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Postpone CITIRA due to the coronavirus!

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Ramon L. Clarete

Introspective

Days before the spike of local cases of infection with the SARS-COV-2 coronavirus which causes COVID-19, the Senate Ways and Means Committee was ready to approve its version of CITIRA (the Corporate Income Tax and Incentives Rationalization Act). The proposed law is the second phase of tax reform of the government, which reduces the corporate tax rate and reforms the investment incentives laws of the country.

The Department of Trade and Industry and the Department of Finance organized a consultation on it on March 3 at the Philippine International Convention Center, a prelude to its final push at the Senate. The proposed law was to be passed in the Senate this month or before Congress goes into recess until May of this year.

There is good basis to put off for now the enactment of CITIRA because of the coronavirus. While the WHO has yet to declare this outbreak as a pandemic, recent developments strongly indicate the world is in it already. As I finished this column, about 114,430 persons had been infected and 4,027 had died from the disease, according to Worldometer. While the fatality rate is low, it is however rising each day. When I started this article last week, Worldometer reported 85,721 infections and 2,933 fatalities.

COVID-19 has been regarded as a far more serious health crisis than the SARS outbreak in 2002 and 2003. The present coronavirus has, as of end of February, infected about 10 times more people in twice as many countries. While the final SARS fatality rate was 9.6% and current fatality rate of COVID-19 is estimated at 3.5 %, it is still too early to compare the two.

As more countries catch up with the COVID-19 testing, the health emergency may rapidly deteriorate to a situation that authorities have to take very drastic moves to save lives.

And these measures, like lockdowns and travel bans, would limit mobility of people, prohibit congregating, and disrupt economic activities world-wide, generating a global economic crisis and unemployment.

IMF Managing Director Kristalina Georgieva had recently said that the coronavirus crisis now gripping the world threatens to derail global economic growth. Her dire projection may not be a threat anymore. We are witnessing the unfolding of another global economic crisis of a dimension far more concerning than the 2008 financial and economic crisis or the economic slump in the early 2000s due to the SARS virus.

The markets reflect this outlook with equity prices plunging by nearly 8% in just one day. Investors are already considering an economic recession worldwide as likely just months away. Oil prices likewise have precipitously declined due to sharp cuts in demand, which in turn mirrors the slowing down of productive activities in the major economies of the world.

Information gathered as of last week here in our country is that exporters of electronic products, which employed their workers in six days per week, had reduced work days by a day because raw materials from abroad are not coming in on time.

A large export company of electronic products, which employs thousands of workers, had to contend with the problem of rising freight rates. Cathay Pacific had to cancel flights going to China. Most of this company’s raw materials of come from China, and it exports to China. Its business is part of the global value chain in electronic products, which is now disrupted by the virus. Indeed, a quarter of the country’s imports come from China according to the Philippine Statistics Authority.

In February, this company had to honor its contractual obligations, and how costly that was. Last month, its freight cost increased by $171,188 because of the virus.

How many more of our country’s exporters are already in this situation? And titirahin pa sila ng CITIRA (And they will still be hit by CITIRA).

I am for reducing the corporate tax rate, and it can even be made better for the economy if the Congress considers cutting the rate in two or three steps.

I have, however, a strong reservation of the changes it is proposing on the investment incentives. These are not just fiscal measure. They are also trade promotion measures. Most of our exporters are locators in PEZA (Philippine Economic Zone Authority) zones. More than half of our exports come from the electronics and semi-conductor sector. The incentives the firms enjoy insulate them from the uncertainties that firms selling to the domestic market contend with.

Why should we give them special treatment? Because they are exporting. They compete with firms in other countries which have likewise treatments that make them competitive. By taking that treatment away from our exporters, we reduce our exports.

If authorities are concerned that some locators in these zones are no longer exporters, then PEZA should clean their ranks and exile the firms that do not deserve to be among the country’s exporters.

Others may disagree with me that exports are placed at risk with CITIRA. If their concern is that the government is getting a raw deal with the 5% special income tax in PEZA zones, then let us recompute the special income tax rate so that the locators pay their due income tax rates. But it is important for the economy to spare these exporters from having to lose that special treatment. Because if they did, these businesses can relocate elsewhere. Look, Honda has left us and Vietnam gains from our loss. Once electronic or manufacturing exporters are gone, they are difficult to attract back.

These points are debatable, of course. I focus instead on the wrong timing of CITIRA and l go back to the virus. There are still many things we don’t know about it. The little we do know so far is that this can be worse than the global financial crisis and global economic crisis we had 10 years ago.

COVID-19 is complicated because the productive and logistics capacities worldwide are adversely affected. We live now in a world where countries are interconnected to produce anything of value. China now counts for a fifth of the world’s GDP, and millions of its people, most of them workers, have been told not to leave their houses to prevent the further spread of the virus.

The PSA reported that in January, our exports grew by 9.7%, year-on-year. But imports grew by only 1%. The January growth was better than in 2019, where the country’s exports contracted by 6.7%. While electronic products continue to be the top commodity exports of the country, the January spike in exports largely came from minerals and mineral products.

Electronics are highly dependent on imports. If import growth slowed down in January, then we are likely to see a decline of exports in electronic products very soon. That would be 55% of our country’s exports. The delays of imported raw materials are traceable to the COVID-19 outbreak.

The world is likely now to be at the start of a more complicated global economic crisis, the duration of which cannot be cut short by some financing or economic stimulus, but by the knowledge gained by humanity, with the help of the world’s scientists and health experts, in containing the virus. CITIRA introduces another dimension of uncertainty to our exporters. Let us put this off for now and let the authorities like the PEZA and the other investment promotion agencies monitor the deteriorating situation and assist our country’s exporters save jobs.

 

Ramon L. Clarete is a professor at the University of the Philippines School of Economics.





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