Philippines Targets Higher Mining Tax Revenue

by Mary Swire, Tax-News.com, Hong Kong

21 February 2012

The Finance Secretary Cesar Purisima has disclosed that the Department of Finance is looking at how tax revenues can be increased, within the government’s review of its mining sector policies in the Philippines.

Purisima, in a media interview, was replying to concerns that had been expressed in the mining industry over the proposed terms of a draft executive order, which will be issued shortly by President Benigno Aquino, and which will review the tax arrangements for mining contracts.

It has been reported that, within that review of mining policies, there would be a competitive bidding process for mining rights and the currently-applied royalties and tax incentives would be re-calibrated. The government’s search for additional mining revenues, it has been said, could mean an increase in the current 2% excise tax and the revocation of tax holidays.

According to Purisima, the Department of Finance’s intentions are to re-establish a greater equality for the government in natural resource contracts. He held up as an example the USD4.5bn Shell-Chevron-Philippine National Oil Company’s Malampaya natural gas-to-power project.

Under the Malampaya contract, after 70% of the gross proceeds from natural gas sales is allocated to the contractor to recover its investment, the remaining 30% is shared by the government and the consortium on a 60-40 basis, respectively. Last month, for example, the Philippine government received USD1.1bn as its share of the income from the project for 2011.

Under the Philippine Mining Act of 1995, he explained, mining contracts are classified either as existing Mineral Production Sharing Agreements (MPSAs), during a transitional period, or Financial or Technical Assistance Agreement (FTAAs) for new contracts. As, effectively, MPSAs are only charged the 2% excise tax, Purisima said that they have been used by investors grandfathering old into new contracts, rather than sign new FTAAs, which allow a “fairer” sharing of revenue between the government and the mining company.

He therefore felt that the mining companies are taking advantage of the MPSA arrangements to avoid paying their fair share of taxes, and that FTAAs should, instead, become the norm in new contractual negotiations.

He did, however, take the time to deny reports that changes could be insisted upon for existing contracts. He emphasized that those contracts would be respected in all cases.

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