No room for recovery for an FTAA contractor

(First of two parts)

During the Council on Foreign Relations held sometime in 2010 in New York City, President Aquino made a remark: “The Philippines has vast minerals that are still untapped. It has one of the world’s largest deposits of gold, nickel, copper and chromite. Through responsible mining, we intend to generate more revenues from the extraction of these resources.” Blessed with abundant natural resources, the Philippines has long been a producer of minerals. This can be seen in recent years as the production of minerals through several mining projects has been continuously increasing. Due to limited government means, the State acknowledges the indispensible role of the private sector in taking advantage of the untapped natural resources.

The 1987 Philippine Constitution itself recognizes that since the State owns the mineral resources, their exploration, development and utilization shall be under the full control and supervision of the State, which may directly undertake such activities, or may enter into co-production, joint venture, or production-sharing agreements. The President, after notifying the Congress, may likewise enter into agreements involving either technical or financial assistance for large-scale exploration, development, and utilization of minerals.

In March 1995, Republic Act (RA) No. 7942 (or the Philippine Mining Act of 1995) was enacted by Congress in response to the Constitutional mandate on the exploration, development and utilization of mineral resources through the combined efforts of the government and the private sector. Under the said law, the following mining rights may be acquired by a contractor for the exploration, development, utilization and processing of mineral resources: (1) Exploration Permit; (2) Mineral Agreements (such as Mineral Production Sharing Agreement, Joint Venture Agreement, and Co-Production Agreement); (3) Financial or Technical Assistance Agreement (FTAA); and (4) Mineral Processing Permit.

Focusing on the FTAA, which is a contract between a contractor and the government for large-scale exploration, development, and utilization of mineral resources, Section 81 of RA No. 7942 provides for a government share in an FTAA, the collection of which is to commence after the FTAA contractor has fully recovered its pre-operating expenses, exploration, and development expenditure. The said section also provides a general enumeration of what shall consist, among other things, of the government share – i.e., contractor’s corporate income tax, excise tax, special allowance, withholding tax due from the contractor’s foreign stockholders arising from dividend or interest payments to the said foreign stockholder in case of a foreign national and all such other taxes, duties and fees as provided for under existing laws.

In implementing Section 81 of RA No. 7942, the Department of Environment and Natural Resources (DENR) has issued DENR Administrative Order (DAO) No. 99-56, as amended by DAO No. 12-07, which prescribes the fiscal regime of an FTAA. Specifically, Section 3 of DAO No. 99-56 enumerated what the government share shall consist of, namely: (a) excise tax on minerals; (b) contractor’s income tax; (c) customs duties and fees on imported capital equipment; (d) value-added tax (VAT) on the purchase of imported equipment, goods and services; (e) withholding tax on interest payments on foreign loans; (f) withholding tax on dividends to foreign stockholders; (g) royalties due the government on mineral reservations; (h) documentary stamp tax; (i) capital gains tax; (j) local business tax; (k) real property tax; (l) community tax; (m) occupation fees; (n) all other local government taxes, fees and imposts as of the effective date of the FTAA; (o) special allowance as defined in the Mining Act; and (p) royalty payments to any indigenous people/indigenous cultural communities. Further, in the same Section 3, it was clearly stated that items (a) to (g) shall not be collected from the contractor upon the date of approval of the mining project feasibility study up to the end of the recovery period.

Using DAO No. 99-56 as legal basis, the then Commissioner of the Bureau of Internal Revenue (BIR), in BIR Ruling No. 010-07 dated May 4, 2007 and BIR Ruling No. 008-07 dated 3April 3, 2007 (involving the same FTAA contractor which is wholly foreign-owned), confirmed that excise tax on minerals and VAT on its purchase of imported equipment and goods shall not be collected from the FTAA contractor upon the date of approval of the mining project feasibility study up to the end of the recovery period. While DAO No. 99-56 did not define the term “recovery period”, the same was defined in Section 214 of another administrative order, namely DAO No. 96-40 (or the Revised Implementing Rules and Regulations of RA No. 7942) which states that the “recovery period” shall be reckoned from the date of commercial operation and shall be for a maximum of five years or until the date of actual recovery of its pre-operating, exploration and development expenses, whichever comes earlier.  To be continued

Maria Ofelia B. Galura is a supervisor from the Tax Group of Manabat Sanagustin & Co. (MS&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The view and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or MS&Co. For comments or inquiries, please email [email protected] or [email protected].