Cambodia to Cut Taxes For Industries Strained by Coronavirus, Suspension of Trade Scheme

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Cambodia's Prime Minister Hun Sen speaks to the media during a press conference at the Peace Palace in Phnom Penh, Feb. 24, 2020.
Cambodia's Prime Minister Hun Sen speaks to the media during a press conference at the Peace Palace in Phnom Penh, Feb. 24, 2020.

Cambodia’s Prime Minister Hun Sen on Monday pledged to cut taxes for up to a year for garment producers impacted by the novel coronavirus (COVID-19) epidemic and facing new tariffs after the European Union suspended preferential trade status for the country citing rights violations.

Speaking during a conference at the Council of Ministers in the capital Phnom Penh, Hun Sen also announced tax exemptions for hotels and guesthouses for four months that have seen tourist numbers drop precipitously amidst the spread of the virus, which has killed more than 2,600 people—mostly in China—and infected hundreds in more than 30 countries and territories.

Hun Sen said that Cambodia’s garment sector has been unable to import raw materials from China amid supply chain disruptions attributed to COVID-19, as well as the loss of about 20 percent of trade preferences under the EU’s “Everything But Arms” (EBA) scheme, which amount to around U.S. $1.1 billion of the country’s annual exports.

Garment factories will receive tax breaks for between six months and a year, as well as other subsidies from the national budget, he said, while paying workers 40 percent of the current minimum wage for up to six months in the event that production is suspended. The government will pay workers an additional 20 percent of the minimum wage over the same period in the event of a suspension.

“Within this six months, [workers] will receive four months of vocational training and will be paid U.S. $120 [per month],” Hun Sen said, adding that workers should be prepared to find new jobs outside of the garment sector.

“I want to reiterate to Cambodia’s people and politicians that Cambodia will not ask for reinstatement of the EBA.”

Last week, Hun Sen appeared to shrug off the EU’s decision in mid-February to suspend tariff-free access for around one-fifth of Cambodia’s exports to its market over rollbacks on democracy and human rights, saying his country will “continue to export” despite facing higher tariffs.

The decision would reinstate tariffs on garments and footwear, as well as travel goods and sugar, beginning Aug. 12, unless it is blocked by the bloc’s governments or its parliament, the European Commission (EC) said.

On Nov. 12, the EU warned in a preliminary report that Cambodia has not taken enough measures to prevent a withdrawal of its EBA status, noting the country’s further deterioration of civil, political, labor, social, and cultural rights since the launch of a review process in February last year.

Cambodia is the second-largest beneficiary of EBA trade preferences after Bangladesh, accounting for more than 18 percent of all imports to the EU market under the EBA scheme in 2018.

EU imports from Cambodia totaled 5.3 billion euros (U.S. $5.8 billion) that year, nearly all of which entered the EU duty-free, taking advantage of EBA preferences.

Clothing and textiles—a crucial industry in Cambodia that employs around one million people—account for around 75 percent of EU imports from the Southeast Asian nation.

Tourist industry

Also on Monday, Hun Sen said that a set of tax cuts for hotels and guesthouses would help buoy an industry that has seen a 60 percent decline in tourists in the month of February, including a 90 percent falloff in the number of tourists from China, Hun Sen said, noting that Siem Reap province—home to the Angkor Wat Temple complex—had been “hardest hit” by the drop.

“To better understand this issue, I used the word tax exemption, but, as a matter of fact, the state will pay taxes on their behalf,” he said.

“The most important thing is we do it in Siem Reap—a province where foreign tourists used to come. But now tourist arrivals there are very low.”

Government officials have been ordered to reduce travel to overseas meetings, members of the public are being urged to travel within the country instead of abroad, and local officials in Siem Reap have been asked to organize cultural events in a bid to attract more tourists to the province, he said.

Hun Sen said that the measures had been designed to help Cambodia’s economy in the face of the COVID-19 crisis, adding that “other countries around the world are experiencing a similar situation” and declines in the number of foreign tourists.

Experts weigh in

While experts welcomed government support for the two industries, they warned that the measures announced by Hun Sen would damage national interests and are not sustainable in the long term.

Man Seng Hak, vice president of the Free Trade Union of Workers in the Kingdom of Cambodia, told RFA’s Khmer Service that the government is “obliged” to help workers and factory owners in times of crisis, and expressed concern that the measures would ultimately benefit the owners, while doing little to support those who labor in their factories.

He noted that Social Security benefits will expire for workers in the event of a halt in production, and suggested that a government contribution of 20 percent of worker wages in such a situation is too low.

“I request that the government review its proposed payment of 60 percent of wages to workers,” he said.

“I think that if the factory owner pay 40 percent, the government should do the same, because many workers are already in debt [while receiving full wages].”

Man Seng Hak also warned that there is no guarantee that the labor market will rebound, calling the proposed government measure “unsustainable.”

Morm Rithy, the president of the Cambodian Tourism and Service Workers Federation, told RFA that using the national budget to pay business taxes for hotels and guesthouses, while beneficial in the short-term, would contribute little to Cambodia’s tourism sector.

Instead, he said, the government should consider ways to shore up weaknesses in the industry, including better promotion, and negotiate with the EU for restoration of EBA status.

“This strategy works in the short-term, but is ineffective over the long-term,” he said.

“Even in the short-term, it will only help with some sectors, not all. The question is, what will [hotel and guesthouses] do after the expiration of the four-month [tax exempt] period? How will these companies continue to operate?”

Cambodia’s Ministries of Labor and Tourism have yet to release any figures related to how their industries are being impacted by COVID-19 and the withdrawal of EBA status.

Reported by RFA’s Khmer Service. Translated by Sovannarith Keo. Written in English by Joshua Lipes.





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