Commentary: Is the proposed mining fiscal regime too high, low or just right?

Minerals are an essential part of modern society but its extraction comes with both opportunities for economic growth and challenges for social and environmental protection, among others.

It makes sense that regulations and fiscal policies are in place to see to it that neither is compromised, with the overarching goal to promote sustainable development. 

However, regulations can still become too burdensome and increasing taxes encumber industry competitiveness. A mining fiscal regime that’s too prohibitive can discourage investors and impair competitiveness, while one that’s too low risks increasing social and environmental costs. 

A recent roundtable discussion by independent think tank Stratbase ADR Institute (ADRI) Institute discussed the effects of the proposed mining fiscal regime, House Bill 8400. The roundtable discussion was jointly organized with Philippine Business for Environmental Stewardship, the Department of Environment and Natural Resources, and the Mines and Geosciences Bureau.

The bill, which already passed on third reading in the House of Representatives, further increases the mining taxes and is now being criticized by industry players and economic experts. The final version (HB8400) imposes a range of royalties applied to income from mining operations which includes a 1-5 percent margin-based royalty tax on large-scale mines, depending on operation margins, a 1-10 percent windfall profits tax on income from mining operations, and thin capitalization and ring-fencing. 

The mining industry is a heavily taxed industry - from 1.7 percent business tax, 1 percent royalties to indigenous peoples, to 5 percent royalties if the operation is within a mineral reserve – in addition to “policy uncertainties and the moratorium,” said Chamber of Mines Executive Director Ronald Recidoro. His discussion on how comparing our mining industry with the global economy just showed how far behind we are and underscored our need to catch up. He said that the Philippines is already at a disadvantage compared to other industry players with “fairly mature, robust mining fiscal regimes,” including Chile, Peru, Canada, South Africa, and the state of Queensland in Australia. 

It is only the Philippines that imposes a mining tax based on revenue rather than income, and the only country with a static excise tax regime on minerals, including a 4 percent excise tax. 

Using a copper-gold model developed to analyze tax regimes by computing for the average effective tax rate (AETR), Recidoro showed that “current Mining Production Sharing Agreement (MPSA) (88.10%) and Financial or Technical Assistance Agreement (FTAA) (73.4%) tax structures in the Philippines are more expensive than the countries above, even higher than wealthier countries such as Canada (72.8%) and Australia (69.9%). 

This only affirms the analysis in IMF’s Report on the Fiscal Regimes for Mining and Petroleum that “the current FTAA regime is not competitive internationally.” What is alarming is that this statement was made before Tax Reform for Inclusion and Acceleration (TRAIN) doubled the excise tax from 2 percent to 4 percent.  

He explained that while Canada and Australia do “tend to have higher mining tax regimes, [this] was accepted by investors due to stability of policies, infrastructure and ease of doing business.” After all, policy environment is critical in industry competitiveness and economic development.

Recidoro adds that the final version of the proposed bill (HB8400) will give an AETR of 78.10 percent, resulting in an even more expensive tax structure compared to other countries. While it does lead to a revenue increase for the government, it will discourage current and potential investors “who [have] invested all funds in the project and taken all project risk.” 

Even without the proposed bill, the current tax regime is skewed to imposing high taxes on “gross revenues, payable whether a mine is profitable or not, [whereas] other countries are skewed towards profitability, with higher rates applied to income depending on operating margins,” Recidoro said. 

This is counterproductive, according to Stratbase ADRI President Dindo Manhit, “if a law that seeks to line the country’s coffers with additional tax revenues actually ends up losing billions’ worth of potential income as well as jobs and other benefits.” Adding more taxes to the mix will not result to increased revenues but instead leave the industry even more uncompetitive.

There must be a more balanced approach rather than an “unhappy compromise” if the proposed bill becomes a law before the end of this Congress. 

For UP School of Economics professor Ramon Clarete, expanding the tax base rather than imposing new higher taxes is more beneficial. He also added that an income-based tax scheme (e.g., corporate tax and resource rents taxes) is more advantageous as opposed to the output-based tax scheme we still practice. 

As Manhit put it, a more balanced policy approach is only achieved “in close consultation with stakeholders and backed by scientific data, which must be crafted to carefully consider competitiveness not just in the volatile global market of metallic ores but also in attracting large foreign investments needed in legitimate mining operations.” 

A balanced policy approach also means assessing our industry with respect to what can be adopted or emulated from the global mining industry.

Vanessa Pepino is an environment fellow of the Stratbase ADR Institute, a partner of Philstar.com.