The Department of Finance (DOF) has made a last-minute appeal to the Senate to pass its original proposal of a uniform royalty rate of 5 percent for all mining operations, whether located inside or outside a mineral reservation, in line with the government’s reform objectives of making the country’s tax system simpler, more efficient and fairer for all taxpayers.
Finance Assistant Secretary Ma. Teresa Habitan told senators before the adjourment of the congressional session last month that the DOF proposal would haul in an estimated P7.2 billion in incremental revenues to the state coffers in the initial year of its implementation, which is double the projected amount of P3.7 billion that the government will collect from the mining revenue reform bill approved by the House of Representatives in November last year.
“In the House, there was a considerable discussion about how the royalty was going to be calculated and with different methodologies on that. What finally was approved by the House can be considered a compromise position. The DOF always wanted a simpler manner of computing the royalty,” Habitan said during a recent hearing on the proposed new fiscal regime for the mining industry conducted by the Senate ways and means committee.
The House version lowers the current 5 percent royalty on large-scale mining inside mineral reservations to 3 percent and imposes a royalty equivalent to 1 to 5 percent of profit margins for large-scale mining outside mineral reservations, and 0.1 percent of gross output for small-scale mining outside or inside mineral reservations.
Habitan said the DOF prefers a rationalized and single fiscal regime for the mining industry to make this sector’s tax system simpler, more equitable and more efficient, in line with the overriding goal of the Duterte administration’s Comprehensive Tax Reform Program (CTRP).
She said that in 2017, data from the Mines and Geosciences Bureau (MGB) and the Bureau of Internal Revenue (BIR) showed that the government collected P1.1 billion in royalties and 1.9 billion in excise taxes from mining operations. The royalties were collected only from operations inside mineral reservations.
Most mines in the country operate outside mineral reservations and do not pay royalty, she said.
The DOF proposal on reforming the fiscal regime for the mining sector as outlined under Senate Bill 1979 filed by Senate President Vicente Sotto III calls for the retention of all existing taxes and fees on the mining industry, and a royalty of 5 percent on gross output paid to the government on all mining operations, regardless of the nature of the agreement, whether large-scale or small; metallic or non-metallic minerals extraction; or located inside or outside of mineral reservations.
According to Habitan, the existing taxes paid by mining contractors are the corporate income tax (CIT), excise tax, indigenous people’s royalty, local business tax and value-added tax (VAT), among others.
The DOF wants these taxes retained under the new fiscal regime to level the playing field among all other sectors.
SB 1979 also provides for an additional government share when its basic share is less than 50 percent of the net mining revenue; thin capitalization to avoid mining contractors relying too much on debt funding; and ring-fencing in which each mining project will be treated as a separate taxable entity.
Under the DOF-endorsed SB 1979, the current 5 percent royalty rate for operations located inside mineral reservations will be retained, while for those outside mineral reservations, a phased-in rate is proposed, as follows: 1) on the first 3 years upon the effectivity of the law, 3 percent; 2) on the fourth year, 4 percent; and 3) on the fifth year, 5 percent.
Mining operations inside mineral reservations are located in areas where the government has already made some investments and where there is some certainty on the presence of minerals, while those outside mineral reservations are areas not developed by the government and where discovery of minerals is thus less certain.