Taxes, AUVs, and the Pinoy Consumer

It could have been worse.

The ninth of June, like some dates from cheesy love songs, could have been one memorably painful day for the local automotive industry. That’s because that was supposedly the day the dreaded Revenue Regulation No. 4-2003 should have taken effect. RR 4-2003, a new tax scheme for new vehicles by the Department of Finance, would, for one thing, totally disregard the exemptions of some models that are presently enjoying duty-free status. That means the price tags of these vehicles, particularly that of the hugely popular AUVs, would have shot up drastically. If computations by auto manufacturers are to be believed, AUVs would cost at least P400,000 more if RR 4-2003 was implemented. It would not require a triple-digit IQ then to figure out a price increase of such scale would have caused the extinction of genus AUV. If it was the Ice Age for dinos, it’s RR 4-2003 for the AUV.

Thankfully, the Ice Age never came — at least for now.

June 6 was the last day of the Senate before it went into recess, with regular sessions set to resume on July 25. Before June 6, majority of auto manufacturers were hoping and fervently praying — short of conducting ritualistic sacrifices involving virgins — that the proposed excise tax bill be tackled in the Senate and passed into law. For the local auto industry, a period of more than a month would be too long a wait. For one thing, manufacturers claim a final decision from the Senate would finally enable them to proceed with their respective product planning and pricing — or in short getting on with their businesses. More importantly, most manufacturers perceived the proposed excise tax bill in the Senate as something they could live with, as opposed to the DOF’s tax scheme.

The present taxation of new vehicles is a convoluted system shot with numerous loopholes and open to equally numerous "interpretations". Commonly referred to as an engine-based tax system, the amount of duties on a new vehicle depends on its engine size and seating capacity. The larger the engine, the heftier the tax. Vehicles capable of seating ten passengers (including driver) are exempted from certain major taxes. Four-wheel drive sport-utility vehicles are slapped with high duties, but pickup trucks, due to their cargo beds, are exempt from this rule, being supposedly commercial vehicles. AUVs get a tax break thanks to their purported ten-person seating attributes and judicious use of locally-made parts.

The proposed bill in the Senate is a value-based taxation system. Based on what it’s called alone, again it would not require a triple digit IQ to figure out that in this system taxes of new vehicles will be based on how much they are worth. The more expensive the vehicle, the higher the duty. The apparent logic behind this is if one can afford a pricey, fancy car, then one should also be able to cough up a fancy tax figure as well.

After undergoing modifications in the Senate, the current version of the excise tax bill proposes to levy only a two-percent tax on vehicles priced below P600,000. Vehicles exceeding P600,000 but no more than P1 million are taxed at P12,000 plus 20 percent of whatever value that exceeds P600,000. Compared to the present system, the new tax plan may even result to cheaper vehicles.

But vehicles that have price tags exceeding the P1 million mark but not over P2 million are slapped with a P92,000 tax plus 100 percent of whatever value that’s over the million-peso mark. Vehicles going over the P2 million mark get a whopping P1.092 million tax — and get this — plus 150 percent of whatever value exceeding P2 million.

This system clearly favors vehicles costing less than P1 million, while encouraging manufacturers to introduce models priced in the P600,000 range. While top-model compact pickups hover in the P1million price range, some "creative" product planning and pricing by manufacturers may get these vehicles to slot in below the all-important million-peso mark. As for AUVs, most are still below that critical level, and estimates by manufacturers show that even without the tax exemption AUVs are currently enjoying, price increases would only be around P50,000 or so. A level they deem that’s still within reach of their target market.

Which is a consideration that’s extremely significant for manufacturers. In the last several years, the trend in local automotive purchases tended to lean toward the Commercial Vehicle segment, where the AUVs belong. While passenger cars still comprise the bulk of the local industry’s annual sales, those of the non-car products like sport-utes and the AUVs are steadily rising — a sharp contrast to dwindling car sales. In Toyota, for instance, the Revo makes up around half of the company’s sales. Honda’s AUV-classified CR-V is hugely popular, outselling the company’s Civic sedan. The Adventure is also a key product for Mitsubishi, while manufacturers like Isuzu Philippines and Universal Motors Corporation manage to thrive even in the absence of car products, banking mostly on the success of the Crosswind AUV and Frontier pickup, respectively. These aforementioned companies are the top-sellers in the local industry.

Unfortunately, the Senate failed to pass the bill before its recess, and manufacturers claim the industry is left in limbo because of that. However, since the bill managed to get passed during its second reading last June 6, DOF Secretary Isidro Camacho suspended anew (the regulation should have been in place since early this year) the scheduled imposition of RR 4-2003 on June 9, citing the "progress" in the status of the excise tax bill in the Senate as reason enough for the postponement. Some vehicles, therefore, and specifically AUVs, get to live another day. How long, though, is anybody’s guess.

One thing, however, reamins certain. Whatever tax scheme gets passed, ultimately it’s the consumer who’s going to pay for it. Not the auto manufacturers. Not the DOF. Not the Senate. You.