DOE urges COA to honor Malampaya contracts

MANILA, Philippines - The Department of Energy (DOE) has urged the Commission on Audit (COA) to honor the contracts of the Malampaya gas project in Northwest Palawan after it determined the project has been compliant in its payment of government taxes.

The energy regulator said yesterday it has written COA to affirm it is maintaining its position with regards to the controversy.

“First time it was raised, I said I need to study the full background of the issue. Then discussed it to the Economic Cluster and the Cabinet. We concurred with the DOE stand,” Energy Secretary Alfonso Cusi said.

Cusi said the legal basis of the DOE’s position is contained in Presidential Decree (PD) 87, otherwise known as the Oil Exploration and Development Act of 972; and PD 1459, which authorizes the energy chief to enter into petroleum service contracts.

“In light of these solid legal foundations, we entertain no doubt whatsoever on the legality of our position on this matter,” Cusi added.

The DOE’s previous administration pushed for the COA to honor the contracts of the Malampaya gas project to avert the negative impact on the upstream exploration industry and discourage foreign investors.

According to Cusi, petroleum exploration in the country remains at 33 percent, which is relatively lower than its Southeast Asian peers.

“In the face of these daunting challenges, of the foremost consideration in the mind of foreign investors in deciding where to invest is the predictability, certainty and consistency of investment rules and regulatory regime of a country,” he said.

“It is therefore, of fundamental importance that we observe the sanctity of contracts in our commercial transactions,” he added.

COA has issued a notice of charge to collect from the Malampaya consortium, which includes Shell Philippines Exploration B.V. (SPEX), Chevron Malampaya LLC and PNOC Exploration Corp., P151 billion in tax payment covering the period 2002 to 2016.

The amount stems from the COA’s position that corporate income tax should not form part of the government’s share in the Malampaya project.

Cusi raised the matter to the Economic Cluster after SPEX filed a second arbitration case arising from the COA ruling.

Meanwhile, DOE director for legal Arthus Tenazas said COA’s decision interferes with the powers of the DOE to implement PD 87 and PD 1459.

He said Section 12 of PD 87 states the contractor is exempted from all taxes, except income tax.

Section 18 of the law further provides “that in no case shall the annual net revenue share of the government, including all taxes paid by or on behalf of the contractor, be less than 60 percent of the difference between the gross income and the sum of the operating expense and Filipino participation incentive.”

“So it is very clear in the law that the 60 percent share of the government may include all income paid by the contractor. Considering that the contractor is exempt from all taxes except income tax, the taxes that is referred to under Section 18 of the law, PD 87, refers to income tax,” Tenazas said.

He said the DOE’s position is also anchored on PD 1459, Sec. 1, which provides that “the share of the government including all taxes shall not be less than 60 percent of the difference between the gross income and the sum of the operating expenses and such allowances such as the secretary of Energy may deem proper to grant.”

“So the law practically provides that the 60 percent share of the government include all taxes out of the net income of the project,” he said.

The energy official said COA’s decision was “misconstrued and misapplied,” and disregarded the legality, fairness and the sanctity of the contract of the Malampaya project.