Reshaping the tax landscape of the mining industry

The Philippine mining industry has undergone a tax overhaul, and it is far more than a surface-level polish. With Republic Act (RA) No. 12253, otherwise known as the Enhanced Fiscal Regime for Large-Scale Metallic Mining Act, signed by President Ferdinand R. Marcos, Jr. on Sept. 4, 2025, the government is set to reshape how the wealth buried beneath our mineral-rich soil is distributed.

Prior to RA 12253, the mining industry operated under a patchwork of tax rules and regulations which often raised concerns about potential gaps in enforcement and revenue collection. Key issues included the seemingly selective imposition of royalties on operations within mineral reservations, leaving highly profitable ventures outside these zones largely unregulated. Companies also had the flexibility to offset losses across different projects, potentially masking the true profitability of individual operations. Further, the absence of restrictions on related-party borrowing allowed entities to claim excessive interest deductions, significantly reducing taxable income.

These persistent gaps underscored the need for a more equitable regime leading to the passage of RA 12253, as applicable to all large-scale metallic mining operations. This landmark legislation introduced several key reforms intended to address longstanding issues in the mining industry and reshape how mining operations are regulated in view of the government’s principles of accountability, transparency and good governance in the management of mineral resources.

Among the key highlights of RA 12253 is the introduction of a five-tier royalty system imposed on mining operations outside mineral reservations. The tier system is margin-based and follows a progressive taxation scheme ranging from a 1% to 5% tax rate, depending on the profitability of the operation. For operations with margins less than or equal to 0%, a minimum royalty rate of one-tenth of 1% or 0.01% of the gross output of the minerals or mineral products extracted or produced applies. Meanwhile, the royalty rate for operations within mineral reservations remains at 5% of the gross output of minerals or mineral products.

This shift toward a margin-based system, along with the imposition of a minimum royalty for operations outside mineral reservations, addresses the concern over selective royalty imposition and hereby creates a more balanced and fair system for all miners, regardless of the location of the operation.

Complementing the shift to a margin-based royalty system, another salient feature introduced by RA 12253 is the imposition of windfall profits tax ranging from 1% to 10% based on margin. This tax is levied on top of existing corporate income and excise taxes and is aimed at capturing a fair share of mining revenue during periods of high profitability, particularly when commodity prices surge.

RA 12253 also enforces a ring-fencing rule which treats each mineral agreement or financial or technical assistance agreement as a separate taxable entity. This provision prohibits the consolidation of income and expenses across various operations, thereby preventing companies from offsetting losses from one operation against profits from another.

As emphasized by President Marcos, “Gone are the days when a mining contractor can bury its profits beneath the weight of losses. No longer can we use one project’s failure to conceal another project’s success.” By requiring project-level tax reporting, the ring-fencing rule enhances transparency and ensures that the actual or true profitability of each mining operation is properly reported for tax administration.

To further reshape the tax landscape of the industry, RA 12253 places a limit on the deductibility of interest expenses arising from related-party debts of mining contractors and operations. Specifically, the interest on such debt is deductible only up to a two to one debt-to-equity ratio at any point during the taxable year. This aims to fill the gap in the previous framework where entities were able to significantly reduce their taxable income by claiming excessive interest deductions on intercompany loans.

These measures are among the most transformative elements of RA 12253, marking a significant shift in how mining operations are taxed in the Philippines. With the law now in effect, mining contractors and operators are expected to reassess their financial structures and tax planning strategies to ensure compliance with the new fiscal regime. To facilitate this transition, the law provides a 150-day period from its effectivity, giving taxpayers sufficient time to align their systems and practices with the updated requirements.

Despite the promise of a simpler and more equitable system of the new fiscal regime, the transition may pose challenges for the mining industry. From an investment perspective, the introduction of new taxes such as the windfall profits tax and margin-based royalties, along with stricter reporting obligations, may prompt investors to reassess the financial viability and risk profile of mining ventures in the Philippines. Although the law provides legal stability for existing agreements, the potential impact on returns and operational flexibility could influence future investment decisions, especially during the transition period.

Nevertheless, RA 12253 offers a transformative opportunity beyond the surface. By ensuring that mining revenue is fairly shared and transparently managed, the Philippines is taking a bold step toward inclusive growth and sustainable development. For mining companies, the message is clear: if you want to dig, you must also give back. For communities, it is a promise of progress, with an estimated revenue impact of P25.08 billion from 2026 to 2029, as projected by the Department of Finance, and with 40% of collections from royalties and excise taxes going directly to local government units. For the government, it is a blueprint for fiscal resilience, environmental stewardship, and economic justice.

Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.

Dana Danielle F. Uganiza is a senior in charge from the Tax Advisory & Compliance practice area of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.