Aquino reform laws: Sin tax in 2012, mining in 2013?

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A bill to reform the country's mining law is still being drafted by an inter-agency body created by Malacañang and waiting in queue

MANILA, Philippines – In his 2012 state of the nation address, President Benigno Aquino III urged Congress to pass two reform bills. One he stamped “urgent,” the other he said could “wait a little while.”

Aquino signed the sin tax reform law in December, paving the way for its implementation on the first day of the new year.

A bill to reform the country’s mining law however is still being drafted by an inter-agency body created by Malacañang, and waiting in queue.

Both are important measures—they will raise additional revenues for the Philippine government that is only now making strides to end its fiscal woes. The government had complained that its share in mining revenues was small, while strong industry lobby kept excise taxes on sin products—tobacco and alcohol—among the lowest in the world for a long time.

However, for Aquino, the sin tax measure was the priority. It was “in a mature form already,” he was quoted as saying in earlier reports. On the other hand, there are sticky issues that need to be resolved in the mining bill first, the Finance department said.

Aquino flexed his political muscle to get the sin tax bill passed and enacted, the first time in nearly 16 years that efforts to restructure the country’s excise tax system succeeded in Congress.

Will he do the same for the mining reform bill this year?

Mining taxes

The government gets its share of mining revenues in two ways: by imposing an excise tax under the mineral production sharing agreement (MPSA), and getting a percentage of net revenues through the Financial or Technical Assistance Agreement (FTAA).

Most of the mining firms in the country hold MPSAs, which impose only 2% excise tax on their gross revenues, plus a 5% royalty tax on mineral reservations. The FTAA is for foreign majority owned firms.

Mining’s contribution to government coffers is undeniably small, complained Aquino, adding it is also disproportionate to the dangers the extractive industry poses to the environment. Thus, hiking the excise tax to between 5% and 7% has been a frequent call.

A “fair” revenue-sharing scheme between the government and mining firms is what the mining reform bill aims to provide.

Aquino issued his mining policy—Executive Order 79—in July 2012 calling on Congress to pass a new mining law that will raise the government’s revenue share.

He ordered the creation of the Mining Industry Coordinating Council (MICC) to supervise the drafting of the new law. The council is composed of representatives from the Finance and Trade departments, the National Economic and Development Authority as well as the Mines and Geosciences Bureau.

Recently, the MICC announced it was finally looking at two options for the revenue-sharing scheme.

The options are to take a percentage of mining companies’ gross margin or take a portion of their gross revenue, where income tax paid is deducted after computing the government’s share.

Both will be benchmarked on world metal prices available on the London Metals Exchange.

“The new scheme will strive to strike a balance between raising government revenue and keeping a fiscal regime that is competitive with other developing countries,” the MICC has said.

The revenue-sharing scheme is just one of the contentious issues that are still being deliberated on in the drafting of the reform bill. Other issues include the harmonization of national laws and local ordinances, and the moratorium on new mining permits.

National vs local

While EO 79 upheld the primacy of national laws over local ordinances, mining firms are urging the government to clarify the matter further in the reform bill.

At the center of the issue are bans on the supposed destructive method of open-pit mining put in place by several provinces.

Industry players claim the bans are illegal and run contrary to the Philippine Mining Act of 1995, which allows this method.

One company, Sagittarius Mines Inc. (SMI), the local partner of Swiss mining firm Xstrata, has been held back by a South Cotabato ban on open-pit mining since 2010. The company’s application for an environmental compliance certificate was dismissed by the Environment and Natural Resources department because of the ban.

As a result, the company pushed back commercial production of its $5.9-billion Tampakan copper-gold project to 2018 from 2016. If the project pushes through, it will be the Philippines’ largest single foreign investment ever.

SMI may opt to file a case to invalidate the South Cotabato ban after the Justice department issued an opinion that stated the ban is essentially in conflict with national law.

In Memorandum Circular 2012-181 it issued on November 29, the DOJ stated “the power of local government units to pass ordinances and resolutions is merely a delegated power coming from Congress and that ordinances should not contravene an existing statue enacted by Congress.”

Moratorium on new permits

The enactment of a revenue-sharing scheme meanwhile is required before a moratorium imposed by EO 79 on the issuance of new mining permits could be lifted.

Existing mining operations and those with approved contracts before the EO’s effectivity were not affected by the moratorium, said the government as it promised to respect earlier agreements it entered into.

While the granting of mineral agreements was suspended, the government is still allowing exploration permits. However, these permits are limited to exploration works only and do not include authority to conduct actual mining or extraction of minerals. In case those granted these permits actually discover minerals, they will be given preferential option in the granting of mineral agreements in the future should they wish to pursue their projects.

The moratorium has put the mining industry at a standstill. Over a thousand applications for new mining contracts are on hold. As a result, mining and quarrying contracted by 2.2% in the third quarter of 2012, government data showed. This decline was a reversal of the 4.1% growth the industry recorded in the same quarter last year.

Government officials also significantly slashed mining investment forecasts for 2013 until 2016.

Draft bill out ‘before polls’

As the government threshes out the thorny issues, the MICC expects to be ready with the draft bill before the May mid-term polls, a source in the Finance department said.

“There’s no draft yet. Hopefully, we can have it before the elections,” noted the source.

When it’s ready, the group will submit the draft to the Ways and Means committees of both chambers of Congress for sponsorship.

The passage of the mining reform bill will mark another milestone for the Aquino administration, which succeeded in enacting last year the most divisive and controversial measures that had languished in the legislative mill for over a decade. –

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