Understanding mining: part 2

Read Part 1 here

We continue today with the second and final part of the letter sent by a reader, lawyer Deo G. Contreras, Jr., about the state of Philippine mining. The letter which appeared in the column last Tuesday ended with the need for mineral and metal processing plants or refineries, and particularly mentioned the fate of the copper smelting plant in Leyte that had to be subsequently closed because of under-utilization.

While the copper smelter in Isabel, Leyte eventually resumed operations under the ownership of the private mining company, Glencore International PLC, in the early 2000s, and is even considering expanding its production capacity, there remains a dearth of investments in processing plants.

The second part of our reader’s letter takes off on this note.

“… if attention is drawn to the Central Bank refinery plant in Quezon City, the gold supply to such refinery is coming from small-scale miners, mainly illegally sourced.

“In the early 1990s when the refinery plant was established, not a single large mining company brought and sold its gold for refining in the plant as such sale was treated as domestic sale and subjected to VAT aside from the regular excise tax, corporate tax and other local taxes.

“Even the refinery charges were similar to charges done by foreign refineries. Thus, the mining companies adversely affected exported their gold abroad for sale and refining. The CB refinery at such time was operating at about 40 percent capacity only.

Conflicts over IP lands

“Everyone is in total agreement that all conflicts over mineral-rich areas covered by IP [indigenous peoples] lands and ancestral domain must be resolved. But this is mainly the function of government.

“The latest cases of local government units banning mining including open-pit method of mineral extraction in defiance of the ruling of the national government that such mining ban is contrary to law, remains a main responsibility of government. The inability of the government to resolve such issues definitely discourages investments in mining.

“Finally, the amendment of the Philippine Mining Act specifically with respect to the government share in MPSAs (Mining Production and Sharing Agreements) is worth looking at and seriously.

“The Philippine Mining Act was passed by Congress in 1995 at a time when the country’s economy was devastated by the excesses of the martial law rule of President Marcos.

Stability of mining laws still worrisome

“Thus, with huge investments having left the country including in the mining sector, the mining industry through the joint efforts of the Philippine Chamber of Mines, DENR (Department of Environment and Natural Resources)-MGB (Mines and Geosciences Bureau), Department of Trade and Industry-BOI [Board of Investments), Department of Finance, the Office of the President and the Congress of the Philippines, saw the need to revitalize the industry by crafting and passing a new Philippine Mining Act of 1995, and which included the lowering of the excise tax on gross revenue in mining from a high of five percent to two percent.

“In the case of MPSA, the two percent excise tax on gross revenue was considered the share of the government in order to give financial respite to Filipino-owned mining activities under the 60-40 percent ownership limitation.

“Then in 1997, barely two years after the mining law was passed, its constitutionality was questioned at the Supreme Court by an obscure Indigenous Tribal Group from Mindanao, but obviously supported legally by an anti-mining group who are still currently undertaking their anti-mining advocacy.

“Thus, the law was put in question for seven years or until 2004 when the Supreme Court upheld the constitutionality of the Philippine Mining Act of 1995. Investors in mining started coming in after the 2004 decision of the Supreme Court.

“To date, it has just been seven years since the mining law was finally declared as valid and constitutional, and investors are still looking in.

Heavily taxed business

“It can be argued that mining is uniquely taxed heavily and imposed with most financial burdens among all industries in the country. The excise tax on gross revenue is just the tip of the iceberg. A corporate income tax of five percent is also imposed on mining.

“Taxes such as the VAT (Value Added Tax), withholding taxes, custom duties, royalties, SDMPs (Social Development and Management Program), CDPs (Community Development Program) to surface owners, LGUs (Local Government Unit) and IPs, real property tax, business tax, permits and local fees are major impositions on legitimate mining activities.

“Thus, if an MPSA holder will have to pay a government share of say five percent on gross revenue, it will be in effect [set aside] a seven percent tax on gross revenue inclusive of the two percent excise tax. The industry will be thrown back, and worse than where it was barely 15 years ago. 

Illegal mining losses

“An important question is how much revenue is lost through illegal small-scale mining? In a survey in 1995-96 by a foreign firm, Philippine small-scale miners produced a combined gold volume of 34 tons, more or less as against a few legitimate gold mining companies with a combined gold production of less than 35 tons!

“The latest number of employment generated by 20 members of the Chamber of Mines is about 340,000 employees, but with a downstream effect of creating six to seven additional livelihood and service businesses, which translates to about two million jobs. This is not a bad employment and livelihood record.

“It has been a steady rise for the mining industry after eight years from the 2004 decision of the Supreme Court declaring the Philippine Mining Act as constitutional against the legal challenge initiated by several anti-mining groups.”

Do we want a robust mining industry here?

Reiterating what we said in this column last January 28, if the Philippines would want to nurture its mining industry, it needs to heed the three important conditions that international mining investors look for, i.e., a competitive taxation regime, a sound legal system that will uphold the law, and a relatively low uncertainty involving land claims.

Until this happens, we can only expect the same trickling of investments that we have been seeing since the law was amended in 1995, or almost two decades ago. Or none at all.

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Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. For a compilation of previous articles, visit www.BizlinksPhilippines.net.