Sunday, January 29, 2017

Congress is About to Make Cars More Expensive For You


Late last year, the Department of Finance looked at revising the excise tax on new vehicles initially as a means to curb Manila’s worsening problem. Then, they clarified it’s to increase tax collection. With the government bent on reducing personal income tax, they had to find alternative ways to fund government operations. This is especially true as the current administration is looking at spending big on infrastructure development, something that quite frankly, the previous administration didn’t do.

At the time, a proposal was put forth to change the current new vehicle excise tax as outlined in BIR Revenue Regulation No. 25-2003 to:
  • Below P 600,000: 5 percent
  • P 600,000 to P 1,100,000: 20 percent
  • P 1,100,000 to P 2,100,000: 40 percent
  • P 2,100,000 and over: 60 percent
Take note that this excise tax is only applicable to automobiles. The Revenue Regulation has a different scheme for buses, trucks, cargo vans, jeeps/jeepneys/jeepney substitutes, single cab chassis, and special purpose vehicles.

In the past few weeks though, the 17th Congress is considering altering certain parts of this proposal and integrated them into House Bill 4774 or The Tax Reform for Acceleration and Inclusion Bill Act. In its entirety, it outlines various ways the government is looking to cut personal income tax while increasing tax in others.

For example, the same bill proposes an increase in excise tax for petroleum products. Unleaded gasoline will have an excise tax of P 7 per liter (from P 4.35) increasing to P 9 in 2018 and P 10 in 2019. Diesel meanwhile will go up to P 3 per liter (from zero) to P 5 in 2018 and P 6 in 2019.

For would-be car buyers though, House Bill 4774 has revised the new vehicle excise tax. Instead of the straightforward but rather draconian tax scheme earlier proposed, this new one puts a fixed “floor tax” within a certain bracket and adds percentage increments of any value above that floor. It pretty much echoes the system in BIR Revenue Regulation 25-2003, but with much higher values:
  • Below P 600,000: 4 percent
  • P 600,000 to P 1,100,000: P 24,000 plus 40 percent of value in excess of P 600,000
  • P 1,100,000 to P 2,100,000: P 224,000 plus 100 percent of value in excess of P 1,100,000
  • P 2,100,000 and over: P 1,220,000 plus 200 percent of value in excess of P 2,100,000
Side-by-side, this is how things are shaping up comparing the current excise tax versus the Department of Finance proposal versus House Bill 4774 taking into account the same assumptions as in the previous story:


The possible effect of this increase in new vehicle excise tax to the automotive industry has already been discussed previously, so to the most important question of all: how will this affect vehicle pricing?

Again, the base is the Net Manufacturer’s/Importer’s Selling Price. Defined in BIR Revenue Regulation No. 25-2003, this is landed cost + importation duties + tariffs (if it’s built in the Philippines, then it’s Cost of Goods Sold or COGS). Carmakers then add the excise tax before putting their profit margin. Since global industry rates float automotive wholesale margin as 8-14 percent and automotive dealer margin as 7-10 percent, for the sake of this argument, the peg of 15 percent split between the carmaker and the its dealer is used. Finally, Value Added Tax or VAT of 12 percent is computed based on the total of the margin + excise tax + net manufacturer’s price.

In case you’re wondering, the BIR has safeguards against undervaluation of goods based on motor vehicle reference books such as the Japanese and US Red Book, Karo, and World Car Book. In that case, the BIR has a floor rate that’s computed as: 80 percent x (Suggested Retail Price – Excise Tax – VAT). For this article, this won’t be tackled.

Compared to the previous proposed scheme and now under House Bill 4774, this is how it will affect the Suggested Retail Price or SMRP:


Both versions see an increase in suggested retail price, although the proposal in House Bill 4774 has effectively cut the increase for any vehicle below P 2,100,000. For example, vehicles below P 600,000 sees a  P 6,000-P9,000 increase or 2 percent compared to P 12,000-P 17,000 or 3 percent in the original proposal. The same goes for vehicles in the P 600,000 to P 1,100,000 and P 1,100,000 to P 2,100,000 which sees an increase of anywhere between 2-16 percent instead of 3 to 27 percent. It’s only when the Net Manufacturer’s/Importer’s Selling Price hits P 2,100,000 that things get crazy. The original proposal meant an increase of anywhere between 13-19 percent while now, it’s 19-27 percent. Those luxury cars above P 3,500,000? It goes up by 27-72 percent compared to the original proposal of 7 to 27 percent.

Car buyers curious as to how House Bill 4774 will affect the carmaker’s price range will find the next chart interesting. This chart compares each major brand’s suggested retail price under the current excise tax (blue) versus the original proposal (red) and the one in House Bill 4774 (green).


