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A reform long overdue

Much fuss has been raised about the proposed Corporate Income Tax and Incentives Rationalization Act or CITIRA (the erstwhile Tax Reform for Attracting Better and High-Quality Opportunities or TRABAHO Bill), with claims that it affects the mood of investors who now choose to wait and see. What’s not emphasized enough is that much of the uncertainty results from the long-winded process the discussion on this reform takes. Proposals to rationalize fiscal incentives have been filed since the 10th Congress, mostly in the Lower House, with the Senate joining the fray starting in the 13th Congress. The push for the reform has been gaining momentum over time, getting much-deserved attention starting the 17th Congress. It has been more than two decades. The issue has clearly peaked, indicating that the reform is bound to happen. It will serve all sectors better the sooner the law is passed.

When one searches the Internet for information on taxation in the Philippines, its complexity is often a highlight. Recent tax reform efforts, while not perfect, have contributed a lot in simplifying the system, improving efficiency and fairness, and directing behavioral change (e.g. healthier lifestyles) through taxation. CITIRA will add to this, specifically by modernizing our investment incentives regime.

Incentives are privileges given to entice investors to locate their operations in the country. The Philippines gives fiscal incentives, or incentives that allow investors to pay lower taxes. These come in the form of tax holidays (or a period of time that no taxes are paid), reduced or special tax rates, exemptions (for instance, on import duties) and allowable deductions that lower the taxable base. Inasmuch as they help direct investments to critical sectors and geographical areas, fiscal incentives are a good handle for industrial and development policy.

However, while incentives erode our tax base, the evidence is weak on their effectiveness in attracting investments and their contribution to economic and social ends. The Oct. 6, 2019 edition of “Yellow Pad” by Filomeno S. Sta. Ana III discussed this at length. CITIRA tries to address this by sharpening the focus of the incentives and aligning them to broader goals. First, it eliminates the distinction between foreign and domestic investors, so that investors receive incentives based on qualifications other than their nationality. Second, it offers more targeted incentives that lower costs and promote desirable economic activities (e.g. additional deductions for research and development, training, employment). Third, it prescribes performance criteria and a graduation period for the enjoyment of incentives, so that there is clear basis for their award and that the incentives expire, to encourage innovation and promote strategic investment areas. Fourth, it introduces administrative reforms for simplicity and greater transparency.

The first-level test for CITIRA is whether or not the ends it promotes are worthy. Only after that should second-level issues, like the types of cost-based incentives or performance criteria come in. And more specific third-level issues, like the rate of deduction or the length of time for the enjoyment of incentives, follow. While expected behavior, one looks extremely self-centered if the main opposition to the reform rests on the basis of a couple of percentage point increase in the tax rate or because the transition period from the old system to the new is too short. These matters are the easiest to negotiate and to arrive at workable solutions on. But reform should not be held hostage just because a single lobbyist couldn’t get his way.

One element that merits greater attention in CITIRA is the shift from gross to net income taxation.

In the current regime, after tax holiday, qualified firms enjoy a special tax rate of 5% on gross income earned (GIE), proceeds of which are shared by the national government (3%) and the local government unit (2%). Gross income is defined in the IRR of the PEZA Act as “gross sales or gross revenues… net of sales discounts, sales return and allowances and minus costs of sales or direct costs.”

Allowable deductions are broad and generous. For ecozone export enterprise, they include: direct salaries, wages or labor expenses; production supervision salaries; raw materials used in the manufacture of products; goods in process (intermediate goods); finished goods; supplies and fuels used in production; depreciation of machinery and equipment; rent and utility charges associated with building, equipment and warehouses, or handling of goods; and, financing charges associated with fixed assets. For ecozone developers/operators, and facilities, utilities and tourism enterprises, allowed deductions are: direct salaries, wages or labor expenses; service supervision salaries; direct materials, supplies used or resold to another ecozone enterprise; depreciation of machinery, equipment and buildings owned and/or constructed; financing charges associated with fixed assets; and, rent and utility charges for buildings and capital equipment. Aside from administrative expenses, the main difference from net income are deductions permitted for losses and bad debts, and the carrying over of net operating loss.

Given the slim difference, shifting the tax to net income from gross income earned should be easy. A special (read: lower) tax rate on net income can be adjusted to approximate what qualified enterprises would have gotten under a GIE regime, so the issue of benefit can be addressed. The primary advantage of the shift will be increased transparency, and less vulnerability in defining what constitute direct costs. It will also make seamless the eventual graduation to the regular CIT regime once the incentive expires.

The shift does not necessarily mean higher tax takes, which is a different matter altogether that can be addressed by just increasing the rate whether on net or gross income earned. The main benefit is more simplicity and transparency in the system in the long run.

Finally, on the other element of CITIRA, one should still keep caution about the speed and rate of reduction of corporate income tax. Absent due restraint and proper timing, what could be recovered in terms of tax base through the rationalization of incentives, and even the gains of previous tax reforms, would easily be wiped out by a careless CIT reduction. Action for Economic Reforms maintains that only a modest and paced reduction in CIT by at most four percentage points (from 30% to 26%) is warranted. Further reduction can only be done if it is proven that we have the fiscal space to do so, and that the economy is seeing the benefits of lower corporate taxes.

In the end, most important in evaluating reforms are the broad goals they are supposed to achieve. CITIRA has those down pat. It is time to buckle down and get to the specifics.

