Tax Reform: Are you on board the passing TRAIN?

INSIDE MAN

What are the implications of the TRAIN program?

The Palace: the last hurdle?

It is all over save for the effectivity date. On the surface, we can already tell that there was intense lobbying but the parties moved forward to craft a realistic revenue positive TRAIN that would not only fund the Golden Age of Infrastructure or BBB's [Build-Build-Build] PHP8.4 Trillion for the next 4 years, but also imbed the foundation for 5 or 6 more tax reform bills to follow.

Our conditional support

Ever since the CTRP was announced last year, we have been cautiously pushing for its adoption but not without detail changes for tax efficiency's sake. We cast our lot with this administration's economic triumvirate of Diokno [DBM], Pernia [NEDA] and Dominguez [DOF] to further our hopes and dreams of 1. infrastructure catching up with 40 years of underinvestment [Build-build-build], 2. an economic climate that is competitive income, tax and opportunity wise, with the rest of fast growing ASEAN and 3. 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.

Pro-poor? Not at all

One of the first criticisms of the TRAIN that passed, is that TRAIN is not pro-poor. This is true. TRAIN does not have impossibly high taxes that fleeces the rich to spread to the poor but forces creative tax evasion. True again that 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 income for the men and women and uniform etc., money needs to be raised. On the other hand when one considers the tax give back in raising the threshold of zero income tax on bonuses and personal income, it can only be pro-poor. It is also just because it eliminates the punishing taxation on victims of “bracket creep” and hence puts more cash into the pockets of the regularly employed. These are consumption taxes and taxable consumption is more of a middle and high class duty. True these added costs will be passed on to the consuming public, but as U-Sec Chua accurately pointed out, the consuming public is your tax paying sector, who are not the poor. The pro-poor part is the expense side for which the revenue of TRAIN is meant to supply.

A victory for freedom of choice [for the rich]

Closer to our heart's 4-wheeled items of desire, we see far more reasonable tax rates for the hyper-luxury and luxury cars. Mind you it is still high and this is evident in the cautiously limited range of top end vehicles, that the new Jaguar-Land Rover importer, Coventry Motors is introducing, half a year after Mr. Wellington Soong returned the JLR franchise. The high rates of taxation under the original CTRP, appreciably lowered in TRAIN, led Mr. Soong, the previous JLR distributor, to correctly fear a sales downturn for the sub-premium models of the JLR range. This may well presage smaller sales volumes but of far pricier, more luxurious vehicles. 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, Senate and DOF USEc Karl Kendrick Chua who batted for more stratospheric tax rates.

Scoop the estimated prices

Initial calculations of 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. Still 50% of 34.0M [instead of 100.0%] is much more than 8.0% of 2.0M. If the luxury car is a hybrid, like Porsche, Mclaren or Lexus, tax rates dive from the regular luxury car's 50.0% to 25.0%. Fancy crew cab pick ups, now excise tax exempt, will be some 20.0% cheaper to buy. The hardest hit in price increase is Tier 3 of the 4 tax tiers – cars priced between 1.0M to 4.0M, with the highest jump at the popular SUV-compact sedan sweet spot – the 1.4M to 2.0M SRP priced segment. Easily 10.0% dearer. Ouch!

Plenty of exemptions

The bill defines a large tax exempt range – trucks, special purpose trucks [dumpers, transit mixers, etc.] jeep and Jeepneys. Trucks were defined to include all pick ups, not just single cab chassis. The latter may prove a boost to local body builders like Centro, Almazora, Del Monte, etc. as L300FB and FX substitutes will abound. We suppose this tax break is in support for the family enterprise and agricultural starter/small scale businesses.

Down to the nitty gritty

So why this seemingly inconsistent pricing? The taxes are based on CoGS [Cost of Good Sold] or Net Manufacturer's Price and not SRP [suggested retail price]. To get to Net Manufacturer's Price means estimating, as per international benchmark pricing, deduction of the current taxes paid, then guesstimated 7.0% to 10.0% wholesaler/distributor mark up, then 7.0% to 10.0% dealer mark up and 12.0% VAT. Of greater impact has been the elimination of the fixed tax that is slapped every time the price crosses the price threshold between tiers. The current system's fixed tax evens out the distortion caused by purely percentage based tax rates. We surmise that in the interest of easier tax administration, the DOF technocrats and the Legislature agreed to simplify the tax rates as just a percentage, even if it causes some distortion.

Projected revenues restored

As for fuel taxes, we've always been of the opinion that given steady low oil prices of today, we should be reinstating the fuel tax that was rescinded in 1997. The fact that it was spread out over 3 years, allays our fears that TRAIN will stoke inflation/rising prices. Moreover, we see a firmness of hand in the current legislature who do not succumb to vote rich lobbies to sacrifice these revenue measures that restored projected overall revenues to Php130B from the first round of changes in Congress.

Spillover taxation

We also suppose that TRAIN went beyond the initial sectors targeted for increased revenue, perhaps treading on the timing of the next 6 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.

Victory!

Savoring “our” seeming victory, and we expect wailing and gnashing of teeth from the pro-poor pretenders/defenders, we will still insist that the government didn't have to go through extra taxing means to make up for the reductions in tax rates for cars and fuel. If only they revisit the hybrid PPP's and let the Private sector take up the slack via full on PPP. Last time I looked there's 14.7 trillion resources in private banks. It is quite a simple solution that we have been championing as early as 3rd quarter of last year. Why if 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 via PPP will relieve government to fund its pro-poor social and missionary non-profit programs. In the meantime, freedom of choice, for so long as you pay the price, rules.

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