The taxman cometh
The TRAIN tax program threatens to throw a monkey wrench into the auto industry
It’s been a long and tortuous ride for the government’s TRAIN—or Tax Reform and Inclusion—program through Congress. But like the proverbial locomotive, its passage seems inevitable. While the reduced income tax is decades overdue, there is grumbling in many sectors about the rest of the tax package, with everything from diesel to sugar getting slapped with new levies as Congress tries to squeeze as many tax laws as possible into a single bill.
But these dues are also long overdue. Over the past 20 years, gasoline prices have increased from P20 per liter to over P40—yet the tax on gas has remained at P4.35 the whole time. What was a 20% tax two decades ago is now effectively just 10%, robbing the Philippine government of billions in revenue.
The expanded value-added tax or E-VAT helps, and set at a standard 12%, it’s inflationproof. But the government needs more sources of revenue to make up for the loss of income-tax collections. One of the key areas where TRAIN hopes to cover these losses is through increased automotive taxes. Our automotive excise taxes are some of the lowest in the region. And while that didn’t seem like a problem when our industry was puttering along at just 100,000 cars a year, with the market looking to breach half a million sales in 2017, it’s suddenly a very, very big deal.
The Department of Finance had hoped to collect an additional P20 billion to P30 billion through the new scheme, but the proposed 200% levy on high-end vehicles promised to virtually kill luxury car sales, with multimillion-peso price increases. You can’t collect taxes when there is nothing to collect taxes on!
Thankfully, Congressional deliberation has cut luxury-car taxes down to a more manageable level. While the estimated P10,000,000 price increase for your typical Ferrari or Lamborghini hurts, buyers in that rarefied air can afford it, their money coming from business investments rather than monthly salaries. Buyers in the premium range are more price-sensitive, but they do have the option of stepping down a variant to make up for the million-peso price increase. Others are buying early, to take advantage of current prices. Land Cruisers are literally flying off dealership lots, with some buyers snapping up several, just in case.
Buyers at the cheaper end of the spectrum are less financially flexible. Profit margins for superminis like the Mitsubishi Mirage are so slim that prices rise about 4% every year. Dealers use aggressive promos to keep inventory moving, with discounts of up to P50,000. Combined with inflation, the new taxes will raise prices by P50,000 come 2019. No amount of discounting can cover that up. Cheap financing promises to cover the shortfall: That price increase comes out to just a few hundred pesos a month on installment. Not a big ask for young BPO workers with no attachments.
But as soon as you jump up into the next tax bracket, the difference becomes stark. Congress has left the tax increase for vehicles in the P1-million to P2-million range relatively untouched. It’s here where the bulk of SUV sales are found. These buyers, balancing car payments, house payments, and family expenses, may opt to forgo new car purchases altogether. One local SUV manufacturer has confided in us that it projects a 30% drop in sales. Bad news for local workers and suppliers.
Another has expressed confidence that it can absorb the increase by cutting profits. Car manufacturers typically make a 20% profit (17% if you count E-VAT) divided among distributor, dealer, and manufacturer. In other words, they make P20 for every P100 you pay them. About P5
‘Come 2018 we will face a pause in the explosive year-on-year sales growth’
goes to the dealer, P5 goes to the manufacturer, and the rest gets eaten up by marketing, product development, and the like. While this might go some way toward making up for that shortfall, the resulting loss of profitability may lead some dealers to cut back on sales and support staff.
Either way, thousands of jobs are on the line. Whether the companies involved choose employee loyalty over profitability remains to be seen. There’s also the question of whether tax breaks for hybrids and electric vehicles—another measure decades overdue—will help prop up the industry. Even with excise tax breaks, hybrids like the Prius will still cost up to P500,000 more than comparable gasoline or diesel cars. Without further incentives, the future of alternative-fuel transport in the Philippines remains uncertain.
What’s certain is that come 2018, we are facing a pause in the explosive year-over-year growth of the local automotive market. A market that has only come into its own in the past three years. A market that supports nearly half a million jobs in industry, sales, and support. A market that some fear to be more reliant on low prices and easy financing than tax-framers care to admit. But even if Senate deliberations water it down, the TRAIN is coming in, and woe to anyone left stranded on the track when it does.