 

Jenina Joy Chavez is a trustee of Action for Economic Reforms, and heads its industrial policy program.

www.aer.ph

What now?

Perhaps the question to be asked is not simplistically whether the Visiting Forces Agreement (VFA) is good for us or bad for us, but rather do we need a defense treaty with the US at this time, regardless of feelings over the fact that the US has some strategic advantage for itself by bonding with us? We have to be realistic about our status and capabilities before we thump our chests and bellow to be left alone to our own little devices against the big, cruel world.

Under the Mutual Defense Treaty (MDT) between the Republic of the Philippines and the United States of America signed in 1951, both nations declared support for each other if either the Philippines or the United States were to be attacked by an external party. But because of US initiatives and aggressive participation in world conflicts and threats — communism in the 1950s-1960s; the Vietnam War and other wars in Asia in the 1970s; the rise of dictatorships through the 1980s, exacerbated by pandemic financial/economic problems and rising oil crises — anti-US sentiments rose worldwide and so also in the Philippines, maybe in instinctive fear of the too-powerful US.

Was it eerie coincidence that Mt. Pinatubo erupted in furious rage in June 1991, when the Military Bases Agreement of 1947 was expiring, and the Philippine Senate was studying possible renewal or termination of the agreement? Clark Air Base, the biggest US military establishment in the Philippines, was practically the center of the calamity. Yet the Senate voted not to ratify the new treaty proposed by the administrations of Corazon Aquino (Philippines) and George H. W. Bush (US), and, prodded by the emergency wrought by Pinatubo, all US military personnel in the Philippines were removed from the US bases by the end of November 1992.

The cut-clean removal of US bases in the record time of a year clearly amputated the Philippine military, which at that time relied heavily on American military training and equipment. A modus vivendi had to be designed for a smoother flow to total independence from the US physical presence, while minding the patriotic and ambitious (and indubitably noble) goal of the Philippine military and political governance for identity and self-sufficiency. Thus was the VFA installed for this in February, 1998.

The VFA defines the treatment of American military personnel when they are in the Philippines. A counterpart agreement which deals with the treatment of Filipino military personnel in the US was signed in October 1998. It complements the Mutual Defense Treaty (MDT), the mother agreement between the Philippines and the US which guarantees that the two countries will provide military aid to each other in case their metropolitan areas or their territories in the Pacific are attacked by a foreign force.

The general terms of the VFA are:

“The agreement provides that the Philippines will take primary jurisdiction over US military personnel who commit or are accused of a crime in the country, unless the offense is related to US security or is only punishable under US law. On the other hand, the US takes primary jurisdiction over their personnel if they commit offenses against US property or security or against fellow US personnel and their property. They also have primary jurisdiction over their personnel in offenses committed in the performance of official duty” (CNN Philippines, “The Explainer,” Jan 28, 2020).

The matter of jurisdictions was tested and strongly protested by anti-bases and human rights activists in two cases: in 2006 when four US servicemen were accused and convicted of a gang rape in Subic Bay Base, and in the 2014 slaying of Jennifer Laude by 19-year-old Private First Class Joseph Scott Pemberton, who had been unaware that Laude was transgender.

Among the other provisions of the VFA are relaxed reciprocal visa and passport policies for US and Filipino military personnel, tax-free importation of equipment, materials and supplies by the US government, and free entry of US military aircraft and vessels into the Philippines.

The constitutionality of the VFA has always been an issue for nationalists and lawmakers, and public discussion has been roused in every change of political administration. Whether the VFA transgressed rights and liberties in the Constitution was officially challenged twice: in 2000, the case of which was dismissed, and in 2007, the case of which was finally decided by the Supreme Court en banc in 2009, upholding the VFA constitutional. Yet protests against the VFA will not die, led by the socially-focused and other human rights groups.

But this year, as Taal volcano erupted in January, the VFA issue burst forth to rival attention thanks to the fiery anger of the President of the Philippines himself who announced that he would terminate the VFA immediately — and for what reason? According to presidential spokesman Salvador Panelo, “President Rodrigo Duterte is serious in terminating the (VFA) agreement due to the US government’s cancellation of the visa of Senator Ronald dela Rosa, under whose term as Philippine National Police (PNP) chief ‘Oplan Tokhang’ (the tactical operations for Duterte’s War on Drugs) was launched,” the Philippine Star of Jan. 25 reported. The background for this is that the US Senate declared support for the release of detained opposition Senator Leila de Lima by withholding travel visas to Philippine government officials who helped put her in jail for allegations of drug trafficking when she was Secretary of Justice.

“Good move. Visas fall under US Justice Department in the Executive Branch. Either they’re serious about US-PH military alliance or not. They can have De Lima after her trial. In fact, they can pass a law making her a US citizen and part of US military so she is covered by VFA,” Foreign Secretary Teodoro Locsin, Jr. said on Jan. 25 referring to Duterte’s announcement of immediate VFA termination (Ibid.). How jarring, when on Feb. 6, at a Senate foreign relations committee meeting, Locsin declared a change of heart and said he favors a review of the VFA before termination can be discussed (Philippine Star, Feb. 7).

