ADB backs tax hike on oil, vehicles

Manila-based multilateral lender Asian Development Bank (ADB) has expressed support for the government’s plan to hike excise taxes on oil products and vehicles that Finance Secretary Carlos G. Dominguez III had said would not hurt the auto industry’s sales growth.

During a recent meeting between Dominguez and ADB president Takehiko Nakao, the latter was quoted by the Department of Finance (DOF) as saying that “he agrees with the DOF proposal to adjust the excise taxes on automobiles and petroleum products.”

According to the DOF, Nakao “acknowledged that these are ‘progressive’ tax measures.”

As such, the ADB expected the proposed comprehensive tax reform program to “improve the business environment and sustain further growth,” according to the DOF.

The ADB noted that “revenue losses from the proposed reductions in personal income taxes will be offset by broadening the value-added tax base and increasing oil excise taxes,” the DOF said.

An earlier ADB study showed that excise tax collections in the country had a “dramatic decline” from 1997 to 2009; as such, the lender “proposed an increase in excise tax rates on fuel and tobacco and alcohol products, among other tax reform measures to broaden the tax base and increase revenue collections,” the DOF noted.

In a separate statement, Dominguez said that “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.”

“Buyers would also hardly feel the effects of the price adjustments for mass market cars such as the Toyota Vios and the Mitsubishi Mirage from the proposed excise tax increase because of the flexible financing schemes offered by car dealers that stretch to as long as seven years for some models, which will become even more affordable amid the country’s low interest rate regime,” Dominguez added.

“While there may be an initial slowdown in car sales, the industry would be able to quickly recover and continue its robust pace of growth as it did in the past two years, when car sales went up by 25 percent,” according to Dominguez.

Finance Undersecretary Karl Kendrick T. Chua said additional revenues from higher vehicle excise taxes would reach P31.4 billion.

“For instance, a Mitsubishi Mirage would be taxed an additional P12,000, but the average car buyer who can afford to purchase this car model would get a tax relief of some P20,000 a year under the tax reform plan. In terms of the overall impact, those buying Vios or Innova are also the same people who will benefit significantly from the personal income tax reductions,” Chua said.

“In summary, once we have seen and taken this excise on automobiles as a package together with the personal income tax, once we consider that there are also many other factors that affect decisions to buy cars, we see that this tax can actually be very progressive, can be affordable and can actually contribute to the prosperity of our country,” Chua added.

“The currently vibrant car sales will not be adversely affected by the tax reform plan, as proven by historical data, contrary to the concerns aired by certain players of the local automotive industry. The concerns of the local car sales industry are valid but historical data show that such fears are not likely to occur,” according to Chua.

“Car sales, even when oil prices tripled, continued to grow in the last 10 years because there is also an income effect in addition to a price effect,” Chua noted.

Also, Chua said “incremental revenues from the higher car excises, which have not been adjusted for the last 13 years, will be earmarked to improve traffic management solutions and fund climate change-resilient infrastructure.”

Separately, state-run tax think tank National Tax Research Center (NTRC) said it was time to revisit the estate tax regime, not only to shore up revenues but to also encourage the transfer of properties and make them more productive.

The NTRC also backed fuel marking as proposed by the DOF under its first tax reform package to prevent smuggling.

“The benefits of fuel marking cannot be overemphasized. It prevents fuel adulteration and smuggling. The mere awareness of the mandatory fuel marking serves as an effective deterrent against fuel fraud. It provides fair competition among oil operators and thus assures them of a reasonable return of investment. The oil industry players should therefore welcome the revival of the fuel-marking scheme in the country. On the part of the government, fuel marking will reduce fuel smuggling and will thus help recover revenue that would have been lost through illegitimate sales and tax evasion,” the NTRC said in a report titled “Benefits of Fuel Marking.”

“Actual cases in Pampanga and Zambales show that illegal diversion of tax-free fuel oil from freeport zones to domestic market could be prevented through a robust marking program. Also, based on the experiences of other countries, their figures show that the implementation of fuel marking enables their governments to raise more revenue by preventing fuel smuggling and adulteration. Hence, fuel marking is a worthy undertaking,” the NTRC added.

The NTRC also pushed for a revamp in the country’s estate tax regime.

“The present system of estate taxation has been unchanged since the effectivity of the National Internal Revenue Code of 1997, as amended, on Jan. 1, 1998. Some of its provisions, particularly on exemption and deductions, are deemed ripe for revision or modification, hence, some of the proposals [in Congress] appear to be justified,” the NTRC said in a report titled “Proposed Reforms on Estate Taxation.”

Under the Tax Code, estate tax rates being slapped range between 5 percent and 20 percent in four tiers, based on the assets’ value, with an exemption for net estate of up to P200,000.

The varying and high rates are deemed burdensome, such that some try to avoid payment of estate taxes by donating land.

According to the NTRC, “the grant of estate tax amnesty may be considered not only for revenue consideration but also to encourage the transfer of properties in the name of heirs or beneficiaries of the estate and facilitate the productive use of such properties.”

Citing Bureau of Internal Revenue (BIR) and Philippine Statistics Authority data, the NTRC noted that in 2015, there were only 43,123 estate tax returns filed or only 7.62 percent of the 565,826 deaths in the country.

Between 2006 and 2015, only an average of 34,716 estate tax returns were filed annually or 6.95 percent of the number of deaths averaging 497,228 during the decade.

The share of estate tax collections to the BIR’s total take also remains very small, as the NTRC pointed out that in 2015, the amount of estate taxes collected reached only P3.07 billion or 0.21 percent of the P1.433 trillion collected that year.

From 2006-2015, estate tax collection averaged only P1.64 billion or 0.17 percent of the P968.46-billion average annual collections of the country’s biggest tax collection agency. – Ben O. de Vera