DOF split over shift to gross income taxation

The Department of Finance (DOF) is divided on whether to push or drop its proposal to shift to a modified gross income taxation (MGIT).

Documents supposedly meant to be presented to the Congressional budget hearing this week showed the DOF prepared two versions: The first advocated for the passage of the MGIT and the indexation of so-called "sin taxes" for tobacco and cigarettes and beer and liquor. Indexation means taxes on such products will be adjusted annually based on the inflation rate.

The second version included the sin taxes but called for the revival of an earlier plan that proposed the lifting of excise tax exemptions for Asian utility vehicles (AUVs) and instead, implement uniform taxation for all motor vehicles.

DOF sources said the first version will generate additional revenues of P9.5 billion of which P5 billion will come from sin taxes and P4.5 billion from MGIT.

The other proposal, on the other hand, will bring in more revenues for government with combined taxes from sin taxes and the AUV specific tax projected to reach P10.5 billion or P1 billion more. Of the total, revenues of P5.5 billion will come from taxes on AUVs.

Earlier, Finance Secretary Jose Isidro Camacho denied talks government had a change of heart about the MGIT after realizing the difficulty in pushing for its legislation.

The International Monetary Fund (IMF) was concerned about potential implementation problems. It prefers the current net income taxation where all valid business costs can be deducted to the taxable income.

Other tax experts warned government the country is not prepared for a restructuring of the tax system, aside from being the only country in the world to implement such a tax scheme.

Sources said the lifting of excise tax exemption on AUVs was hatched at the time of former Finance Secretary Alberto Romulo but was shelved in favor of the modified gross income taxation after President Arroyo pushed for its legislation in her state-of-the-nation address before the 12th Congress last July 23.

The removal of excise tax exemptions enjoyed by AUV manufacturers will specifically entail imposing a uniform tax for all kinds of motor vehicles.

Currently, automotive vehicles are classified and taxed according to seating capacity and engine displacement. Five-seaters are considered luxury cars and are imposed higher taxes while AUVs with seating capacity of nine, enjoy preferential treatment because they are classified as utility vehicles.

Sources said "redefining AUVs" is the preferred option since it does not require legislation, unlike the proposed shift to modified gross income taxation.

"Redefining AUVs should be easier because no legislation is necessary. The Secretary of Finance only has to issue an administrative order directing the Bureau of Internal Revenue to start collecting the taxes," sources said.

This early however, the plan is expected to be opposed by the automobile sector.

Ariel de Jesus, spokesman of Toyota motors Philippines said there was no mention of the plan in recent meetings of the industry.

"Industry sales are down by 14 percent year-on-year. If they push for the imposition of the excise taxes on AUV to earn more revenues, it won’t happen. For one, this will lead to an increase in prices, lower demand and eventually lead to the collapse of the industry," De Jesus said.

De Jesus said if the plan pushes through, the negative effects will outweigh its pluses. "Sales from the network of local suppliers could fall and some may be forced to close shop. We’re talking of job losses. The taxes will hurt the industry because we don’t know when the turnaround will happen. AUVs have the highest local content among locally-manufactured vehicles and has the biggest network of local suppliers."

Government is convinced the shift will simplify taxation and will also encourage the underground economy, a potentially-rich source of tax revenue, to surface.