The Star also quoted Locsin as afterward saying that abrogating the VFA would render the Mutual Defense Treaty (MDT) and the Enhanced Defense Cooperation Agreement (EDCA) “nothing but pieces of paper… When you abrogate the VFA, the MDT can remain and so with EDCA but both will be nothing but merely pieces of paper… as the VFA is the implementing document,” Locsin said upon questioning by Senate Minority Leader Franklin Drilon.

Initially, Locsin said the MDT and EDCA can remain without the VFA, but Drilon advised him to review the Supreme Court jurisprudence, which basically stated that the EDCA can only exist with the VFA, the Philippine Star pointed out on Feb. 7.

The Armed Forces is silent on this latest disturbingly confusing and frightening, dizzyingly changing to-and-fro on such a critical issue as the country’s defense and survival. The AFP knows they need the VFA as yet, for the sake of the Filipino people whom they must protect with their lives if need be.

What now? Our leaders must rise above petty personal concerns and vanities and humbly submit to constraints in our common reality, for the common good.

 

Amelia H. C. Ylagan is a Doctor of Business Administration from the University of the Philippines.

ahcylagan@yahoo.com

The events that led to Al Vitangcol’s conviction

Last week, the Sandiganbayan convicted Al Vitangcol III, former general manager of the Metro Rail Transit (MRT) 3, of graft and for violating government procurement laws. Among the incorporators of PH Trams was Arturo Soriano, Vitangol’s uncle-in-law.

PH Trams was paid $1.15 million per month, for a six month term to maintain the train system. The contract was said to be extremely overpriced as it applied only to maintenances services and labor, not to spare parts.

Vitangcol and Soriano were both convicted and sentenced to six to eight years in prison. Vitangcol was also permanently disqualified from holding public office.

Back in 2017, I wrote a column that described in detail how MRT-3 became so problematic and the events upon which PH Trams was born.

Allow me to extensively quote my own column which was publish in this paper. It explains and provides context to Vitangcol’s conviction.

So where did it all go wrong for MRT 3?

“A lethal cocktail of bad engineering choices, politically driven decisions and mismanagement made MRT-3 the mass-moving hazard it is today.

“The series of errors started back in 1995. It was then that a consortium led by the Fil-Estate Group, along with Ayala Land, Ramcar and the Campos Groups — formed a company called the Metro Rail Transit Corporation (MRTC). The consortium was awarded the contract to Build-Lease & Transfer the MRT-3 line traversing EDSA.

“The contract called for MRTC to build the railway structure, construct 12 stations along its span, purchase the rolling stock (the trains) and install its signaling system. The deal also made MRTC responsible for maintaining the system and procuring its spare parts. Government, through the Department of Transportation and Communications (DOTC), was in charge of the daily operations of the system.

Government was to pay the MRTC a lease rate equivalent to the amortized cost of the train line, plus a 16% per annum return on capital. After a period of 25 year period (ending in 2025), the ownership of the line would revert back to government.

“While a 16% return on capital is unusually high for a standard Build-Lease & Transfer contract, it has no bearing on the maintenance woes of the system. The problem lay in the type of rolling stock selected by MRTC.

See, the Czech-made Tarta RT8D5M was not the appropriate choice for a high-volume line like MRT-3 in the first place. Its specifications are more akin to a tramway that runs on street level, rather than that of a metro rail. Trams are designed to run at varying speeds, often stopping to give way to traffic lights, intersections and pedestrian crossways. They are not designed to operate at maximum speed and at maximum capacity, all the time, like a metro system can. Pushed to the limit, the trams were bound to break-down given the stress of usage — and break-down they did.

“The correct choice of rolling stock would have been one using metro-technology, similar to LRT2, which can withstand higher operating strain. “In 2001, MRTC awarded the maintenance and the procurement of spare parts to Sumitomo under a ‘pass-through’ agreement. A ‘pass-through agreement’ is one where government paid the cost of maintenance and spare parts to MRTC, who, in turn, would forward payment to Sumitomo. The system worked well as it allowed Sumitomo to purchase the spare parts it needed to keep both the trains and rails in good condition. Under this arrangement, MRT-3 operated with relative reliability from 2001 to 2010.

“In 2010, newly elected President, Noynoy Aquino, appointed Ping de Jesus as the Secretary of the DOTC. It was the same year that the pass-on agreement with Sumitomo was to expire. Secretary De Jesus extended the Sumitomo contract for one more year to give him time to formulate an alternative plan for the maintenance of the trail line.

“In early 2011, the DOTC crafted a plan to integrate the operations of MRT-3 and LRT-1 in preparation for the eventual expansion of LRT-1 to Cavite. The plan would have unified the maintenance systems of both train lines, a move that would have resulted in massive savings on maintenance costs.

“Sumitomo was qualified to bid for the contract along with other international engineering groups. The bidding was to be held on July 2011.

“A few weeks before the bidding date, however, Secretary De Jesus resigned from his post due to health reasons. Mar Roxas was assigned as his replacement. Roxas’ first act as the new DOTC Secretary was to cancel the bidding exercise.

“Roxas’ move proved to be catastrophic. In one fell swoop, not only did Roxas trash a perfectly good long-term maintenance plan for both MRT3 and LRT 1, he also left MRT 3 with no maintenance contractor. Remember, by this time, the Sumitomo contract had expired.

