| LUCIO PART I |
| THE
TRUTH ABOUT THE LAW AND THE EVIDENCE INVOLVED IN THE TAX EVASION CASES
AGAINST FORTUNE TOBACCO, LUCIO C. TAN & THEIR CO-ACCUSED (AN OPEN LETTER IN REPLY TO FORTUNE TOBACCO'S NEWSPAPER AD FROM FORMER BIR COMMISSIONER LIWAYWAY VINZONS-CHATO) TO MY FELLOW FILIPINOS AND TO ALL CONCERNED: Fortune Tobacco Corporation (Fortune), Lucio C. Tan and the other co-accused, through their counsel, have twice published a two-page advertisement in numerous newspapers on their alleged innocence of the tax evasion charges filed against them by the Bureau of Internal Revenue (BIR) involving Fortune's ad-valorem excise taxes, income taxes and value added taxes for the years 1990, 1991 and 1992. Fortune's misleading newspaper advertisement constitutes a challenge not only to the integrity and competence of the BIR officials and personnel who obtained, gathered and organized the evidence in these cases but also to my personal honor and integrity. Thus, for the sake of truth and justice and in order to sustain a commitment to good government, I write this open letter so that the true facts and the law on these tax evasion cases will be read, heard and fully understood by the people, and not be lost in the courts. To all of you, and to the Government officials involved in decision-making, I present the Government's strong position based on undisputed evidence, clear provisions of the Tax Code and settled jurisprudence, and I ask Government and the courts involved to abide by the law and the facts, and not be swayed by the President's admitted "Utang na Loob" to Lucio C. Tan, in bringing all the accused in the tax evasion cases to justice. THE FILIPINO PEOPLE DESERVE JUSTICE - NOTHING MORE, NOTHING LESS I. THERE IS WILLFUL TAX EVASION AND YES - A HUGE TAX DUE ! A. Indisputable Evidence Of Willful Intent To Evade Taxes - Under Section 127 (b) of the Tax Code, a manufacturer of excise products subject of an ad valorem tax is not allowed to pay a lower tax by selling its products at a lower price to wholesalers effectively owned or controlled by the manufacturer or its owners. Where a dummy arrangement or scheme exists, the ad valorem tax shall be based on the dummy corporation's and individual dealer's distribution price and not on the manufacturer's wholesale registered price. In effect, the law will "pierce the veil of corporate fiction" and treat the manufacturer and the wholesaler-dealer as one entity. The rule similarly applies, and with more legal justification, where the dealers are individuals found to be fictitious and non-existent. Based on the findings of the BIR examiners assigned to investigate the 1990, 1991 and 1992 tax liabilities of Fortune, the following facts and evidence on dummy relationships were discovered and established: (1) On the establishment of the Dummy Corporations - (i) On July 1, 1986, Executive Order (EO) No. 22 took effect, amending the Tax Code by shifting the excise tax on cigarette products from SPECIFIC (based on volume or number of sticks) to AD VALOREM (based on manufacturer's registered wholesale price). Records of the Securities and Exchange Commission (SEC) showed that, barely one and a half months after the effectivity of EO 22, nine (9) marketing arms were incorporated by former Fortune officers within a few days of each other in August and September 1986. These 9 companies are: (1) Carlsburg and Sons, Inc. (2) Crimson Croker Distributors, Inc. (3) Dagupan Combined Commodities, Inc. (4) First Union Trading Corporation (5) Landmark Sales and Marketing, Inc. (6) Mt. Matutum Marketing Corporation (7) Omar Ali Distriutors, Inc. (8) Townsman Commercial, Inc. (9) Oriel and Company, Inc. (ii) All incorporation papers were notarized by the same notary public, Atty. Pe Benito, who is employed as a lawyer of Allied Bank (owned by Lucio C. Tan). (iii) All nine (9) companies have their "liaison offices" in Allied Bank Center. (iv) Seven (7) of these firms have a common auditor who is also Fortune's external auditor. (v) Their Sales Invoices were identically printed as to format, and were registered in Makati City despite the allegation that these firms have provincial bases of operations. (vi) All of these firms have no visible and