The CARS Program: Driving towards enhanced competitiveness

SUITS THE C-SUITE By Wilfredo U. Villanueva

Business World (06/29/2015 – p.S1/4)

In a bid to boost the country’s car manufacturing sector, President Benigno S. C. Aquino III recently signed Executive Order (EO) No. 182, series of 2015, creating the Comprehensive Automotive Resurgence Strategy (CARS) Program. Prior to this new EO, EO Nos. 156 (2002) and 877-A (2010) prescribed the policies and directions governing the Motor Vehicle Development Program. To enhance these policies to further develop the domestic production of automobiles, EO No. 182 covers the manufacture not only of motor vehicles but also of motor vehicle parts.

Ultimately, EO No. 182 intends to enhance the competitiveness of the Philippines as a top investment destination for the regional manufacture of automobiles. Compared with its neighboring countries, the Philippines lags in motor vehicle production. Based on 2014 statistics compiled by the ASEAN Automotive Federation, the Philippines produced a total of 88,845 motor vehicles, compared with Indonesia’s 1,298,523 units and Thailand’s 1,880,007 units. Thus, the CARS Program under EO No. 182 is a welcome development to enable the country’s motor vehicle production to catch up with its ASEAN neighbors.

The CARS Program is limited to (i) the manufacture of three models of four-wheeled motor vehicles and covers only the production of enrolled models; (ii) manufacture of body shell assembly and large plastic assemblies of the model; (iii) manufacture of common parts and strategic parts not currently produced in the country at original equipment manufacturer standards of the model; and (iv) shared testing facilities for vehicles and parts.

EO No. 182 prescribes the minimum qualifications which must be met by the car makers, parts makers, and the shared testing facility proponent in order to qualify for the CARS Program. For the enrollment of a model, one of the criteria is a planned volume of not lower than 200,000 vehicles over the model life up to a maximum of six years. However, some stakeholders voiced concerns over this minimum volume requirement, as it would appear that less than three models currently produced by various manufacturers would qualify if the 200,000 production requirement will be strictly enforced.

A participating car maker can only apply for one model during a specific application period. But if the three models are not subscribed for within the said period, the BoI can set a new application period for enrollment of additional models; in this case, more than one model may be granted to a manufacturer.

The highlight of EO No. 182 is the substantial government support to the program. Total fiscal support is set at a maximum of P27 Billion beginning 2016. Two kinds of fiscal support will be available to registered participants for a period of six years during the enrolled Model Life; these are (1) Fixed Investment Support (FIS), and (2) Production Volume Incentive (PVI).

Each enrolled model shall be qualified for fiscal support in an amount not exceeding P9 billion, where 40% will be allocated for FIS and the other 60% will be for PVI. For Parts and Shared Testing Facilities, the FIS shall not exceed 40% of the capital expenditure for tooling and equipment to manufacture the parts, including the training cost for the initial start-up operations.

This specifically quantified fiscal support under EO No. 182 is what sets it apart from its predecessor-issuances, which only provided for general provisions regarding the restructuring of existing tax rates.

For instance, EO No. 156 (2002) provided for the restructuring of most-favored nation tariff rates in order to make these comparable with other countries having similar development programs. It also provided for the rationalization of excise taxes on automobiles to shift to a purely value-based system. Similarly, EO No. 877-A (2010) provided for the restructuring of tariff rates and excise taxes, and included a general provision on the grant of incentive packages for the export of motor vehicles, other vehicle assemblies, and parts.

EO No. 182 emphasizes, however, that registered participants shall not be allowed to register their activity under any other program which grants fiscal incentives.

In addition, EO No. 182 provides for the issuance of a non-transferable Tax Payment Certificate (TPC), which shall be the evidence of the fiscal support given to qualified participants. The TPC may be used to defray the tax and duty obligations of the participants to the National Government, particularly income tax, excise taxes, import duties, and value-added tax.

Note that EO No. 182 explicitly states that the TPC shall be used to defray the tax obligations to the National Government. This means then that the TPC may not be used to defray local tax liabilities of the qualified participant, such as local business tax. EO No. 182 is laudable in that it provides concrete impetus to our automotive manufacturing industry.

As the name implies — the Comprehensive Automotive Resurgence Strategy (CARS) Program — EO No. 182 is in line with the Government’s focus on industry resurgence to promote sustainable and comprehensive growth. It is consistent with the new industrial policy which aims to transform and upgrade the manufacturing industry with the long-term vision to develop globally competitive industries supported by strong forward and backward linkages.

In order to achieve this goal of driving Philippine competitiveness versus its neighbors, government must ensure that the CARS Program is implemented efficiently, particularly in the granting of fiscal incentives. Given the capital investments required by the car manufacturing industry, any and all fiscal assistance from the Government will surely be a welcome relief and a motivation for the stakeholders to further improve their businesses.

It will be interesting to see how the TPC mechanism will be implemented by the Department of Finance (DoF), and eventually, by the Bureau of Internal Revenue and the Bureau of Customs vis-a-vis the specific fiscal support. Thus, it will be incumbent upon the DoF, the BoI, and the Department of Budget and Management, to implement an efficient TPC mechanism that will enable the qualified participants to maximize the fiscal support granted to them, without gridlocks and conflicting interpretations of applicable tax regulations.

Wilfredo U. Villanueva is the Head of Tax Services and General Counsel of SGV & Co.