Citira: One last cry As easy as Abc

Maybe it’s true that CITIRA – the Corporate Income Tax and Incentive Rationalization Act – is done and dusted, and potentially rushed before the year ends. And in the New Year, the investment climate will change. I hope not.

Let me say in all sincerity that I believe in the good faith of government and all the people who espouse CITIRA. The principles appear to be on the fair side: performance-based, targeted, time-bound, and transparent. When the government says everyone should contribute their fair share, it seems the case is easily made.

Then there is that other side. The export market only sees the product and the price point, and does not see nor care about what we’re trying to achieve as a country, tax collection-wise. That part never factors in the decision-making of a potential export customer.

Investors also only see operational efficiencies, the cost of doing business, and ease of doing so. Unfortunately, locating in a territory to pay more taxes because that country needs help is not their business model.

And between preserving and increasing employment opportunities from more investors vs doling out cash transfers to the poor by the government (coming from projected additional tax collection), I take the former as the more productive and sustainable way to go.

Many of those in the economic zones simulated the impact of the proposed 18 percent net income tax as a substitute for the five percent gross income tax (GIT). They are in denial that the change in law will happen, but many of them said they couldn’t manage the cost. They will contract, not expand, and try their options in other territories.

The government says allowing exporters to enjoy the same incentives is unfair to domestic market enterprises that pay the full tax. But the simple truth is, exporters do not compete with those who sell locally because they are selling to different markets, and their challenges are quite different, too.

There may be more than 100 million Filipinos, but there are 4.5 billion people in the rest of Asia Pacific alone – a huge export market but with different rules, cultures, behaviors, price points, and competitors. It indeed makes sense to sport some of that entrepreneurial bravery in the local market before pushing one’s products in foreign territories.

The reality is, if the cost of producing a product or service in the target export market is cheaper than expanding in the Philippines, one could just set up operations there. Case in point, the garments and wearable exporters of the country cry that the average labor costs in Cambodia ($170) and Vietnam ($149) are much cheaper than the Philippines ($265), and the fiscal incentives they enjoy here is the neutralizer. And if you’re a multinational, you are constantly looking for competitive advantage, more efficient costs, and fiscal perks of operating in a different territory.

The new tax costs in CITIRA will just push them to take their business elsewhere. There is no tax to count nor employment opportunities to speak of if they are not even here. When they are here, the jobs they create for our people give the latter the power to consume products of, and thus support, local businesses.

Export business is simply not the enemy of local business.

Employment generation may seem to be an overused defense. It is however real and serious. Using figures cited by the Department of Finance, there are two million workers directly employed in the zone. Add to that the seven million workers employed by indirect exporters (computed with the multiplier used by the Philippine Statistics Authority). Thus, there are nine million heads possibly supporting a third of the Philippine population (using NEDA’s method that each employed person supports a family of four).

PEZA-registered enterprises delivered about P45 billion of corporate and personal income tax contribution in 2018, an amount that’s worth preserving, and which we should rather not put at risk in the name of collecting more taxes.

When the 18 percent increased incentivized rate bites in 2020, it will slowly go down to 13 percent in 10 years, to complement the general income tax rate of 30 percent that slowly goes down to 20 percent in 10 years’ time as well. As I said though, the export market does not compete with the domestic market, and foreign investors couldn’t care less about what we’re trying to do with the tax rates. They will only see the 18 percent. Telling them not to worry because 18 percent goes down to 13 percent in 10 years cannot lure them today, but that can lure them in the 10th year. In the meantime, we can lose them today.

The best way to collect more from registered enterprises and keep them competitive, and keep them here is to just increase the existing tax rate to a manageable level. Maybe even see if the five percent GIT can be bumped up to seven percent. The term of the incentives should definitely be longer than five years because export market conditions are not bound by specific timelines. Our exporters do try to improve and do not rely on fiscal incentives alone, true. But competition in the export market is not a non-moving target, and they improve, too.

The point is to make sure our exporters can afford to be competitive by not removing their advantages. Let’s collect a bit more tax but let’s manage business contraction or capital flight.  We can help the unemployed, but we could also preserve employment that help our people help themselves.

* * *

Alexander Cabrera is the chairman of Integrity Initiative, Inc., a non-profit organization that promotes common ethical and acceptable integrity standards. He is also the chairman and senior partner of Isla Lipana & Co./PwC Philippines. Email your comments and questions to [email protected]. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.