Train’s here. Let’s ride



There’s a saying about being “careful about what you wish for, you just might get it.” We can smell the intense lobbying but for the good of the economy, all parties moved forward to craft a realistic revenue-positive Tax Reform for Acceleration and Inclusion (Train) law that will not only help fund the P8.4-trillion “Golden Age of Infrastructure” but also propel a following five or six more tax reform packages.

Ever since the Comprehensive Tax Reform Package was announced last year, we cautiously pushed detail changes for tax efficiency’s sake. We cast our lot with the administration’s economic triumvirate of Ben Diokno, Ernesto Pernia and Sonny Dominguez, taking heart on the prospect of infrastructure catching up with 40 years of underinvestment; a fertile economic climate competitive in income, tax and opportunity with the rest of fast-growing Asean; and a more equitable tax regime that puts more cash in the pocket of low- and middle-income earners and levels the playing field by rationalizing tax incentives and exemptions that have been abused over time.

Quick off the mark were criticisms that Train was not pro-poor. This is true. Train does not have impossibly high taxes that targets the rich and and encourages creative tax evasion. True, Train will raise energy prices, but with the many pro-poor freebies promised by the President, i.e. free housing, free college education, free irrigation, free jeepneys, doubled incomes for the men and women and uniform etc., where do you get the cash? Now consider the tax give-back in raising the threshold of zero income tax on bonuses and personal income. Definitely pro-poor. It also eliminates the punishing taxation on victims of “bracket creep” and hence puts more cash in the pockets of the regularly employed. True, the added costs will be passed on to the consuming public but as the Finance department’s Karl Chua accurately pointed out, the consuming public is your taxpaying sector which is not the poor. The pro-poor part is the expense side that Train revenues is meant to supply.

Closer to our heart’s four-wheeled items of desire, we see far more reasonable tax rates for hyper-luxury and luxury cars. Mind you, these are still high and this is evident in the cautiously limited range of vehicles, top end, that the new Jaguar-Land Rover importer, Coventry Motors, is introducing half a year after Wellington Soong returned the JLR franchise. The high rates of taxation under the original CTRP, appreciably lowered in Train, led Soong to correctly fear a sales downturn for the sub-premium models of the JLR range. This may well presage the introduction of even far pricier and more luxurious models. We’d like to believe that our argument, perhaps better championed by hyper luxury car importers themselves, that one should not tax the luxury class too high for fear of zero sales (zero tax revenue) won over the House, the Senate and Chua who batted for more stratospheric tax rates.

Initial calculations by media colleagues and car enthusiasts on car prices come 2018 have yielded some surprises. Some luxury cars will have lower taxes than what they pay for under the current system; the importers won’t be too greedy for margin. Still 50 percent of the net import price of P34 million (instead of 100 percent) of a junior Rolls will take many, many Wigos to match at 4.0 percent of P500,000. If the luxury car is a hybrid like those from Porsche, Mclaren or Lexus, tax rates dive to 25 percent. Fancy crew cab pickup trucks, exempt from automobile excise tax, will be some 20-percent cheaper to buy. The hardest hit in price increase is Tier 3 of the four tax tiers – cars costing between P1-4 million, with the highest jump in the popular SUV-compact sedan sweet spot or the P1.40-2 million segment. Easily 10.0 percent dearer.

The bill defines a large tax-exempt range that includes trucks and special purpose trucks (dumpers, transit mixers, etc.). With more affordable pricing for both single and double cab pickup trucks, local body builders like Centro, Almazora, Del Monte, etc. that make L300 FB and FX substitutes will probably feel a sales “pick-up”. Such a tax break supports family enterprise and agricultural starter/small scale businesses.

So why this seemingly inconsistent pricing? The taxes are based on cost of goods sold or net manufacturer’s price and not suggested retail price. To get to net manufacturer’s price means estimating as per international benchmark pricing. Then deduct current taxes paid. Next, guesstimate 7-10 percent wholesaler/distributor mark-up. Then 7-10 percent dealer mark-up and 12 percent VAT. The fixed tax that is slapped every time the price crosses the price threshold between tiers has been eliminated. This flat rate evens out the distortion caused by exclusively percentage-based tax rates. We surmise that in the interest of easier tax administration, Finance department technocrats and Congress agreed to simplify the tax rates as just a percentage, even if it causes some distortion.

As for fuel taxes, we’ve always been of the opinion that given the steady low oil prices of today, we should be reinstating the fuel tax that was rescinded in 1997. The fact that Train’s tax is spread out over three years allays our fears of higher inflation/rising prices. We happily note that the legislature did not succumb to the temptation of appeasing vote-rich lobbies that wanted to whittle the forecast revenue to half of P130 billion.

We also suppose that in search for compensatory taxes, Train went beyond the initial sectors targeted for increased revenue, perhaps treading on the timing of the next tax reform programs. The coal tax was passed because coal has not been taxed since 1988. Sugary drinks and tobacco, deemed subject to sin taxes, were easy pickings, riding the moral wave of an anti-smoking President. Mining, the favorite whipping boy of high society, environmentalists and armchair ecologists, gets higher taxes.

Savoring “our” seeming victory — and we expect wailing and gnashing of teeth from the pro-poor pretenders — we still insist that the government didn’t have to go through extra taxing means to make up for reductions in tax rates for cars and fuel. If only they revisit the hybrid public-private partnership scheme and let the private sector take up the slack via full-on PPPs. Last time I looked, there’s P14.7 trillion in resources in private banks. It’s quite a simple solution that we have been championing as early as third quarter of last year. Why this falls on deaf ears remains a mystery. Are we so stubbornly bound to the order that PPP be relegated to being just a hybrid now? Pushing the burden of building and financing to the private sector will give the government added wherewithal to fund its pro-poor social and missionary non-profit programs.

TITO F. HERMOSO is Autoindustriya’s INSIDE MAN
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