Possible Effects of the Proposed Implementation of Automobile Tax Hike on the Philippine Economy

In a third world country where majority of its citizens cannot afford to buy cars, in a country where one
of the problems it faces is heavy traffic jams, there is a move by the Philippine government to adjust the
current car excise tax rates.

In 2017, the Philippine automotive industry will feed around 500,000 cars into the already crowded
metropolises of the country, with the National Capital Region receiving anywhere from 78 to 82 percent
of the new car sales. This figure extrapolates from the combined end-of-year sales estimates of both the
Chamber of Automotive Manufacturers of the Philippines (CAMPI) and the Association of Vehicle
Importers and Distributors (AVID). On one hand, CAMPI’s president Rommel Gutierrez said during the
2016 Philippine International Motor Show, that his organization would reach the targeted 370,000 units
sales by end of 2016. Final sales reports show the number may actually be exceeded due to aggressive
4th quarter performance. AVID, on the other hand has already practically delivered on its sales target
registering a 103 percent sales increase from its members. By the 3rd quarter of the year the
organization reported a 27% growth from the previous quarter with a total of 68,746 vehicles sold.
Industry experts are confident the group can exceed the fourth quarter and thus the total annual sales
because of the massive financing deals from led by Ford, Suzuki and Hyundai. It is thus safe to say that if
the sales trend continued at the same momentum as it did towards the end of the 3rd quarter, total
industry sales combined, would mean about 450,000 new cars, SUV and commercial vehicles crowding
into the already tight city streets, oftentimes with no garages to properly park in.

Industry research experts BMI predict that passenger car sales in the will grow an average 24 percent
annually throughout the 2017-2020 period. It also expects the local passenger car market to outperform
other ASEAN countries over the same period.

Consumer led growth in the Philippines will be supported by subdued inflationary pressures, and
attractive borrowing rates and the research firm’s Country Risk team expects inflation to remain within
the Central Bank’s 2 to 4 percent target range through to 2020. This boost to consumer spending power
also converts to more car sales, with access to cheap credit, with steady interest rates at an average 3
percent over the 2017-2020 period.

The car industry in the Philippines is steadfastly growing but there is a threat that might give a downside
phase in the industry.
The government has stated two reasons for proposing this new excise tax structure. First, they see it as
a way to reduce traffic congestion because it limits new vehicle ownership. This, they hope, will make
people consider using public transportation instead. Second is that the administration is looking to
spend big on infrastructure and they need to raise funds for the development of new roads and such.
Increasing the excise tax levied to carmakers, they find, is the most logical step.

The current auto excise tax structure uses a value-based model that Filipino car buyers have enjoyed
since the early 2000s.

With the current auto excise structure, vehicles with a manufacturer net price of up to 600,000 pesos
will be taxed at 2%; those over 600,000 up to 1.1 million at a fixed excise of 12,000 plus an additional
20% of the amount in excess of 600,000; those over 1.1 million up to 2.1 million at a fixed excise of
112,000 plus 40% of the amount in excess of 1.1 million; and cars over 2.1 million at a fixed excise of
512,000 plus 60% of the amount in excess of 2.1 million.

But under the House bill sponsored by Quirino Rep. Dakila Cua, the tax on automobiles priced up to
P600,000 is targeted to go up from two percent to four percent, while those priced from P600,000 to
P1,100,000 would be taxed at P24,000 (up from P12,000) plus 40 percent (up from 20 percent) of the
amount in excess of P600,000. Vehicles priced from P1.1 million to P2.1 million would be taxed at
P224,000 (up from P112,000) plus 100 percent (up from 40 percent) of the amount in excess of P1.1
million. Last but not least, cars costing more than P2.1 million would be taxed P1.22 million (up from
P512,000) plus 200 percent (up from 60 percent) of the amount in excess of P2.1 million. According to
Finance Secretary Carlos Dominguez III, implementation of the automobile tax increase would begin in
2018, which will give the government enough time to fix the rail-transit system and put in place
alternative modes of city travel that encourages people to use mass-transport systems, instead of using
their own vehicles.

Who would really be the ones affected by the automobile tax increase?

Some argue that this tax increase is “anti-poor” since the government is just milking the people and it
does not let them experience luxury or if not, high-end cars. Some say that the government won’t let its
people experience the better things in life such as having a car. But the government insists that even if
for the car buying public, it’s obvious that the new vehicle excise tax will mean more expensive cars, it’s
far from being “anti-poor”. It reiterates that cars below P 600,000 will still remain affordable.

The big brunt of the increased excise tax will be shouldered by buyers opting for cars ranging from P 1.1
million upward. And that could put the brakes on the runaway success of the PPVs. That said, it won’t be
surprising if some carmakers will simply take a hit on their profit margins to try to maintain their SRPs
close to the levels where they are now. Some may even resort to tactics having them undervalue their
importations drastically; although, the government does have a safeguard against this.

This analysis is quick and dirty and there could be other factors which could have both positive and
negative effects on this proposed new tax scheme. Things like foreign exchange can possibly affect the
net manufacturer’s price and a tightening of bank lending could result in a shorter lending period or
lesser people having the liberty of financing. Even an increase in fuel prices and the corresponding
inflation in the prices of basic goods could mean the deferment of a new vehicle purchase. Plus, it
cannot be forgotten that this new excise tax scheme will affect the 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 will dampen the rosy outlook of carmakers who signed up for the Comprehensive Automotive
Resurgence or CARS program. Not only will the increase in excise tax may affect their ability to sell
200,000 units within a six year period, but some have already warned of full scale closure of their local
production facilities.