Side-by-side, it’s obvious that mainstream carmakers are not affected so much by House Bill 4774. In fact, brands known for value-oriented pricing will see a negligible increase in price. Some carmakers have actually even said that they are willing to absorb a part or the entire additional tax just to keep their prices competitive. It’s the premium car brands that will be heavily punished under House Bill 4774 with some models from BMW, Lexus, and Porsche hitting in excess of P 14,000,000.

Going back to sampling ten popular vehicles in the market once more, this is how House Bill 4774 will affect their prices compared to the original proposal and the current excise tax rate:


It’s clear that though there will be price increases across the board, the effect isn’t as high as the original tax scheme proposed. In fact, across the ten samples, the highest increase tops out at P 140,000. And with Filipinos heavily reliant on financing (some brands say that buyers opt for financing between 70 to 90 percent of the time), the increase in excise tax would mean an increase in monthly payments by less than P 4,000 over the span of three years (around P 12,000 if over a one-year period). As long as banks continue to offer low interest rates at long payment terms, people who are looking to buy a car will still be able to afford one. It’s actually the increase in excise tax on gasoline and diesel which may lead to higher inflation and cost of goods in the long run.

Nonetheless, whatever version of the new vehicle excise tax gets passed, it must be remembered that this will still have a long reaching effect in the industry. It must be reiterated that this proposal will affect carmakers in more than just the excise tax. It can affect other factors such as corporate income tax collection, employment, supplier orders, and many more. This can reduce total government collection if taken as a whole. Plus, the new excise tax may put into question the recently signed Comprehensive Automotive Resurgence or CARS program, which was, as you guessed it, supposed to revitalize local car manufacturing.

With the automotive industry and its allied services (parts suppliers, banks, dealerships, etc.) contributing up to 15 percent of GDP, the government must be very careful in implementing a tax system. While the time is right for the Philippines to enter an era of mobilization, haphazardly increasing taxes may have an undesired effect. Careful studies must be done to ensure that the effects of increase the excise tax remain minimal not just for car buyers but for the car industry as well.

11 comments:

  1. Thanks for this sir Uly. Any idea/estimate when HB 4774 shall take effect (if at all)? any chance you know how long the usual process is? Shall this go through the senate also?

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    Replies
    1. Like any law, it has to go through Congress and the Senate. It will have to be approved by the President as well. Even if it's declared as a priority bill, it will take some time. Likely Q3 2017 or more likely 2018

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  2. There are too many cars on the streets already. This is a wise move on the part of our government.

    But as long as there are low downpayment and installments, temporary surge in car sales will occur. People are buying cars without real capacity. This effect will falter after 3-4 years.

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  3. I BELIEVE YOU ARE BEING NAIVE IN SAYING THERE ARE TOO MANY CARS ON THE STREET. ACTUALLY, MORE CARS MEAN MORE PROGRESS, ITS AN UNWISE MOVE SINCE THIS IS THE ONLY TIME WE ARE CATCHING UP OUR NEIGHBORS WHO SOLD MUCH MORE CARS THAN US FOR MANY YEARS ALREADY. THIS MOVE IS A REVERSAL OF GROWTH AND AN INSULT TO BUSINESS AS WELL AS LABOR

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  4. THE MAIN CAUSE OF METRO MANILA TRAFFIC IS THE WANTON DISREGARD FOR TRAFFIC RULES BY JEEPNEY, UV EXPRESS, BUSES, TAXI AND PEDICABS. THEY STOP WHEREVER THEY FELL LIKE IT, THEY MAKE UNAUTHORIZE LOADING AND UNLOADING STATIONS ALL OVER

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  5. Dadami lalo mga scooter at pedicab dito

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  6. Car sales will surge this 2017 in anticipation of the price increase in 2018 (if the new law is passed). Then car sales will go down. Some car brands will then close shop and the PH auto industry will slowly die

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  7. More cars means more progress? If those cars were bought cash, may be.
    There's a real progress if we do have high end public transportations, where most people will prefer using public transportation than buying another car.

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  8. I think it should be lower segment cars that must have higher taxes because these are the ones easily available to the market today especially the low downpayment schemes. The luxury brands are almost twice the price already and if we add much higher taxes we won't see BMWs and Mercs much more Ferraris and Lambos on the roads.

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  9. Building up way of transportation is one matter but the most important now is the safety in using public transport. There are a lot of cases of muggers. So people don't usually feel safe using public transportation. Also, there are choosy cab's. They are picky in selecting passengers destination. So we need the government to establish public safety and control to all public transport.

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  10. How is the car industry reacting to this?

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