As the Philippines transitions toward the new normal, Filipinos realize the difficulty of commuting now more than ever. Safety and convenience concerns cause many to avail new vehicles, despite the rising oil prices and supply constraints in the global value chain.

Notably, the Bureau of Internal Revenue issued Revenue Memorandum Circular 63-2022, which may trigger more cost consciousness in the automotive industry to manage the excise tax on automobiles, which vary between four to 50 percent of the selling price, net of excise and value-added tax.

A glance at history will show that in August 1986, the excise tax on automobiles was introduced in the Philippines through Executive Order 36. The said tax was then based on the engine displacement and type of fuel. After 17 years, Congress revised the excise tax structure and based it instead on the vehicle price. Currently, the BIR is implementing the pertinent law by defining the tax base as the highest among the following:

• Declared manufacturer's or importer's selling price, net of excise and value added taxes ("first tax base"); or

• 80 percent of the actual dealer's price, net of excise and value added taxes ("second tax base"); or,

• Total cost of importation and expenses divided by 90 percent ("third tax base").

The imported automobiles will not be released from customs custody without payment of the excise tax. Also, under the third tax base, there is effectively a 10 percent industry profit margin for the sale of automobiles.

Interestingly, the determination of excise tax using the third tax base may be complex since, at the time of importation, there must already be an accurate declaration of the automobile cost, including the selling and administrative expenses before these automobiles are even sold to the market. This uncertainty in cost determination can trigger material deficiency excise taxes and penalties for inaccuracies, errors, or unforeseen circumstances.

In order to address this issue, the BIR issued Large Taxpayer Service Memorandum 1-2004, which deleted the third excise tax base, in case the net manufacturer's selling price is more than the cost to sell.

With the passage of RMC 63-2022, the third tax base corresponding to the 10 percent industry profit margin and the required cost declaration at the time of importation of automobiles is now reiterated. Moreover, no Authority to Release Imported Goods shall be issued for the importation of automobiles without computing the three tax bases to clearly show that the excise tax was based on whichever is higher of the three values mandated under existing issuances.

The automotive industry in the Philippines is still struggling due to the impact of the pandemic on the disposable income of their customers. In the same vein, the commuting public is also coping with lack of reliable public transportation, the rising inflation, and soaring fuel prices. The reiteration of the third tax base may affect new vehicle prices. Perhaps, this development may accelerate the transition toward purely electric vehicles or further promote "pick-ups," since the same are currently exempt from excise tax.

***

For more of Dean Nilo Divina's legal tidbits, please visit www.divinalaw.com. For comments and questions, please send an email to cabdo@divinalaw.com.