“Realizing his mistake, Roxas scrambled to renew the Sumitomo contract on annual and six month terms. This was a bad decision since Sumitomo (or any other maintenance contractor, for that matter) would naturally not invest in long term preventive maintenance programs given the short term nature of its contract. The rolling stocks, rails and signaling systems began to deteriorate. This is when system failures began to occur.

“In October 2012, Roxas, through MRT General Manager Al Vitangcol, awarded the maintenance contract to a firm called PH Trams CB & T. Two of PH Trams’ six incorporators-directors were Arturo Soriano (Vitangcol’s uncle-in-law) and Wilson T. De Vera. Vitangcol concealed the fact that Soriano was the uncle of his wife.

“As for De Vera, it will be recalled that he was the man accused by the Czech Ambassador of attempting to extort $30 million from Czech train maker Inekon back in July 2012. Also among its directors were Marlo de la Cruz and Manolo M. Maralit.

“By this time, Roxas was moved to the DILG and Secretary Jun Abaya took over the helm of the DOTC. Abaya’s first act was to ratify the contract of PH Trams even if the bidding process was allegedly a fluke.

“The terms of PH Trams contract was problematic too. It called for PH Trams to provide the manpower for the maintenance of MRT-3, while government was to handle the procurement of spare parts. This proved to be a bad formula considering the tedious process of government procurement. In most cases, government could not provide the spare parts on time. This left PH Trams with no choice but to resort to remedial repair work or “band-aid solutions” to keep the trains running. This caused the entire system to deteriorate even more rapidly. This went on for three years.

“In 2015, the maintenance contract was awarded to SBI CB&T a Filipino-German partnership, and then, to Busan Universal Rail, Inc. in 2016. Given the short term contracts given to these firms, neither invested in long term solutions for MRT-3. The trains deteriorated to point where they became safety hazards. This was when derailments of trains and uncoupling of cars began to occur.

“With one error of judgment over the other, the MRT-3 line was left in a pitiful state. Most trains were out of commission due to damage and lack of spare parts. In fact, only 13 out of 73 trains were working as of February 2015. Too, the rails were in need of rehabilitation and the signaling system needed to be replaced.

“With its back against the wall, the DOTC purchased 48 new train cars from Dalian of China. The new trains were meant to augment the ageing and dilapidated Czech-made units. By this time, it was 2015 and the Presidential campaign was in full swing with Mar Roxas running as the administration’s candidate.

“Roxas was getting a lot of flack for the MRT-3 mess. He was desperate — he needed to show the public that relief was on the way.

“He had the trains delivered from Dilian even without their motor, couplers and signaling system just to have something to show.

“The public relations stunt was not enough to assuage the anger of the public over the MRT-3 mess. In many respects, it cost Roxas’ his presidential bid.”

The story of MRT-3 only proves that when political interest and greed collide, rationality flies out the window, corruption is committed and the public pays the price for it. May the Vitangcol’s experience serve as a lesson to all government bureaucrats.

 

Andrew J. Masigan is an economist.

If the coronavirus is such a big economic threat, act on it

By Daniel Moss

ALMOST ALL OF Asia’s central bankers have said the economic risks from the Wuhan coronavirus are significant. Then why aren’t they all taking action?

In a slew of interest-rate meetings last week, policymakers have been all over the map. Thailand surprised most economists by reducing rates, while the Philippines cut and India held, as anticipated. The Reserve Bank of Australia acknowledged the dangers to its commodities-heavy economy, but doesn’t appear to be in a much of a hurry to do anything about it. China quickly pumped liquidity into the financial system and lowered the money-market policy rate when trading resumed last Monday.

There’s a missed opportunity in this lack of a unified response, which could accelerate a recovery from any economic hit the virus brings. However, despite many shared characteristics — proximity to China, as well as dependence on tourism, investment, and supply chains — there are limits to policy integration. In the monetary arena, Asia doesn’t exist as a region the way Europe does.

Still, in the most extreme examples, some degree of coordination has been useful. For example, rates came down in the US, Europe, and China during the financial crisis of 2008. That commitment eventually stabilized markets and growth resumed. I’m not equating the virus to the Great Recession, but joint firefighting can be a big confidence-booster. Major powers also cooperated effectively to stabilize currency markets when Japan’s banking system cratered in 1998 and the euro crashed in 2000.

We’ll know the cavalry has really arrived if, and when, the Federal Reserve responds. As I wrote last week, the central bank should recognize that in an era of worrying about “global developments” — a key reason cited for its 2019 cuts — something that shuts down a broad swathe of China’s economy is a rather big one. The European Central Bank, meanwhile, has been circumspect. Peter Praet, a former top official, expressed concerns about acting prematurely in response to the virus: “What worries me probably more — the sort of perception you know, especially in financial markets, that central banks always have to react,” he said, adding, “There’s only so much a central bank can do.”

The caution is unfortunate, but understandable. Many central banks eased considerably in 2019 and it’s important not to make knee-jerk decisions. Borrowing costs are low and there’s something to be said for keeping powder dry for a truly dire scenario, like a recession or financial shock. But there’s also a case for acting quickly precisely because rates are low; if you allow a slowdown to take hold, even more monetary weaponry might be required. “Sooner the better,” Philippine central bank Governor Benjamin Diokno said in an interview with Bloomberg News last week.

