Constitutional Limitations and Foreign Ownership in the Mining Industry
The 1987 Philippine Constitution limits foreign participation or ownership in the mining industry such limitation holds back the foreign investments. However, the 1987 Philippine Constitution allows full foreign ownership if the President enters into technical or financial assistance agreements with foreign-owned corporation for large-scale exploration, development, and utilization of minerals.
Currently, there are three fiscal regimes for large-scale mining: the Mineral Production Sharing Agreement (MPSA) outside mineral reservations, the MPSA within mineral reservations, and the Financial and Technical Assistance Agreement (FTAA). It’s significant to note that the only regime allowing for 100% foreign ownership is the FTAA for large-scale mining.
Proposed Simplification of Fiscal Framework
Owing to the uncertain and complex current fiscal mining regime of the Philippines, the Senate passed the first reading of Senate Bill No. 2826 (“S.B. No. 2826”) amending the House Bill No 8937 (“H.B. No. 8937”), or the “Enhanced Fiscal Regime for Large-Scale Metallic Mining Act” on 17 September 2024. S.B. No. 2826 proposes a simplified fiscal regime for large-scale mining activities involving exploration, feasibility, development, utilization, and processing, under MPSA or FTAA, as defined in Republic Act No. 7942 or the Philippine Mining Act of 1995.
Instead of multiple fiscal regimes, S.B. No. 2826 proposes to categorize the fiscal framework for large-scale metallic mining into two divisions: one for areas within mineral reservations and another for those outside, specifically regarding royalty tax payments. Additionally, S.B. No. 2826 introduces a unified fiscal regime that applies to both MPSA and FTAA mining companies for the imposition of windfall profits tax and ring-fencing, among other provisions.
Royalty Tax Structure
The royalty tax rate for large-scale metallic mining contractors and/or operators operating within the mining reservations is 4% based on gross output. On the other hand, the royalty tax rate for those operating outside mining reservations is a five-tier, margin-based ranging from 1% to the maximum royalty rate of 5% based on its income (i.e. gross output less deductions).
S.B. No. 2826 also proposes a simplified five-tier, margin-based windfall profits tax rate ranging from 1.5 to 10 percent on income from operations. Those large-scale metallic contractors and/or operators whose net profit is less than 30% of revenue will not pay any windfall profits tax. It bears emphasizing that the tax is levied on the income of the operations, instead of its gross output. This will ease the burden of the metallic mining contractors and/or operators as the tax falls heavy if it is imposed on the gross output.
Additionally, S.B. No. 2826 introduces ring-fencing, treating each operation of metallic mining contractors and operators with multiple projects as separate taxable entities. This prevents them from offsetting profits from one project against losses from another. The implementation of ring-fencing will restrict the consolidation of income and deductions for tax purposes across various activities or projects undertaken by the same contractors and operators. This measure will particularly benefit new foreign investors, as it ensures no discrimination against them compared to existing foreign investors, given that the former have no income against which to deduct exploration or development expenses.
Audit and Compliance Measures
For audit purposes, the Bureau of Internal Revenue and Bureau of Customs are authorized to examine and audit all sales and exportation of minerals, mineral products, and raw ores. The books of accounts and records of metallic mining contractors and/or operators, including assay reports and the sales and marketing agreements entered into by them, shall be open for inspection by the said bureaus. Further, the Mines and Geosciences Bureau shall be furnished with a copy of such assay reports, sales and marketing agreements, and integrated annual reports of metallic mining contractors and/or operators. Thus, aside from the tax returns to be filed by the metallic mining contractors and/or operators with the Bureau of Internal Revenue, it must comply with disclosure and reportorial requirements pursuant to the transparency mechanism in S.B. No. 2826.
In summary, S.B. No. 2826 aims to create a fair fiscal regime that benefits both the government and players in the mining industry. The Department of Finance has consistently highlighted its goal to not only develop the mining sector but also enhance the entire value chain associated with it. With these reforms, we can anticipate increased foreign investment in the Philippines’ mining industry and a more competitive landscape.
Conclusion
It is vital for metallic mining contractors and operators to engage a lawyer who can navigate the intricate legal requirements, ensuring compliance with regulatory standards and protecting against potential legal risks. It’s important to note that failing to meet reportorial requirements disadvantages not only the Philippine tax authorities but also the taxpayers involved in the mining industry.
A mining law firm can assist in drafting and negotiating the Mineral Production Sharing Agreement (MPSA), ensuring compliance with environmental regulations and local ordinances, while advising on the implications of profit-sharing and operational responsibilities. Additionally, the law firm can play a crucial role in mitigating risks related to potential lawsuits and disputes that may arise during the life cycle of the mining project. This includes preparing for challenges related to contract interpretations, environmental compliance issues, or disputes with local communities and stakeholders.
Abo Law Firm’s Legal Light Bulb aims to shed light on this proposed landscape, emphasizing the importance of legal guidance to navigate the evolving terrain of the fiscal regime in the Philippines’ mining industry.
