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Is mining taxation’s purpose to create more taxation?
Perhaps more than any other sector in the country, the mining industry is known for being subject to plenty of regulations, taxation, duties and royalties, both from local and national governments.
To flesh out some issues related to this, independent think tank Stratbase Albert Del Rosario Institute (ADRi) in cooperation with the Department of Environment and Natural Resources – Mines and Geosciences Bureau (MGB) organized a roundtable discussion on “Mining Fiscal Regime” on Tuesday in Makati.
Resource speakers from the Department of Finance represented by Assistant Secretary Ma. Teresa Habitan and Director of domestic Finance Elsa Agustin. The mining Industry was represented by Chamber of Mines of the Philippines (COMP) Executive Director Ronald Recidoro. They presented their positions on the new mining taxes proposed in House Bill 8400 which recently passed on third reading. The reactors were Dr. Ramon Clarete of the UP School of Economics, Calixto Chikiamco of the Foundation for Economic Freedom (FEF), and yours truly.
The DOF presentation outlined the major mining impositions: (1) corporate income tax (CIT) 30 percent, (2) excise tax 4 percent of market value of gross output at removal, (3) royalty 5 percent of market value of gross output if within mineral reservation (MR), and (4) other national government taxes, including customs duties on imported capital equipment, VAT, withholding taxes on interest payments and on dividends, capital gains tax, and documentary stamp tax.
Then there are local government taxes and fees: local business tax, real property tax, community tax, occupation fee, registration fee, permit fee, wharfage fee, extraction fee. There are more actually, like the mining operations tax, environmental fee, rental fee, mine waste and tailing fee, barangay permit fee, etc.
Not mentioned in the DOF presentation are the various mandatory programs and expenditures by large scale mining (LSM) as provided in the Mining Act of 1995. These are: social development and management program (SDMP), annual environmental protection and enhancement program (EPEP), community development program, environmental work program, safety and health program, special allowance to claim owners and surface right holders.
Then there are mandatory funds: rehabilitation cash fund, mine monitoring trust fund, mine waste and tailings fees reserve fund, final mine rehabilitation and decommissioning fund, and environmental trust fund, mine rehabilitation fund (MRF), among others.
Now comes House Bill 8400 sponsored by Congressman Suansing and it proposes among others: (1) royalties 1-5 percent of margin for LSMs outside mining reservations (MR), 3 percent of gross output for LSM inside MR, and 0.1 percent of gross output for small scale mining (SSM) outside or inside MR. (2) windfall profits tax (WPT) 1-10 percent based on margin, and (3) thin capitalization and ring fencing, up to 3:1 debt equity ratio and disallows deduction of excess interest expense over this ratio.
This bill therefore intends to reduce the financial burden of the industry by having lower royalties for LSM and starts to collect royalties from SSM at minimal amount. This is a good initiative except that the huge discrepancy in royalty between LSMs and SSMs means the latter would prefer to remain small forever and, hence, remain less transparent, less accountable, harder to monitor.
The introduction of the WPT is wrong. Any big increase in earnings by the sector are currently captured by corporate income tax, excise tax, and VAT so there is no need to introduce another tax.
The DOF had its own proposals partly different from HB 4800 and these are: (1) retain existing national taxes and fees, (2) Impose royalties of 5 percent on all: metallic and non-metallic minerals, SSM and LSM, inside MR and outside mineral reservations (OMR), (3) Impose additional government share (AGS) on all, where AGS = (50 percent of NMR) – (basic government share), and (4) Introduce thin capitalization and ring fencing: each mining operation or agreement is treated as separate taxable entity.
Proposals 1 to 3 are problematic because the DOF is silent on removing or reducing the mandatory programs and mandatory funds as enumerated above, yet it will retain current taxes (excise tax was raised only this year from 2 percent to 4 percent under TRAIN law), expand royalty coverage, and introduce AGS.
The government, the DOF in particular, should learn to step back and not just tax-tax-tax anywhere. It should learn to (a) remove or cut those mandatory programs and mandatory funds, or (b) retain all of them but count them as additional tax and must be deducted from the tax liabilities of mining firms.
COMP’s Recidoro discussed the tax regimes and gave a comparative analysis of the following:
1. Big mining exporters Chile, Peru, Canada, South Africa, Australia-QLD have no: excise tax, local biz tax, royalty for IP, royalty for MR. The Philippines has excise tax 4 percent, local biz tax 1.7 percent, Royalty – IP 1 percent, Royalty – MR percent.
2. High taxes on gross revenues are payable whether a mine is profitable or not. In contrast, structures of other countries are skewed towards profitability.
3. Average effective tax rate (AETR) = (discounted total tax take of government over project life) / (discounted pre-tax project cash flows starting from development period of a project), the Philippines’ MPSA (88 percent) and FTAA (73.4 percent) tax structures are more expensive than comparable countries: Canada 73 percent, Australia-QLD 70 percent, South Africa 63 percent.
Now if we combine high AETR with high instability in policies, which is like proposing to raise taxes and/or royalty almost every year, the country’s attractiveness in mining further goes down.
As of 2016, there were 11 projects worth $23 billion of potential mining investments, the biggest of which is the Tampakan project in South Cotabato at $5.9 billion. Many if not all of them are not in any production stage and we can ask, is the Philippines better off without these big mining projects?
The answer is no. With current players, the Philippines’ gross production in metallic and non-metallic, LSM and SSM, is around P170 billion a year and total taxes, royalties collected is around P33 billion a year. If those big projects are here, perhaps the sector can produce P300 billion or more, so that even at current tax and royalty rates, national and local government revenues may be P50 billion or more.
By introducing ever higher taxes, royalties and other shares, the government is squeezing the legitimate big players who are already in a struggling situation. Clarete is right when he advised that government should focus on expanding the base, expanding the mining industry to become a strategic pillar of growth.