In Australia, rates were cut three times last year to a record low 0.75%. RBA Governor Philip Lowe is now worried that more reductions will inflate asset prices just when things may have bottomed. In a series of speeches and presentations last week, Lowe signaled his preference for a period of masterful inactivity. But China accounts for 40% of global growth and is Australia’s biggest customer. Lowe says the virus is a bigger worry than the 2003 outbreak of Severe Acute Respiratory Syndrome, which almost halved Australia’s growth rate in the second quarter of that year. Pity he’s so reluctant to act.

After five rate cuts last year, the Reserve Bank of India has made clear that it’s uncomfortable with another cut amid an inflation spike. As a substitute, policymakers lowered lender reserve requirements and boosted money-market funding. Still, inflation has been declining in the major economies for decades and this spurt in India looks temporary. The RBI should be able to look past it. As I wrote last year, a collapse in growth is the bigger threat.

The good news is that some central banks appear to be learning their lesson. The Bank of Thailand has shown some nimbleness after moving too slowly last year to combat the strength of the baht. Governor Veerathai Santiprabhob made clear he isn’t done after Wednesday’s quarter-point reduction took the main rate to a record low of 1%.

What’s clear is that Asian policymakers aren’t sitting around and waiting for the Fed. They nevertheless could stand to pick up the pace. Given the weight of China’s economy, valor may prove the better part of discretion.

 

BLOOMBERG OPINION

Common station’s Area A to start construction soon

By Arjay L. Balinbin
Reporter

THE construction of Area A of the common station project in North Avenue, Quezon City is expected to begin this month, the Department of Transportation (DoTr) said.

Transportation Undersecretary for Railways Timothy John R. Batan said the Ayala Corp. has completed Area B, where the concourses connecting Areas A and C of the common station project are located.

“Area B, tapos na ’yun (that’s done). For Area A, construction works will begin already, alam ko maghuhukay na ’yan sila sa EDSA by February or March (They’ll be digging on EDSA by February or March),” he told BusinessWorld in a recent interview.

BF Corp. and Foresight Development and Surveying Co. (BFC-FDSC) will construct Area A, where the platform and concourse for the Light Rail Transit (LRT)-1 and the Metro Rail Transit (MRT)-3 is to be located.

“They are in the process of completing their submission of the detailed engineering design, but since (the contract is) design-build, construction works will begin already,” Mr. Batan added.

The common station project aims to link four commuter train lines: LRT-1, MRT-3, MRT-7, and eventually, the Metro Manila Subway.

Area A, Mr. Batan said, is targeted for completion by the first quarter of 2021.

San Miguel Corp. is in charge of the construction of Area C, where the platform for MRT-7 is located.

“2021 ang partial operations ng MRT-7 (MRT-7 is targeted for partial operations in 2021); so we expect that by 2021, Areas A, B and C should all be completed and ready,” Mr. Batan said.

In January 2017, the government and private companies involved in the project signed a memorandum of agreement after years of deadlock on the matter of the common station’s location.

The agreement was signed by Transportation Secretary Arthur P. Tugade; Public Works Secretary Mark A. Villar; Metro Pacific Investments Corp. Chairman Manuel V. Pangilinan; SM Prime Holdings, Inc. Director Hans T. Sy; Ayala Corp. Chief Executive Officer Jaime Zobel de Ayala; and San Miguel Corp. President and Chief Executive Officer Ramon S. Ang.

Under the agreement, the common station will be built at a compromise site near the original 2009 site in front of SM Annex (North EDSA) and the 2014 location near Ayala-owned TriNoma Mall.

Monetary, fiscal tools should be readied for nCov outbreak — DoF

THE Department of Finance (DoF) said the government should be ready to implement monetary and fiscal measures to cushion the impact of the novel coronavirus (2019-nCoV) citing a study that pointed out the Philippines’ vulnerability to effects of the outbreak.

“(The government should) continuously monitor developments in trade and tourism (and) be ready to implement monetary and fiscal tools to counter potentially adverse economic fallout,” Finance Secretary Carlos G. Dominguez III told reporters in a Viber message over the weekend.

Last week, the central bank at its first rate-setting meeting this year cut benchmark interest rates by 25 basis points to shield the economy from the effects of the outbreak.

According to the International Monetary Fund (IMF), the Philippines still has space for expansionary macroeconomic and monetary policy to mitigate the possible risks of the outbreak.

“Under these adverse risk scenarios, fiscal stimulus should be prioritized toward public capital and social spending programs,” the IMF said.

Mr. Dominguez also said authorities should stay vigilant in ensuring the biological safety and good health of the population amid the ongoing spread of the virus.

“(There is also a need to) prepare marketing and finance programs to assist industries that may become distressed,” he added.

Mr. Dominguez made the statement in response to an article by the independent think tank ODI, which said the Philippines, along with Sri Lanka and Vietnam, are the top countries likely to be vulnerable to the economic impact of the outbreak as well as the slowdown in China’s economy.

“Much of the outbreak is currently centered around China with the affected areas effectively being under lock-down. This will affect the Chinese economy and beyond. Many countries in South East Asia and Africa are increasingly dependent on economic links with China for their growth and economic transformation,” it said.

According to ODI’s study, “Economic vulnerabilities to health pandemic: which countries are most vulnerable to the impact of coronavirus,” the Philippines and Vietnam will be the most affected by the outbreak through direct health impact and direct flight cancellations.