tangible assets and have no decent workplace at their Makati address. In fact, four (4) of them have only one (1) employee, common to all four, at their Allied Bank Center address. (vii) Fortune's gross profit margins in 1990, 1991 and 1992, based on examinations of its manufacturing accounts, indicated that Fortune's gross profit rate was around 9.49% while those of its marketing arms ranged from 14.31% to 28.97%, or an average gross profit rate of 22.14%. Thus, from these data, the dummy companies were making more, or bigger profit margins, in the sale of Fortune cigarettes than the manufacturer itself. (2) On the Non-existent Fictitious Individual Dealers - (i) From Fortune's records, it appears that it began using fictitious individual dealers only on October 27, 1989. (ii) Each individual dealer bought from, and transacted with, Fortune only once. (iii) Each individual dealer purchased products amounting from P1 to P6 Million. (iv) The addresses of the individual dealers did not appear in the sales invoices but were indicated as "c/o Office" while their residence certificates were shown to be "on file". (v) All sales to individual dealers were on pick-up basis but were not acknowledged as received by them in the covering sales invoices. (vi) All names have no middle initials, thereby rendering them virtually impossible to locate. (vii) All of them have no permit or registration with the BIR. (viii) All have no Taxpayer's Identification Number (TIN). (ix) All have no definite addresses indicating residence numbers or streets but just general directions or addresses indicating towns and provinces, e.g. Tabuk, Kalinga Apayao, Lapu-Lapu, Cebu City, Jolo, Iligan City, Inopacan, Leyte, Tubay and Jabonga, Agusan del Norte. (x) There were no individual dealers from the National Capital Region (NCR), although the bulk of Fortune's cigarette sales were in the NCR. The individual dealers were mostly from far flung areas in Mindanao, in the Visayas and from the Northern Luzon area. Based on the Alpha List of 2,078 Individual Dealers obtained from Fortune for 1992, these Dealers are supposedly from places/locations in the following provinces: Abra - 6 Davao - 109 Misamis - 21 Agusan - 44 Ifugao - 6 Nueva Vizcaya - 5 Basilan - 18 Ilocos -43 Palawan - 79 Bohol - 200 Isabela - 48 Quirino - 7 Bukidnon - 40 Jolo - 12 Samar - 74 Cagayan - 81 KalingaApayao - 12 Sulu - 2 Camiguin - 3 Lanao - 108 Surigao - 20 Cebu - 690 Leyte - 107 Sultan Kudarat - 19 Cotabato - 68 Maguindanao - 35 Zamboanga - 116 Mindoro - 71 (xi) From certifications duly issued by the BIR District Officers, Town/City Mayors, Barangay Captains, Municipal/City Treasurers, Municipal/City Assessors, COMELEC Registrars, all these individual dealers were found to be non-existent and hence fictititious. (xii) For Year 1992 - 89% of Fortune's total cigarette sales were made under the above circumstances to the individual dealers in the above locations. Only 11% were reported as sales to the 9 dummy corporations. For Year 199 - 10% were made to 1,943 individual dealers under the same circumstances. For Year 1990 - 43% were made to 4,045 individual dealers also under the same circumstances. For Year 1989 - 5% were made to 495 individual dealers likewise under the same circumstances. Based on these findings of dummy corporations and fictitious individual dealers, the BIR (particularly, myself, as Commissioner) saw the clear and willful intent to evade the payment of correct ad-valorem, income and value-added taxes due on the sale of Fortune's cigarettes, and indubitable proof of misdeclaration and misrepresentation of the manufacturer's registered wholesale price both in the manufacturer's sworn statements, required under Section 127(c) of the Tax Code, and the Sales Invoices covering Fortune's sales to the dummy corporations and the fictitious individual dealers. Thus, Fortune's manufaturer sworn statements declaring its wholesale price, being obviously fraudulent and misdeclared, were disregarded by the BIR. Instead, the BIR obtained the 9 dummy corporations' distributors' price per cigarette brand in arriving at the correct basis for the ad valorem, income and value-added taxes due from fortune for tax years 1990, 