Taxing AUVs
The Philippine Star
May 06, 2002

In the government's feverish drive to raise money through new taxes, it is the small people who usually get the short end of the stick. The fiscal artillery, this time, is apparently aimed not at automotive manufacturers but on the country's less-privileged toiling population dreaming of buying that first new car and on the small- and medium-scale entrepreneurs.

Amendments on the newest automobile excise taxation scheme is the result of long, drawn out discussions going back to at least two finance secretaries ago. In short, this is something that had been carefully studied, re-evaluated, re-assessed, and finally a final version crafted.

It took a lot of compromise from the trade department (who wanted to protect the interests of car manufacturers) and the finance department (who simply desired to maximize revenue collections) for discussions on automotive taxation amendments to reach this stage. So who's siding with the consumer?

So the bad news is that prices of Asian Utility Vehicles (AUVs) would be still be slapped excise taxes. The good news is that it will only be at 3 percent, down from the original plan to tax AUVs at 15 percent. Gee, thanks.

For the middle-income family scrimping and saving to get their new car, the average, almost bare AUV would be taxed an additional P24,000 to P36,000 per vehicle. The pick-up type vehicles, sought after by the starting-out businessman, would cost P67,000 more while vans would be more expensive by about P100,000.

AUVs were initially exempted from taxes until December 1997 when the Bureau of Internal Revenue (BIR) issued a regulation lifting this exemption. This ruling was put on temporary hold when the automotive industry, supported by trade industry, appealed on the basis of its effect on the development of the AUV sector.

The Department of Trade and Industry (DTI) won the first round and the sale of commercial AUVs like Toyota Tamaraw FXs and Mitsubishi Adventures managed to phenomenally grow and dethrone yesteryear's passenger jeepneys as Manila's "king of road."

The finance department, on the other hand, pending resolution of the issue, continued to keep tabs of what it should have been collecting. Since 1997, this is now estimated to be about P20 billion.

Whether or not government will start sending collection letters to the AUV manufacturers for these "back taxes," they are already happily looking at the "plugged holes" of the revised taxation bill, and the estimated billions of pesos that will be brought in to the government coffers in the coming years.

Plugging holes - a catch-up game

AUVs are a product of a government initiative in the late 80s to encourage local content in locally assembled passenger cars. The objectives apparently were achieved as the growth in sales of AUVs enabled local assemblers to survive the financial crisis of the 90s.

However, several street-smart operators aided by "blind-eyed" bureaucrats were able to spot some loopholes in the system and started to load AUVs with all sorts of enhancements to justify higher prices but still utilizing the tax exemption.

The privilege given to the AUVs was later extended to the SUVs when an administrative order exempted 10- or-more seater vehicles from paying excise taxes. SUVs qualify for the 10-seater rule exemption if rear jumper seats are counted. But since the jumper seats are really not functional, I'd say this is novel way of dodging paying taxes.

The original AUV incentive has been thoroughly abused, therefore duping the government of billions in taxes yearly. This is part of the cause of the more than P20 billion taxes that DOF says should have been collected because of loopholes in the system.

The question is why it took so long for the government to plug these loopholes. It apparently is always a step behind the smart operators, and just playing a catch-up game.

Someone else tends to get the shorter end of the stick

While I agree with the lifting of exemption on 10-seaters, I have reservations though on other items in the new taxation bill. It would seem offhand that the government's plan to change the basis of motor vehicle taxation would strongly favor the makers of big vehicles.

As an interesting aside, my e-bug tells me that a proposal to shift the taxation base from engine displacement to a suggested retail price actually came from Ford Motors Corp. Understandably, this has caused irritations in the relationships between some members of the Chamber of Automotive Manufacturers of the Philippines, Inc. or CAMPI and the American automobile company. Remember the reactions when Ford first applied for CAMPI membership?

The new bill proposes to shift the basis of the motor vehicle taxation from fuel-type and engine-displacement to wholesale pricing. Vehicles worth below P600,000 would have to pay an excise tax of 10 percent. Those worth P1 million and below would be slapped an excise tax of 15 percent. SUVs priced below P2 million would have to pay a tax of 25 percent. Any vehicle worth P2 million and up would have to carry an excise tax of 100 percent.

Compare this to the current system where, for instance, an automobile with a 1.5-liter engine or lower is subjected to a 15 percent tax while heavier vehicles with a 3.0-liter engine or higher have to pay an excise tax of 100 percent. Those in between are slapped a rate of 35 and 50 percent.

Currently, for instance, a four-wheel drive is assessed a higher tax. The Department of Finance (DOF) proposal would take away that distinction, a plan that Japanese car manufacturers believe greatly favors American carmakers that produce the big and the bully types.

The new scheme also appears to be "more friendly" to the affluent. The buzz, though, is that the government is trying to placate those whose businesses will be displaced by the removal of the 10-seaters exemption, that is, by offering them preferential rates in the importation of the same luxury cars.

In their spreadsheet, DoF smugly say that the government will come off billions of pesos richer. If taxes will not significantly affect high-end vehicles, where then would the additional taxes come from? You guessed it correct second time around.

The Japanese car assemblers apparently did their maths a little late, which explains their delayed reaction when, through CAMPI, they lately protested against the graduated value-based taxation.

As the DoF prepares to submit the draft bill to Congress, don't expect the Toyotas, Hondas and Mitsubishis in the Philippines to take things sitting down. The automotive industry appears poised to embark on a "thrilla" year. Let the lobbying begin.

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