Mining bill expected to raise gov’t revenue but poses risk to FDI growth

By Luisa Maria Jacinta C. Jocson, Reporter

THE proposed new fiscal regime to govern the mining sector is expected to strengthen the position of responsible miners and benefit the government, which will receive a fairer share of the revenue generated by the industry, analysts said, though miners warned that investors may elect to go elsewhere as a result.

“The new fiscal regime may benefit the government more as it aims for simplification and fair share, more so as policy makers look to achieve fiscal consolidation over the course of the several years without necessarily burdening other revenue sources,” Security Bank Corp.’s Chief Economist Robert Dan J. Roces said in an e-mail.

“As such, this will help manage and stabilize the high fiscal and debt-to-GDP ratios on top of economic recovery,” he added.

The House of Representatives’ Committee on Ways and Means last week approved a new fiscal regime which raises the tax rate on the mining sector to 51% from 38%.

The measure aims to increase government revenue from mining to P37.5 billion in its first full year of implementation.

Under the proposal, a royalty of 5% will be imposed on the market value of gross output of large-scale mining operations.

A minimum government share of 60% of net mining revenue, including all taxes and charges, will also be imposed on all mining operations.

A 10% export tax will also be levied on the market value of mineral ore exports to encourage domestic ore processing.

The bill also proposes a government system for the public disclosure of all mining tax and revenue data in the extractive industries value chain.

Eleanor L. Roque, head of the Tax Advisory and Compliance Division of P&A Grant Thornton, said that fiscal rationalization will promote transparency and level the playing field.

“It also minimizes the discretionary powers on the taxes and charges that can be imposed on a particular contract. I think it will encourage responsible and conscientious miners. Although mining as an industry is potentially a huge source of revenue for the government, we should still be very cautious and prudent to ensure that we are getting the most benefit from this industry. These are our natural resources. Once mined, we can never get them back so maximizing benefits for our country should also be a major consideration,” she said in an e-mail.

She said the Philippines should export high-value products which have already been processed.

“In most cases, the products we export have low value because the important processing steps are done abroad. So, the income realized here in the Philippines is also very low which, in turn, means low government share and taxes. Then, we import those same products after they have been processed at a very high value. Encouraging the processing to be done here in the Philippines will also transfer the much-needed technology to our workers and skilled laborers,” she added.

Tax Management Association of the Philippines President Fulvio D. Dawilan said that the measure will be good for both the environment and the economy.

“The accrual of the royalties paid by large-scale metallic mining operations into a Natural Resource Trust Fund is a new concept. The fund redounds to the benefit of the localities affected by the mining operations. There are therefore clear benefits to the affected local government units, including the use of the funds for the rehabilitation of abandoned mines,” he said in an e-mail.

“Also, the requirement for the small-scale miners to get tax identification (numbers) as a requisite for registration with the Mines and Geosciences Bureau and Mining Boards will place them on the radar of the tax authorities. This will require them to pay their fair share of taxes on the income generated from their mining activities,” he added.

Mr. Dawilan noted that assigning royalty collection duties to the Bureau of Internal Revenue (BIR) is a new move. 

“This is correct as in fact the royalties paid by mining contractors are actually taxes which should be under the jurisdiction of the BIR,” he added.

Stock market analysts said that the new fiscal regime will likely not impact investor appetites.

Mercantile Securities Corp. Head Trader Jeff Radley C. See said in a Viber message that the mining industry anticipated these changes as the government needed more money.

“The proposals would be acceptable as long as the taxes on mining are aligned with those of other countries. Furthermore, higher prices of global metals and other minerals in recent months will help support or sustain higher taxes (and the government’s share from) mining. Higher taxes are also commensurate with the corresponding impact on the environment and any additional government intervention or spending that could entail,” Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a text message.

According to environmentalists, the measure will likely minimize exploitation by mining companies.

“This is the right direction. Without endorsing the specific proposals, there is definitely a need to increase the government share of mining revenue as the current fiscal regime is grossly advantageous to mining companies,” Antonio Gabriel M. La Viña, a lawyer, educator and environmental expert, said in a text message.

“Incentives for domestic processing are also welcome because raw materials are valued much less than those which have been processed here. Minerals are sovereign wealth, national patrimony owned by current and future generations of Filipinos. They should not be squandered to favor private entities, both domestic and foreign,” he added.

Asian Institute of Management Associate Director John Paolo R. Rivera said that the measure will help mitigate the harmful impact of mining activity.