1991, and 1992. There were no distributors' price that could be obtained from the fictitious individual dealers since they were non-existent and hence could not be found. If it were true, as Fortune's counsel alleges, that it is enough under Section 142 of the Tax Code that the manufacturer registers its wholesale price in its Manufacturer's Sworn Statement and the BIR would be bound by such registered wholesale price (and not be made accountable for willful intent to evade taxes for the dummy corporations and fictitious individuals), then why did Fortune set up marketing arms/distributors consisting of the 9 dummy corporations and more than 2,000 fictitious individual dealers, and take the trouble and the efforts to sell its cigarettes through these dummy dealers/distributors? Logic and reason can only lead to the conclusion that this scheme/devise was meant purposely and willfully to evade payment of the correct amount of ad-valorem excise, income and value-added taxes. The BIR examiners' reports, which form part of the complaint I filed (during my term of office) with the Department of Justice, indicate the following underdeclaration of sales resorted to by Fortune in its intent to evade payment of the taxes due thereon for taxable years 1990, 1991 and 1992, as follows: 1. Gross Sales based on Manufacturer's Sworn Statement (Misdeclared) 1990 1991 1992 P10,581,522,160.00 P10,879,999,950.00 P11,736,658,580.00 2. Taxes Paid By Fortune based on Manufacturer's Sworn Statement (Misdeclared) 1990 1991 1992 Income Tax P65,017,411.69 P67,587,744.58 P64,264,693.00 Value-Added Tax P553,996,657.15 P410,165,673.49 P354,015,659.54 Ad Valorem Tax P3,806,272,068.75 P4,457,692,647.05 P4,805,254,523.00 TOTALS P4,425,256,137.59 P4,935,446,065.12 P5,223,534,875.54 3. Adjusted Gross Sales based on Sec. 127 (b) provision for computing Distributors' Price per BIR examiners reports - 1990 1991 1992 P15,268,795,084.00 P15,487,661,440.00 P16,686,372,295.00 4. Basic Deficiency Taxes assessed by BIR on Adjusted Gross Sales (item no.3 above) 1990 1991 1992 Income Tax P372,975,934.31 P363,815,673.42 P384,771,097.00 Value-Added Tax P384,464,082.69 P374,592,287.72 P595,638,572.11 Ad Valorem Tax P2,768,059,055.60 P2,696,343,523.95 P2,920,578,058.75 TOTALS P3,525,499,072.60 P3,434,751,485.09 P3,900,987,727.86 5. Total Deficiency Taxes (with surcharges and interests) 1990 1991 1992 Income Tax P973,548,085.06 P822,302,331.64 P723,773,759.79 Value-Added Tax P1,034,963,266.18 P877,281,454.05 P1,169,688,645.63 Ad Valorem Tax P7,488,360,188.31 P6,370,111,575.34 P5,792,479,816.24 TOTALS P9,496,871,539.55 P8,069,695,361.03 P7,685,942,221.66 Documentary evidence to support and substantiate these tax evasion cases have been presented to the Department of Justice (DOJ) during my term of office. The documents submitted to the DOJ are as follows: Documents to prove 9 conduit corporations were dummies: 1. BIR Examiners' Report and Affidavits 2. Manufacturer's Sworn Statements of Daily Production (Proof of Misdeclaration and Misrepresentation of correct gross selling price) 3. Sales Invoices 4. SEC Records (Certificate of Registration & Articles of Incorporation of dummy corporations and Fortune) 5. Alpha List Of Customers 6. Official Receipts of Conduits 7. ITRs of Conduits Documents to prove individual dealers were fictititious 1. BIR Examiners' Report and Affidavits 2. Alpha List of Individual Buyers provided by Fortune 3. Manufacturer's Daily Sworn Statements of Daily Production (Proof of Misdeclaration and Misrepresentation of correct gross selling price) 4. Sales Invoices 5. Certifications from BIR District Officers, Town/City Mayors, Barangay Captains, Municipal /City Treasurers, Municipal/City Assessors, COMELEC Registrars on the non-existence of the individual dealers. In the face of these overwhelming evidence discovered and obtained against Fortune on its intent to evade the correct taxes due on its cigarette products, as then Commissioner of Internal Revenue, I was bound to uphold and enforce the law and see to the prosecution of Fortune's Tax Evasion, for the effective collection of taxes, without fear or favor. I continue to fight for these cases as my patriotic duty to see that Justice is served