The domestic automobile industry will continue to thrive and sustain its growth momentum amid the Duterte administration’s plan to make the excise tax system more progressive, by among others, replacing the current four-bracket system with a five-tier structure that will impose higher rates on the pricier luxury-car segment, according to the Department of Finance (DOF).

DOF Undersecretary Karl Kendrick Chua noted that in other ASEAN economies such a Indonesia and Malaysia, automobile excise tax rates go as high a 125 and 105 percent, respectively, yet their luxury car markets continue to thrive.

Reforming the excise tax system for automobiles is among the provisions of House Bill No. 5636 or the proposed Tax Reform for Acceleration and Inclusion Act (TRAIN) now pending before the Senate.

This measure, which is the first package of the Duterte administration’s Comprehensive Tax Reform Program (CTRP), also aims to lower income taxes and to make up for the consequent revenue loss by plugging tax leakages, limiting Value Added Tax (VAT) exemptions and adjusting excise taxes on fuel, among other measures.

HB 5636, or the TRAIN, was approved by a 246-9 vote with one abstention last May 31 by the House of Representatives before the Congress adjourned sine die.

The TRAIN is a consolidation of the original tax reform bill—HB 4774—filed by Quirino Rep. Dakila Carlo Cua with 54 other tax-related measures.

Chua noted that in Malaysia, luxury car sales grew by 3.9 percent in 2016, while in Indonesia, the luxury car manufacturer BMW recently expanded its model list and local car assembly, both for the domestic Indonesian and export markets, because of high demand despite the high tax rates.

The same is true in the Philippines, where Satoru Suzuki, president of Toyota Motor Philippines (TMP) recently told the media that the company is not revising its production output for 2017 even if it anticipates an initial drop in vehicle sales because of the looming car price increases under the tax reform package, because he believes demand will pick up again soon enough.

Chua said TRAIN aims to make the tax system more efficient, simpler and fairer by transforming it into a more progressive one where the rich, rather than the poor, bear the tax burden.

“The Duterte administration’s tax reform agenda is not meant to unduly burden taxpayers. It is meant to shift the burden to those who should pay more but have for a long time avoided payment or enjoyed a free ride from blanket exemptions and special treatment,” Chua said.

He pointed out that “the Constitution mandates that the system of taxation must be progressive, that is, taxes are borne by those who can afford more; and taxes on luxury goods is highly progressive taxation.”

Moreover, Chua said that under the TRAIN bill, mass-market vehicles in the first bracket, such as the base model Toyota Vios, will only increase by around P13,000.

“This means that even when automobile loans were financed at 50 percent interest rate per year, which is a very high assumption even at the worst financing terms, the proposed tax rate for mass-market cars will only add P350 in amortization when spread over 60 months, which is the standard loan duration for cars. The additional take-home pay resulting from the proposed hefty personal income tax cuts can more than offset this,” Chua said.

He likewise made it clear that under the TRAIN bill, pick-ups, buses, trucks, cargo vans, jeepney/jeepney substitutes, and special purpose vehicles such as cement mixers, fire trucks, boom trucks, ambulances and off-road vehicles for heavy industries are excluded from the proposed auto excise tax adjustments.

Meanwhile, variants used as commuter vehicles or utility vehicle (UV) express units such as the Mitsubishi Adventure, Isuzu Crosswind, Toyota Hi-Ace and Nissan Urvan that each cost between P800,000 and P1.3 million won’t be significantly affected by the adjustments, Chua said.

Chua said no amount of tax administration reforms in the Bureaus of Internal Revenue (BIR) and of Customs (BOC) will be enough to raise the funds needed by the government for its massive spending on infrastructure and social services because the current system contain inherent flaws that can only be corrected by implementing reforms in tax policy.

“We have a tax system that is inequitable, complex, and inefficient. Even if BIR and BOC were 100 percent efficient, they will still be unable to achieve the collection targets because the tax system has inherent deficiencies that lead to revenue erosion and large scale leakages,” Chua said.

He said the three major reasons for these structural weaknesses are:

1) several tax rates or tax bases are not indexed to inflation and have eroded the value of our collections;
2) the government grants excessive exemptions and special treatments, many without good basis; and
3) highly restrictive bank secrecy laws prevent our revenue agencies from fully auditing and enforcing tax laws.

Thus, Chua said that both tax administration and policy reforms are urgently needed along with reforms in the way the government spends its budget, which is already being corrected with the filing of House Bill No. 5590.

This measure aims to “reform the budget process by enforcing greater accountability in public financial management (PFM), promoting fiscal sustainability, strengthening Congress’ power of the purse, instituting an integrated PFM system, and increasing budget transparency and participation.”

Earlier, Finance Secretary Carlos Dominguez III said this tax reform package is “expected to help reduce poverty rate from 21.6 percent in 2015 to 14 percent in 2022, lifting some six million Filipinos out of poverty, and helping the country achieve upper middle-income country status where per capita gross national income increases from $3,500 in 2015 to at least $4,100 by 2022.”

“We need to sustain economic growth of at least 7 percent every year for one generation. This is how our neighbors did it from the 1960s to the 1990s,” Chua said. “This can only be done sustainably through serious tax reform, which is integral to the larger goals of the administration and crucial for achieving the vision of a prosperous country.”