“While higher taxes may drive away mining companies, it would be a welcome development for the environment because it can compensate the country for resource extraction. It will definitely help the government secure additional sources of funds to support its welfare programs,” he said in a Viber message.

The new tax measures are a welcome development as the mining industry is considered “under-taxed,” according to Alyansa Tigil Mina National Coordinator Jaybee Garganera.

“We had supported the proposal that royalty should be at least 10%. We also proposed a windfall profit tax or super profit tax, but this wasn’t included. We should remember that the TRAIN Law already reduced the corporate income tax… We also felt the new tax regime should have added a provision on a sovereign wealth fund so that mining taxes can finance education, health and other (sustainable development goals) for the next generation. At the end of the day, new and increased taxes will mean very little if the costs of climate change impacts from mining outweigh these taxes,” he said in a statement.

“Except for taxes, mining has very little significant contribution to our economy.  Given the impacts on affected communities and the environment, we must ensure our fair share. And this new tax on mining is the closest we have to achieving that,” he added.

The Chamber of Mines of the Philippines (COMP) has said that the bill will “once again set back” the revitalization of the industry.

“We lament the fact that no consultations took place with the industry that would have allowed us to prove that the onerous provisions of the bill would make the Philippine mining industry one of the highest taxed in the world. We also maintain that figures shown during the committee hearing that purported to show the industry’s effective tax rate at 38% was woefully out of date as the report was (compiled in) 2000, prior to the doubling of the excise tax on mineral products under TRAIN 1,” COMP said in a statement.

“Once again, the mining industry is faced with a drastic policy change that will not be conducive to its growth, preventing it from playing a major role in the recovery of our economy. Should this bill become law, three flagship mining projects that can otherwise substantially contribute to economic development in areas where they are located, result in a substantial amount of exports and tax revenue and a considerable amount of social expenses will instead be in jeopardy. In addition, a number of large-scale operations run the risk of closure, resulting in massive unemployment in their areas of operations,” it added.

COMP called on the Congress to revisit the bill and consult more widely.

“This will give all affected parties an opportunity to contribute to the passage of a mining fiscal regime that will encourage investment and finally unlock the industry’s huge economic potential,” it said.

“Simply put, the onerous tax bill will once again put into question the stability of our policies, which is most detrimental to attracting foreign investment in such a capital-intensive industry. Foreign investors will simply look elsewhere; we are not the only country blessed with mineral resources. If further tax increases are unavoidable, the tax structure should not be onerous as to stop investments from coming in. This will sustain existing mines and encourage quality investment in the hugely untapped Philippine minerals sector, ultimately expanding the tax base and providing far larger tax revenue to the government,” it added.

The Canadian Chamber of Commerce of the Philippines said that the proposal threatens the country’s post-pandemic economic recovery.

Canadian Chamber President Julian H. Payne said the proposed imposition of a 5% royalty on all mining plus a 60% share of net mining revenue is significantly higher than rates now imposed by other countries with major mining industries, including Australia, Canada, Chile, Peru, and South Africa, with which the Philippines competes for investment in mining.

“References to increasing the tax rate in the Philippines from 38% to 51% to be in line with Australia and Indonesia refers to only part of the total share of net revenue the Philippines now receives. It gives an impression that the Philippines receives less in total than these other countries,” he said in a statement.

He said that his other major concern is that the calculated increase in total tax revenue for all mining operations appears to be based and calculated on the current level of mining operations rather than on any reduced level probable with any significant tax increase.

“Sure, the Philippines may get more in total if the current level of operations continues. But if foreign investors in mining go for more hospitable countries with lower total net revenue share taken by the government, total tax revenue from mining in the Philippines will probably decrease. Foreign investors in mining have options to invest in various other countries which have rich mineral resources and the Philippines may not be considered so desirable for foreign investment in mining. The result will be less tax revenue as well as less employment and less business for small businesses that provide support to mining in rural areas where mining is located,” he said.

“The bottom line is this proposed major tax increase on mining in the Philippines will be seen by foreign investors in mining, such as by those in Canada, as a reversal of recent positive steps by the National Government to (encourage) growth of mining as one of the industrial sectors cited as having the greatest potential to support the post-pandemic economic recovery of the Philippines. It will also be seen as quite inconsistent with one of the stated goals of the new Administration to attract foreign investment in the capital-intensive mining sector,” he added.