In terms of country’s exposure to 2019-nCoV through economic channels, Philippines ranked fifth, just behind Maldives and Laos, with Mongolia topping the list.

“Taking these indicators together, we present an overall vulnerability index. Sri Lanka, the Philippines and Vietnam, followed by Kazakhstan, Kenya, Cambodia and Nepal, top this index as the most vulnerable countries in economic terms,” the study read.

According to preliminary estimates by the National Economic and Development Authority (NEDA), a prolonged 2019-nCoV outbreak in the country will largely hurt the tourism sector and might dent the economy by around 0.3% if the effects are felt until June.

The economic impact could further rise to as much as 0.7% of gross domestic product (GDP) if the virus lingers until December.

NEDA Secretary Ernesto M. Pernia said these scenarios considered a 100% reduction in Chinese tourists during and a 10% reduction in other inbound foreign tourists from the baseline during that period.

Central bank governor Benjamin E. Diokno said the bank’s estimates showed the outbreak could have an average impact of 0.3% on GDP growth during the first half, minus 0.1% in the first quarter and minus 0.4% by the second quarter.

Mr. Dominguez has said that the government is maintaining this year’s growth target of 6.5-7.5% despite the virus outbreak and the recent eruption of Taal Volcano.

The World Health Organization has declared the 2019-nCoV a public health emergency of international concern, after it infected more than 20,000 people, mostly in China. — Beatrice M. Laforga

More fiscal reforms needed for ‘A’ rating

THE sovereign credit rating upgrade by Japan’s Rating and Investment Information, Inc. (R&I) could spur investment and boost infrastructure development, but more fiscal reforms need to pass before achieving a rating level of “A,” the chief economic planner said.

“The credit rating upgrade for the Philippines by R&I will enhance the country’s investment climate and creditworthiness. Wider fiscal space enables the country not only to spend more on infrastructure but also invest in ‘suprastructure’ — quality education and Science & Technology Innovation ecosystem required for the Philippines to become a globally competitive knowledge economy,” Socioeconomic Planning Secretary Ernesto M. Pernia told reporters in a mobile phone message over the weekend.

On Friday, R&I upgraded the Philippines’ credit rating to “BBB+” from “BBB” with a “stable” outlook, just a notch away from the “A” rating.

R&I said it considered sustained economic growth driven by aggressive public investment, a downward trend in the share of debt to the economy despite a widening fiscal deficit, rising revenue as well as developments in the Bangsamoro Autonomous Region in Muslim Mindanao (BARMM).

Asked to comment, UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said the Philippines could hit the A rating level ahead of its two-year plan, or before 2022, if critical fiscal reforms pass into law this year.

“If all critical fiscal reforms are passed into law and critical infrastructure development are carried out and implemented, an “A” credit rating is indeed possible,” Mr. Asuncion said in a phone message.

The Department of Finance is still hoping that the remaining tax measures of the Comprehensive Tax Reform Package (CTRP) are passed this year.

The Senate is currently finalizing the Corporate Income Tax and Incentives Rationalization Act (CITIRA) bill, representing Package 2 of the CTRP, with the bill expected to be sponsored out of committee and into the plenary this week.

The measure seeks to gradually lower the corporate income tax to 20% while rationalizing fiscal incentives given to businesses.

Another bill currently being deliberated in Congress is the proposed Passive Income and Financial Intermediary Taxation Act (PIFITA) bill, which aims to reduce taxes on passive income, currently one of the highest in Southeast Asia.

Senate Ways and Means Committee Chairman and Senator Pilar Juliana S. Cayetano had said that the one-year timetable to pass all the remaining bills will not be her “sole decision,” but assured that she can at least have it sponsored in the plenary.

The other measures still being legislated are tax bills dealing with real property valuation and mining.

On Jan. 22, President Rodrigo R. Duterte signed into law the bill raising the tax on alcohol products, electronic cigarettes and other vapor products representing Package 2+ of the CTRP.

Other measures of the tax reform plan that have been passed into law were Republic Act (RA) No. 10963, which slashed personal income tax rates and increased or added levies on several goods and services, and RA 11213, which grants an estate tax amnesty and an amnesty on delinquent accounts left unpaid after being given final assessment.

“A credit rating upgrade from any of the credit rating agencies is always a good sign that the economy will and can improve moving forward,” Mr. Asuncion said.

S&P Global Ratings, Fitch Ratings and Moody’s Investors Service rate the Philippines at “BBB+”, “BBB” and “Baa2,” respectively. — Beatrice M. Laforga

NGCP claims to have thwarted 100 cyberattacks on grid system

THE National Grid Corp. of the Philippines’ (NGCP) transparency regarding its operations has become an issue after reports that it has detected 100 cyberattacks, officials said.

At a Monday hearing at the Senate Committee on Energy, NGCP President Anthony L. Almeda disclosed the detection of cyberattacks “a hundred times,” in the past few weeks. On top of this, National Transmission Corporation (TransCo) said the NGCP uses the NARI Transmission Control Operational Platform System, which allows remote access to the grid.

“Ito po ’yung ginagamit na computer control na pwede mag-switch on and switch off ng circuit breaker ng powerplants (This is the computer system that is used to switch powerplant circuit breakers on and off),” TransCo consultant Rowaldo del Mundo told the panel. He also answered in the affirmative when asked if such controls are remotely accessible.

