New mining tax regime: How much should the government get? That government will have its way in the impending overhaul of fiscal regimes in the mining sector is all but certain. What remains unclear is the specific range of adjustments, or the system in which the increases would be implemented. The Mining Act of 1995 provides specific schemes and rates for Mineral Production Sharing Agreements (MPSAs) outside minerals reservations, MPSAs within mineral reservations, and Financial and Technical Assistance Agreements (FTAAs). Aside from the 2 percent excise tax, MPSAs within mineral reservations must pay a 5 percent royalty tax. Government takes a 50 percent cut for FTAAs, the only fiscal regime that allows 100 percent foreign ownership. In addition to the corporate income tax (CIT), mining companies pay customs duties and fees on imported capital equipment, plus a host of local taxes. (The Surigao City government, for example, collects an environmental fee of P25,000 for each ore-loading ship that docks within its waters.) By Danilo Adorador III / July 17, 2013 / For the Aquino administration an across-the-board fiscal restructuring is crucial to sustaining the country’s recent impressive economic performance. The reform in the minerals sector has been a particular focus such that when President Aquino issued Executive Order 79 last year, he suspended the grant of new mineral agreements until Congress enacts a law improving government share from mining operations. Mines and Geosciences Bureau chief Leo Jasareno and other government officials have mentioned a unified system which imposes a 7 percent tax on gross revenue (or 7 to 10 percent according to other media reports) plus 3 percent on windfall profits. There is no categorical statement from the Department of Finance (DoF) regarding these figures but presumably, this simplified fiscal regime would consolidate all current levies into one. Because a single tax scheme may effectively remove royalty fees, it is presumed that the sharing system under this regime would incorporate some compensation mechanism for lands owned by Indigenous Peoples (IPs). A December 2012 statement by the DoF gave an assurance that under the new scheme, IPs “will continue to receive royalties if the mining area is located in an ancestral land or domain.” “As I understand, the DoF under Secretary (Cesar) Purisima is aiming for one, single tax. The proposed revenue sharing scheme will be based partly on the gross sales, which it is less subject to discretion,” Director Jasareno told Mining Week in a phone interview. Jasareno confirmed the range of 7 to 10 percent tax rate plus tax on windfall but did not elaborate, saying he would leave it to DoF to disclose the final specific rates and schemes. Nevertheless, the MGB director said that under the proposed adjustments, the government aims to collect as much as P10 billion annually from the current level of P2 billion. Another considerable factor in this proposal is the broader push on fiscal incentives reform which is likely to result in the removal, or at least reduction of, tax holidays that are deemed bereft of valuable trade-offs. Meaning, these perks have not produced the ideal outcome for which they were introduced in the first place: to encourage more investments in the mining sector. In recent interviews, Purisima has indicated the government’s effort to “strike a balance between generating more revenue for the state and keeping the country attractive to investors.” Investment firms and credit rating agencies couldn’t agree more. Global investment banking and securities firm Goldman Sachs last month said the passage of the mining reform bill would further bolster the country’s Foreign Direct Investments (FDI) and sustain its impressive economic growth. Sound policies in the minerals sector are needed to fully unlock the country’s mineral potentials, it said. Echoing the same assessment, Credit rating agency Moody’s Investors Service said that among all necessary fiscal improvements, the legislation related to the mining sector in particular could provide a greater boost to government revenue. Moody’s is expected to upgrade the Philippines to investment grade anytime soon. This so-called unified tax scheme that Purisima appears to favor bears striking resemblance to the one that the International Monetary Fund (IMF) proposed last year. In a study titled “Reform of Fiscal Regimes for Mining and Petroleum,” the IMF sought the adoption of a 7 percent single tax that would combine excise, royalty and other levies that mining companies currently pay. Purisima had earlier praised the IMF study and described it as “an important input.” It is therefore instructive to explore the findings and recommendations of the IMF study and influence it may have on the government’s final position. Q: Can the government just extend the royalty fees to mines outside mineral reservations as a way of raising taxes? Or why not simply increase the excise tax on minerals? IMF study: Simply extending the royalty to mines outside a mineral reservation or increasing the rate of the mineral excise would increase production-based levies and would make the fiscal regime unattractive for mining projects of low profitability. Q: What is the ideal fiscal regime for future large-scale mining projects? IMF Study: A modified version of the FTAA regime should be