‘Only CNMI taxes its exports’

Garment industry representatives rallied the Legislature yesterday to pass without delay the proposed 1-percent reduction of the existing 3.7 user fee, saying any help is needed at this time to ensure the sector’s survival in the CNMI.

Besides, it is only the CNMI that “taxes” exports.

“The user fee of 3.7 percent of export value makes the CNMI the only place in the world that taxes exports. No where else, no other country in the world does this,” said Paul Zak of Strategic Partners in his testimony during the House Committee on Ways and Means hearing yesterday on House Bill 14-325.

The measure, authored by majority leader Oscar M. Babauta, aims to reduce the existing 3.7 percent garment user fee to 2.7 percent to boost the local apparel industry’s ability to compete globally amid the worldwide lifting of trade quotas.

Zak said that when the industry arrived on Saipan, there was no user fee, there was a unique non-quota entry to the U.S. market, and low wages.

Over the past two years, he said competitors in Asia have been preparing for the World Trade Organization’s lifting of quotas by passing legislation to reduce corporate taxes and provide incentives for garment companies.

“The more you export, the lower your taxes,” he said.

He feared the only problem with the bill is that it may be too late considering during the current administration, six companies have already closed shop on Saipan, representing 20 percent of the industry

In the meantime, Vietnam’s garment industry grew by 50 percent during the same period.

He said there are now 600 garment factories in Vietnam, while Saipan is left with 22 factories, which is a throwback to 1991.

“The clock has been turned back nearly 14 years,” he said.

Right now, he said the garment industry “is bleeding to death, drop by drop.”

Its demise, he said, would also mean collapse of the CNMI economy.

“Where does the CNMI get $40 million of tax revenue to substitute our departure? The entire economic structure of the CNMI faces potential collapse,” he said.

He lamented that in the past three years, what the CNMI government did was to pass beautification tax, increase the labor fee by $50, and impose fuel surcharge of 3.5 cents per kwh.

He said the beautification tax charges .34 percent of the value of total raw material imports, which translates to $1.5 million in new revenues.

The labor fee increase means $783,000 in higher costs given the industry’s employment of over 15,000 workers.

The recent implementation of fuel surcharge, he said, would mean an estimated $2.9 million in extra costs for the industry.

In Vietnam, he said electricity is virtually free because the government supplies power if a factory built while in China; price per kw is less than $.03.

“Change is long overdue. Re-alignment of policy is long overdue,” Zak, noting that in the end the people of the CNMI benefit if garment industry stays in the Commonwealth.

Meantime, Jack Torres, L&T Group of Companies Human Resources Department head, told the House panel that factories are sure to stay if they remain competitive.

“As long as we stay competitive, we’ll still stay here,” he said.

Torres also answered “yes” to Rep. Clyde Norita’s question if factories would remain on island if the 2.7-percent user fee is passed and the HeadNote 3(a) of the U.S. Tariff Code is amended.

Lawyer Richard Pierce said the question is not about its departure but its survival in the CNMI.

The bill said that reduced rate serves as a local remedy while authorities work at the national level for the amendment of Head Note 3 (a) of the U.S. Harmonized Tariff Schedule.

The amendment would allow local garment factories to increase the maximum allowable foreign content material from 50 percent to 70 percent.

The government has projected that the decline in garment industry would result in a 20-percent loss in user fee.

The government used to receive an average of $30 million a year in garment user fee.

Overall all taxes derived from the industry totals some $70 million a year, which forms a third of the government’s budget.