Energy Secretary Alfonso G. Cusi pressed the NGCP to subject its operations to audit to ensure that security measures are in place to counter attacks.

“The vulnerability is always there, the threat is always there, we must have the defenses in place,” he said in the same hearing. “That’s why we want to have an audit to determine if we have the right defensive mechanism to protect our system.”

Mr. Cusi said the department has attempted to audit the NGCP since 2017, but was declined. The NGCP, for its part, said it is open to the audit, provided it is conducted by the Energy Regulatory Commission.

NGCP Spokesperson Cynthia P. Alabanza said the detections are proof that its cybersecurity efforts are effective. “Nag-invest ang NGCP heavily on cybersecurity, ‘yung mga vulnerability, everyday pinag-aaralan (NGCP invested heavily in cybersecurity, and the vulnerabilities are evaluated every day),” she told reporters after the hearing.

“Kahit anong sistema na may cyber aspect, may mga detections talaga pero dahil matatag ang ating cybersecurity efforts, walang nakakalusot (Any system with a cyber aspect will have attempted instrusions but our cybersecurity efforts are robust, and nothing has got through),” she said.

Asked to comment, Ateneo de Manila University professor and cybersecurity expert William Emmanuel S. Yu said NGCP represents “critical infrastructure” that must be protected.

“I am not familiar with the systems being used in NGCP. Nor am I familiar with the NARI Transmission Control Operational Platform system. I am pretty certain that there are mechanisms that can be used to secure such critical infrastructure,” Mr. Yu said via e-mail, Saturday.

“It would be important to inquire on what controls NGCP has in place to prevent such attacks from occurring and what they have to ensure that nothing else is getting across.”

Mr. Yu called the matter a national security concern, citing the experience of Ukraine.

“Imagine being able to disrupt power distribution in the country by disrupting the national grid. This has already happened in the past.”

In December 2016, a portion of Ukraine suffered power outages after hackers accessed its electric utility system.

A 2017 Wired.com report, shared by Mr. Yu, described the malware as having the capability to cause a massive power outage “far more widespread and longer lasting” than the Ukraine blackout. — Charmaine A. Tadalan

German firms awaiting tax reform outcome before committing to invest

GERMAN investors are holding off until they achieve clarity on the direction of tax reform, with a key bill that will determine the future of corporate taxes still pending, a German chamber of commerce official said.

“I do understand it takes its process in a democracy to get the law passed but at the same time of course for investors it’s difficult at the moment to decide because they’re not sure how will it be,” German-Philippine Chamber of Commerce executive director Martin Henkelmann told reporters Tuesday.

The Corporate Income Tax and Incentives Rationalization Act (CITIRA), which seeks to lower corporate income tax rates and rationalize fiscal incentives, is expected to hurdle the Senate Ways and Means committee this week.

Mr. Henkelmann said investors know that corporate income tax will be reduced, but still face uncertainty over the final form of the incentive regime and the timeline for implementation.

“They look around and say ‘we need a new company site outside of China’, they say ‘where do lots of others grow? I’d like to be part of the group.’ And secondly, ‘who has a stable legal framework?’,” he said.

“(Countries) like Vietnam and Thailand are quite attractive at the moment, while we still wait what we can propose to the German companies. Then hopefully in April we can show them what has been approved here.”

“(What will happen with the) incentives? We’re not sure about this. We know the corporate income tax will be lower… but over a quite long period. This is already the right direction. But when it comes to the other incentives aspect, we still have to look at how it will be.”

Senator Pilar Juliana S. Cayetano, who chairs the committee ushering CITIRA through the legislative process, said Wednesday that the lowering of the corporate income tax from 30% to 20% will span 10 years, reducing the rate by two percentage points every two years.

Without disclosing the details of the incentives program, Ms. Cayetano said the reform would limit the duration incentives are applied. The Fiscal Incentives Review Board would grant incentives, based on recommendations from investment promotion agencies.

Mr. Henkelmann added that the Philippines is distant from key markets for German companies.

“When you are in Vietnam, Thailand you are closer to many important markets. That’s why companies would go there.”

He said the Philippine archipelago requires more transport.

“On the mainland, in Asia, you have perhaps trains or you just have roads that go 500 kilometers along the coastline to go to China and you don’t cross your own sea.”

The chamber sees investment opportunities in the renewable energy, agriculture, and outsourcing sectors this year. — Jenina P. Ibañez

EC assigns top priority to Southeast Asia ‘connectivity’

THE European Commission (EC) is expected to increase its focus on Southeast Asia after Germany took over the commission’s top post, German Ambassador to the Philippines Anke Reiffenstuel said.

Ms. Reiffenstuel told reporters Tuesday that the commission is studying areas of interest it would like to pay more attention to in the region.

“We specifically identified ASEAN and its member states as a priority for us. We have been looking towards Asia for a long time, and ASEAN being an interesting region.”

The EC elected German defense minister Ursula von der Leyen as its 13th president in July.

Ms. Reiffenstuel said the European Commission is interested in the Philippines’ infrastructure program as well as connectivity between Europe and Southeast Asia.

“We call it the connectivity approach. We are interested in getting Europe and the ASEAN connected, but also to support the infrastructure of the relations between the ASEAN member states to connect them better.”

She said Germany has identified the commission’s relationship with Southeast Asia as a priority for its presidency, focusing not just on the bloc but on each member country.