Carmakers see the proposed auto tax reforms as a downside risk to vehicle sales due to the significant
increase in retail prices. The increased taxes will create an artificial sale increase before any
announcement of implementing rules and regulations and car dealers are already making sales
preparations and promotions with banks and financing institutions to rush into aggressive sales
programs to avert the expected sales slowdown.

The current government focuses on how to reform the Philippine taxes in order to have the most
effective and reasonable way to increase collections and to distribute wealth. It is not only the
automobile taxes that are being focused to be implemented but also the income taxes. This
administration’s push to increase taxes purportedly serves a twofold purpose: one, to increase tax
revenue to make up for revenue lost with the lowering of income tax.
Since the car taxes is pushed to be adjusted because of the income tax percentages cut, it is just but
reasonable to compare both when it comes to government revenue collection. The new proposal now
seeks to exempt employees who earn P250,000 or below annually from income taxes. On top of this,
the mandated 13th month pay of up to P82,000 and other bonuses will still be tax-free. The "ultra-rich",
who comprise 0.1% of taxpayers, will be levied a higher rate of 35%.

Disregarding the effects of higher fuel taxes, worsening traffic and whatnot, buyers with taxable
incomes of up to P100,000 per month see their car purchasing ability increase greatly under the new
system. Only luxury buyers actually suffer in terms of real purchasing power. Despite the hypothetically
high profit margins at those levels, there is no way to slash them enough to cope with a 200% tax.

But, in the end, luxury market makes up a vanishingly small percentage of the industry. Sky-high taxes
may cool off the recent luxury boom with little benefit to either tax collections or traffic. On the other
hand, the ultra-low income taxes in the P25,000-P30,000 bracket may encourage more banks to offer
loans to those making less than P40,000 a month.

In terms of reducing the cars on the road, this measure lacks disincentives to keep people from buying
new cars, and even increases purchase incentives for entry-level buyers. Even worse, SUV price
increases may fan the used car market, putting old, stockpiled SUVs with poor emissions and reliability
back on the road, to the detriment of both the consumer and the environment.

With regard to what new taxes mean for industry sales once it passes? Watch this space. If the proposed
tax measures pass in this form, instead of a cooling of sales, we might instead see a small jump, as the
industry inches ever closer to the elusive 500,000 sales per annum benchmark.

When it comes to the car industry, the government assures the car companies that the proposed tax
increase will not hurt the Philippine car industry. Dominguez said the local automotive industry will
continue its “healthy” growth rate even with the proposed adjustments in car excise taxes; given that
the manageable price hikes in mass-market vehicles would be readily absorbed by buyers who will, in
effect, increase their take-home pay by way of substantially lower personal income taxes.

Who wouldn’t want to end traffic jams, right? But the question is, are the people really willing to go with
public transportation? With our current, crappy and hassle land transportation, I doubt. The
government’s reason to end traffic jams makes little sense. Even if the tax on the best-selling vehicle
segments were to increase, it won’t stop people from buying a second or even a third car. With bank
loan rates at a record low, the additional price increase means little or nothing to the would-be
consumer especially if the loans are made payable within five years. At the same time, increasing the tax
on the highest vehicle bracket won’t really raise a lot of revenue given luxury car buyers are of a very
small percentage of the total vehicle market. Some might still buy secondhand cars.

If the government really wants to end traffic jams by encouraging people to use the public
transportation, they must first fix or if not, improve our public transportation and then increase the
automobile tax rates. By this, people might understand and embrace the proposed tax increase.

If you’re planning to buy a car in the near future, then it’s probably best to pull the trigger sooner rather
than later. If and when this policy becomes effective, expect the market to react immediately; think of
massive uptick in demand for luxury car models (whose prices will be hit harder by the tax reform) and a
slight shift in low to mid-end vehicles.

Price increase for low-end cars and starter models will hardly be felt especially if the car is being
amortized through a bank loan. Why? Car loans are paid through monthly installments so the net
increase in SRP will be spread throughout the duration of the loan. Monthly installments will hardly
move.

On the other hand, the increase in SRP will be all the more remarkable for bigger and more expensive
vehicles such as luxury brand cars and SUVs.

The proposed auto excise tax reform will not affect used or second-hand cars. That means that if and
when the new tax system is implemented, going for bank-repossessed cars might be the practical way to
go.
Since the DOF sees this new tax policy being implemented by 2018, car buyers still have at least a year
to finalize their purchases.

For his part, House Speaker Rolando Andaya Jr. says that it may be better to buy a car now while it’s still
cheaper, as the proposed excise tax will “raise car prices by approximately 400,000 to 600,000.”

With affordable financing options such as car loans, car buyers can take advantage of the current tax
structure. Auto dealers also offer lower down payments, so there’s an argument that there’s wisdom in
buying a car now while the current (lower) tax system is still in effect.

If you amortize your car payments through a financing institution or bank that offers friendly payment
terms, you can avoid 2018’s auto excise tax reform and save hundreds of thousands of pesos of your
hard-earned money.