the only regime available for future large mining projects, as over-restricting foreign investment in the mining sector has likely held back investments in the mining sector. A modified version is needed as the FTAA regime imposes a heavy burden on low-profit projects, as it requires a 50 percent government share. The current FTAA regime is not competitive internationally. The major reform of the FTAA fiscal regime would be to replace the current version of the additional government share, which serves as a minimum tax, with a 10 percent surcharge on cash flow after the corporate income tax but before financing. This would lower the government take on less profitable projects and make the overall fiscal regime less regressive. Q: What happens to the royalty fees and excise tax? IMF study: The 5 percent royalty and the 2 percent excise on mineral production should be combined into a single royalty that applies to mines inside and out of mineral reservations, with the combined royalty to be collected by the Bureau of Internal Revenue. This would ensure early revenue to the national government to be shared with local governments. Recognizing that the high royalty rate, particularly when combined with other production-based levies, would make the fiscal regime uncompetitive, the mission proposes that the mining companies be allowed a tax credit against their income tax for the amount of royalty payment in excess of 5 percent. Q: Does the mining sector need income tax holiday? IMF study: The income tax holiday is not needed. Experience in other countries shows that income tax holidays or tax exemptions are a particularly inefficient way to promote investment in new enterprises, which typically are unprofitable in the early years and thus unlikely to benefit. The principal beneficiaries are more likely to be those foot-loose enterprises that seek low-cost labor, are profitable from the outset, and might not need incentives. Tax holidays are particularly inappropriate for mining companies, as it is the resource rents (the surplus value after all costs and normal returns have been accounted for) associated with mineral deposit in the ground, and not tax incentives, that attract investment into the mining sector. There is usually a gap between the amount of investment. Q: How about the other incentives? IMF study: The need to rationalize Philippine’s tax incentives is widely recognized and long overdue. A serious effort is underway within the government and the Congress to harmonize and rationalize incentives. The House of Representatives passed H. No. 4935 in August 2011. This bill would provide a 6-year income tax holiday for mining companies that process minerals and export 70 percent of the output, followed by a 5 percent tax on gross income earned for the next 19 years, which would be paid in lieu of all national and local taxes except the real property tax. Alternatively, registered mining companies could elect a 50 percent reduction in the corporate tax rate for a period of 25 years. An alternative bill, prepared by DOF and which is being discussed within government, would eliminate tax holidays. The mission would strongly recommend elimination of tax holidays, at a minimum, for mining and remove the granting of incentives from the Board of Investments. Q: How to make LGU payouts faster? IMF Study: To improve the procedures for transferring funds under this program and to foster local support for large-scale mining, Congress should enact a continuous appropriation for the distribution of the LGUs share, and payments should be made to LGUs based on estimated amounts with adjustments when final amounts are known. A joint monitoring commission, with national and local representation, could be introduced to oversee the distribution of revenues to LGUs. Q: What is the ideal model for collecting the additional government share? IMF study: The most promising alternative that retains a cash-flow based levy would be a cash flow surcharge, which could be known as the new additional government share (NAGS). The tax base for the surcharge would be determined by adding back depreciation and interest and other financing charges to regular taxable income before the loss carryover, and deducting any capital expenditure and the regular CIT. This yields a tax base of net cash flow in the year after the regular income tax but before any financing. Instead of permitting an annual uplift for losses carried forward, the surcharge tax rate could be set sufficiently low to imply such compensation, or a simple uplift (investment allowance) could be added to the capital costs at the start. If taxable income for purposes of the surcharge is negative one year, the surcharge loss is carried forward to subsequent years so the surcharge would not be charged until the project has positive cash flow. The mission considers a rate of surcharge on cash flow in the range of 10 percent to be appropriate. A rate at this level removes the need to specify uplift, as under the RRT (resource rent tax). The surcharge does give companies a choice in periods of high profits: invest more (and, thus, increase the tax base for the future) or pay extra tax. - See more at: phminingweek/new-mining-tax-regime-how-much-should-the-govt-get/#sthash.hXa7r7Ma.dpuf
Posted on: Fri, 19 Jul 2013 14:40:29 +0000
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