and not subverted by threats or for favor. In my resolve that truth and justice may not be perverted and corrupted, and to ensure that the Government's case will be successfully prosecuted, not lost by "default" because the documents on these tax evasion cases could be conveniently "LOST", I have earlier obtained and kept certified true copies of these documents. If the ADMINISTRATION is serious about prosecuting these cases and seeing justice done, I am making myself and the certified true copies of these documents available to the Government prosecutors. What is perplexing, if it were not too obvious, is President Joseph Estrada's pronouncements about how weak these tax evasion cases are even without knowing the facts involved and seeing the documents available to substantiate the existence of fraud and the willful intent to evade taxes. His pronouncements preempt the courts' judgment on these cases. It is tragic that the President himself is doing everything to have these tax evasion cases dismissed, thus subverting the oath he took as President to uphold the law without favor or fear. B. The Tax Code Provisions Violated And The Penalties Imposed - No amount of misinterpretation and wrongful allegations by FORTUNE and its lawyer can change the law and jurisprudence on the matter! Fortune, a cigarette manufacturer paying excise taxes based on ad valorem on its cigarette products, violated the provisions of the Tax Code. Prior to its amendment by R.A. 6956 which took effect on July 4, 1993, the Tax Code provided, in pertinent parts, as follows: "SEC. 127. Payment of excise taxes on domestic products. - (a) Persons liable; time for payment - Unless otherwise especially allowed, excise taxes on domestic products shall be paid by the manufacturer or producer before removal from the place of production: x x x x x (b) Determination of gross selling price of goods subject to ad valorem tax. - Unless otherwise provided, the price, excluding the value-added tax, at which the goods are sold at wholesale in the place of production or through their sales agents to the public shall constitute the gross selling price. If the manufacturer also sells or allows such goods to be sold at wholesale in another establishment of which he is the owner or in the profits at which he has an interest, the wholesale price in such establishment shall constitute the gross selling price. Should such price be less than the cost of manufacturer plus expenses incurred until the goods are finally sold, then a proportionate margin of profit, not less than 10% of such manufacturing cost and expenses, shall be added to constitute the gross selling price. (c) Manufacturer's or producer's sworn statement. - Every manufacturer or producer of goods or products subject to excise taxes shall file with the Commissioner on the date or dates designated by the latter, and as often as may be required, a sworn statement showing among other information, the different goods or products manufactured or produced and their corresponding gross selling price or market value, together with the cost of manufacture or production plus expenses incurred or to be incurred until the goods or products are finally sold." "SEC. 142. Cigars and Cigarettes. x x x x x (c) Cigarettes packed in twenties. - There shall be levied, assessed and collected on cigarettes packed in twenties an ad valorem tax at the rates prescribed below based on the manufacturer's registered wholesale price: (1) On locally manufactured cigarettes bearing a foreign brand, fifty five percent (55%): Provided, that this rate shall apply regardless of whether or not the right to use or title to the foreign brand was sold or transferred by its owner to the local manufacturer. Whenever it has to be determined whether or not a cigarette bears a foreign brand, the listing of brands manufactured in foreign countries appearing in the current World Tobacco Directory shall govern. (2) On other locally manufactured cigarettes, forty five percent (45%). x x x x x When the existing registered wholesale price, including tax, of cigarettes packed in twenties does not exceed P4.00 per pack, the rate (for the cigarettes packed in thirties) shall be twenty percent (20%)." |