“Let’s get there but not only look at ASEAN as a structure but ASEAN and its member states. They are so different. The ASEAN spectrum is so huge and each member country has its own strength and potential.”

She said the Philippines has a strong growth rate and improving ease of doing business.

Countries like Vietnam have been attracting European investment due to its incentives system and smooth business registration process, she said. — Jenina P. Ibañez

Banks rate cybersecurity as top concern

Board members and Chief Risk Officers (CROs) of banks and other financial institutions have identified cybersecurity as their top short-term (12 months) risk priority. This was revealed in the Tenth Annual Global Risk Management Survey conducted by EY (Ernst & Young) and the Institute of International Finance. Survey participants comprised 94 firms in 43 countries with 23% based in Asia. Cybersecurity emerged at the top spot for the third straight year, considering that it only surfaced as a risk concern in 2015. We see this as a result of rapid technology development and the onslaught of banks embarking on digital transformation journeys in the last five years.

The refreshed survey also affirmed cybersecurity as one of the major risks to anticipate in the next decade. Some of the key issues identified were concerns on industry-wide cybersecurity attacks, third-party security, cloud transition, and cybersecurity capabilities.

INDUSTRY-WIDE CYBERSECURITY ATTACKS
In the next five years, 80% of respondents foresee an industry-wide attack. This concern is attributed to three key factors: (1) constant cybersecurity attacks on banks and other significantly important financial institutions; (2) nation states that have exhibited destructive behavior using cybersecurity attacks; and (3) critical third parties that are regularly attacked, such as telecommunications and cloud provider companies. These issues resulted in recent government and private organization initiatives that utilize cross-industry cybersecurity attack drills rather than isolated tests.

The survey also showed that 53% of respondents worried about their ability to recover operations after a cybersecurity attack. At the same time, 33% were concerned that customers would not be able to access vital bank services immediately after a cybersecurity attack.

These issues relate to another major risk identified as resiliency: the ability to deliver services to customers, clients and markets without disruption. An overwhelming 94% of respondents mentioned that cybersecurity risk is their top resiliency concern, marking a significant increase from 80% in the previous year. This, in turn, led to the rising trend of integrating resiliency into frameworks or functions such as cybersecurity and technology incident responses, disaster recovery, and business continuity planning across business units. Integration is also seen in functions such as crisis management, crisis communication, recovery and resolution planning activities, and testing that includes simulation and table top exercises.

THIRD-PARTY SECURITY
Banks have long depended on third parties to provide core and support services, a trend that is expected to still grow in the future. However, third-party risk is also noted as a major risk in the next decade and described as the risk of operating in an ever-expanding ecosystem.

Cybersecurity is identified as the top third-party risk, with 56% of the banks surveyed echoing this sentiment. Since banks are fortifying their cyber defenses, we should note that third parties handling or processing the banks’ information will likely become bigger targets for cybersecurity attacks. Third parties are expected to be at par or to have better cybersecurity controls than banks. It is also interesting to note that banks are transitioning in defining critical third parties. Previously, third parties were evaluated based only on spending and financial impact, but now, banks are also considering business continuity and resilience (66%), types of data and systems accessed (61%), and sensitivity of data used (54%).

This more holistic approach has led to some challenges for banks in handling the sheer volume of third parties that need to be assessed and monitored for their cybersecurity control effectiveness.

TRANSITIONING TO THE CLOUD
It is evident that cloud transition is the most effective means for banks to tighten cybersecurity, given the service’s promise of efficiency, reliability, and scalability. However, the security of customer information and the banks’ data contained in the cloud remains a big concern for most CROs (92% of respondents). This also poses a major risk in the next decade despite the many cybersecurity controls and capabilities already established by cloud service providers.

Banks are also moderately confident in their capabilities to operate in a cloud environment. We see that banks are keen to first establish their cloud security and risk frameworks prior to transition. There is also recognition of differences between the operation of on-premise systems and cloud environments, highlighting the need for additional controls and capabilities.

CYBERSECURITY CAPABILITIES
The survey further showed that while the banks’ cybersecurity capabilities are mostly rated as “Managed,” (i.e., ad hoc, repeatable, defined, managed, efficient), there is still the challenge to elevate cybersecurity to the next level.

Respondents were wary of cybersecurity capabilities such as data restoration (32%), cybersecurity incident response (30%), identity access management (28%), and patch management (27%). They consider these as key areas where banks need to improve. The capabilities must include employing a skilled and knowledgeable cybersecurity workforce. Capability issues are exacerbated due to the inadequate number of qualified cybersecurity professionals on a global scale. While there is an active inter-organization movement among cybersecurity professionals, there are simply not enough new capable talents who can help bridge the gap.

SECURITY IS ONLY AS STRONG AS THE WEAKEST LINK
Cybersecurity remains a formidable risk for banks to grapple with both in the short and long-term. The challenge to improve the banks’ cybersecurity capabilities includes recognizing that security is only as strong as the weakest link. With the cybersecurity threat landscape rapidly and continually evolving, banks need to increase their vigilance and be more comprehensive in addressing cybersecurity risks.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

 

Philip B. Casanova is an Advisory Partner of SGV & Co.

Nation at a Glance — (02/09/20)

News stories from across the nation. Visit www.bworldonline.com (section: The Nation) to read more national and regional news from the Philippines.

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