No room for recovery for an FTAA contractor

(Conclusion)

In the said BIR Rulings, the BIR commissioner cited as his legal basis, a case (G.R. No. 127882, 1 December 2004) decided by no less than the Supreme Court (SC), sitting en banc, wherein it was ruled that during the recovery period, the payment by the contractor of national taxes is waived. Only local government taxes and fees would be paid during the said recovery period. Quoting the SC en banc, he stated that: “Specifically, under the fiscal regime, the government’s expectation is, inter alia, the receipt of its share from the taxes and fees normally paid by a mining enterprise. On the other hand, the FTAA contractor is granted by the government certain fiscal and non-fiscal incentives to help support the former’s cash flow during the most critical phase (cost recovery) and to make the Philippines competitive with other mineral producing countries. After the contractor has recovered its initial investment, it will pay all the normal taxes and fees comprising the basic share of the government, plus an additional share for the government based on the options and formulae set forth in DAO 99-56.”

However, the BIR, through Revenue Memorandum Circular (RMC) No. 17-2013 dated 15 February 2013, recently clarified the taxes due from FTAA contractors during “recovery periods.” Working on the principle in taxation that tax exemptions must be strictly construed against the taxpayer and liberally in favor of the taxing authority, it was made clear in RMC No. 17-2013 that the non-collection of the “government share” during the “recovery period” of the FTAA contractors referred to in RA No. 7942 is not tantamount to an express grant of tax exemption. The current BIR Commissioner went on further saying that FTAA contractors are liable to pay the taxes due under the National Internal Revenue Code (NIRC) and existing rules and regulations during and after their “recovery period.” This payment is in the nature of compliance with tax obligations and not in the nature of settling the “government share” under the FTAA. Ultimately, the RMC had the effect of revoking and invalidating the above BIR Ruling No. 010-07 dated 4 May 2007 and BIR Ruling No. 008-07 dated 3 April 2007.

As a result of the issuance of the RMC, the FTAA contractor involved in those BIR Rulings recently paid (under protest) the excise taxes due in order to proceed with the shipment of copper-gold concentrates from its mining site bound for Japan.

It is worthy to note that under Philippine mining laws, an FTAA allows 100-percent foreign ownership in a mining venture since a foreign investor is most likely possessed of the financial requirements and technical knowledge for large-scale mining. Thus, the provisions of our mining laws on the fiscal incentives of an FTAA are supposed to attract foreign companies to invest in large-scale mining industry in the Philippines, which involves capital-intensive activities. However, the issuance of RMC No. 17-2013 may strain the relationship between the government and existing FTAA contractors and, worse, may even discourage other foreign companies to invest in large-scale mining industry in the Philippines as they have no room for recovery.

The issuance of RMC No. 17-2013 which revoked and invalidated two previous BIR Rulings was based on the exclusive and original jurisdiction of the BIR Commissioner to interpret the provisions of the NIRC and other tax laws as sanctioned under Section 4 of the NIRC. Although the power of the BIR Commissioner to interpret the provisions of the NIRC is respected, it appears that there is a divergence between the RMC and the decision of the SC en banc as cited in the two previous BIR Rulings. While it is true that the BIR is the government agency which is mandated to ensure the compliance by the FTAA contractor with its tax obligations, it is equally true that the SC has the power to say with finality what the law is. The reversal of a decision of the SC en banc would require another decision held also by the SC en banc. Considering that judicial decisions forms part of the legal system of the Philippines, the issuance of RMC No. 17-2013 may cause reservations as to the authority of the BIR Commissioner to reverse the well-settled doctrine laid down by no less than the SC en banc.

Meanwhile, unless the issue of validity of RMC No. 17-2013 is assailed with the trial courts, FTAA contractors are now enjoined to strictly comply with the RMC in order to avoid the risk of a potential tax audit.

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 manila@kpmg.com or rgmanabat@kpmg.com.