Auto Tax Reforms On Hold

The implementation of a Bureau of Internal Revenue regulation which aims to plug a loophole in the government’s excise tax incentive program for the automotive industry has been deferred for a record fourth time. A major highlight of BIR Revenue Regulation 4-2003 is the strict definition of seats to be used as basis for exempting ten-seater vehicles from excise taxes.

The pending BIR rule issued last January stipulates that automobiles, including light commercial vehicles and utility vehicles, will be levied excise taxes unless they have a seating capacity of ten or more “adult” passengers. At least one local assembler has taken advantage of the loophole on seat definition to gain an exemption from excise tax.

The Department of Finance and BIR maintain the implementation of the revenue measure has been put on hold many times to give Congress time to pass its own auto tax restructuring measure, which would automatically supersede RR 4-2003 or any BIR revenue regulation for that matter. That is why it was originally intended to be a stop-gap measure only, a transitory measure to tighten the implementation of the ten-seater tax exemption rule pending Congress’ approval of the tax reforms. But the five-month-or-so delay in legislation is costing the government millions of pesos in foregone tax revenues.

Meantime, the tax reform proposal was passed on third reading at the House and passed on second reading at the Senate just before Congress adjourned on 6 June. The pending legislation seeks to change the basis for vehicle taxation by pegging excise taxes on the manufacturer’s selling price on a graduated basis – with cheapest vehicles enjoying the lowest tax rate and vice versa, replacing the current method based on engine displacement. Regardless of seating capacity, the proposed tax scheme removes exemptions on ten-seater Asian utility vehicles (AUVs) and gives higher tax rates for high-end sport utility vehicles (SUVs), both of which are top-sellers in the commercial vehicle segment.

While efforts at vehicle tax restructuring will render the commercial vehicle segment – accounting for three-fourths of the industry’s 2003 year-to-date sales – less attractive to car-buyers, the pending legislation is nevertheless seen to increase the attractiveness to consumers of the passenger car segment. In a related development, the Chamber of Automotive Manufacturers of the Philippines (CAMPI) attributes the interim sales growth achieved by the industry to buyers taking advantage of the still low AUV prices while changes on excise taxes effecting AUVs have yet to be implemented. This makes AUVs the standout driver of growth for the industry. Four of the most popular AUV models –Toyota Tamaraw FX, Honda CR-V, Isuzu Hi-lander, and Mitsubishi Adventure – accounted for 61% of total commercial vehicle sales and 49% of cumulative industry sales in the first five months of the year.