
Remember, the best deterrent to tax evasion is indicting and jailing the prominent and big-time tax evaders. This is not going to happen. Mighty is getting off scot free.
Filomeno S. Sta. Ana III coordinates the Action for Economic Reforms.