The tax­man cometh

The TRAIN tax pro­gram threat­ens to throw a mon­key wrench into the auto in­dus­try

Top Gear (Philippines) - - Revised Excise Tax - WORDS BY NIKY TA­MAYO IL­LUS­TRA­TION BY JUAN CARLO MAALA

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.

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