COA defies 3 admins: Contractors should pay P146B Malampaya tax

MANILA, Philippines – The Commission on Audit (COA) is putting its foot down and required oil companies to pay P146.7 billion worth of income taxes for the Malampaya gas project, defying policies of the past three administrations.

“If this Commission will not put an end to this illegal 'tax assumption' scheme, the government will continue to bleed billions and billions of funds that can and should be used for the very purpose intended by law,” the COA proper said in a 15-page resolution dated January 24, 2018, but released only on Wednesday, May 16.

The resolution was signed by COA commissioners Jose Fabia and Isabel Agito. Chairperson Michael Aguinaldo inhibited.

Shell has elevated this issue to the International Center for Settlement of Investment Disputes (ICSID), and the national government has exhausted all efforts to back the consortium's cause. 

But the COA did not budge. 

Income taxes

The consortium is made up of Shell Philippines Exploration, Chevron Malampaya LLC, and Philippine National Oil Company-Exploration Corporation (PNOC-EC).

Under Presidential Decree (P.D) No. 1459, the Department of Energy (DOE) is allowed to enter into petroleum service contracts where the profit share of the government “including all taxes, shall not be less than 60%.” 

It was the scheme followed by the government for the Malampaya Deep Water Gas-to-Power project, wherein the consortium operates the facility and gets 40% of the profit. The remaining 60% is remitted to the government, or the so-called Malampaya fund.

According to COA, the government since former president Gloria Macapagal Arroyo has been applying a scheme called “tax assumption” where the income tax due the consortium was computed as part of the government’s 60% share.

The Department of Energy (DOE), under former president Benigno “Noynoy” Aquino III, told COA in their appeal: “The contractor is still subject to income tax, only that it is part of and included in the 60% government share and goes to the government through the Bureau of Internal Revenue (BIR).”

For COA, tax assumption is illegal and tantamount to tax exemption.

“The tax assumption arrangement increased the actual share of the contractors from 40 percent to 65.97 percent, while the government share substantially decreased from 60 percent to only 34.03 percent. This is a clear violation of the maximum contractor’s share under Section 8(2) of P.D. 87 and the minimum guaranteed government share under Section 18(b) of PD 87 and Section 1(a) of PD 1459,” the COA said.

Section 8 (2) of PD No. 87 states that the contractor shall get a net amount "which shall not exceed 40 percent of the balance of the gross income."

Section 18 (b) of the same decree states that "in no case shall the annual net revenue or share of the government, including all taxes paid by or on behalf of the contractor, be less than 60% of the difference between the gross income and the sum of operating expenses and Filipino participation incentive."

Firm stand

The COA first issued a notice of charge against the consortium in 2015, asking for the tax payment of P53.14 billion. The consortium appealed it with the backing of the DOE under Aquino.

When President Rodrigo Duterte took over, the DOE got the Office of Solicitor General (OSG) as its lawyers to beef up its position.

“The DOE submits that it is the policy of the administration of President Rodrigo Duterte to honor the Government’s contractual obligations under Service Contract (SC) No. 38. However, this allegation is not supported by evidence. While this Commission takes note of the public statements made by the President, there is, to date, no official presidential issuance expressing the President’s policy specific to SC No. 38,” the COA said.

To justify the scheme, the DOE said charging the consortium will “further erode the confidence of foreign petroleum industry investors in the stability and certainty of our rules and regulations.”

“The DOE described investment in petroleum exploration in the Philippines as a highly risky business, as there is no guarantee of return in investments. Thus, there is a need for the Philippines to maintain the attractiveness of the country’s fiscal terms in order to get a reasonable share of the investment money,” the COA quoted DOE as saying.

The COA rejected the DOE’s reasons that the tax assumption scheme is patterned after model production sharing agreements in countries such as Indonesia, Qatar, Syria, Oman and Egypt.

“This Commission cannot give weight to this submission, considering that the same were based only on “model agreements” and that the economic and political circumstances of these countries might not be comparable to those of the Philippines,” the COA said.

Malampaya fund

The COA has been watchful over the Malampaya fund, especially after audits revealed that hundreds of millions were scammed similar to the Napoles pork barrel scheme.

In November 2017, the COA released a special audit report on the misuse of P38 billion worth of Malampaya fund releases and recommended a criminal investigation into it.

The COA said charging the consortium will allow the government to develop its own sufficient and sustainable renewable energy.

“The construction and development of renewable power plants across the country will entail a huge investment cost to the government. But in the long run, the benefits will outweigh the costs as it will translate to lower electricity costs and other associated economic benefits. It bears pointing out that the development of our own renewable and sustainable energy sources is the very purpose of the Malampaya Fund,” the COA said.

The COA also insisted that they are within authority to require payment, even though it goes against the position of the national government.

“While it is true that this Commission is a government agency, it remains to be an independent constitutional commission with the solemn duty to safeguard public funds,” the COA said. – Rappler.com

Lian Buan

Lian Buan covers justice and corruption for Rappler. She is interested in decisions, pleadings, audits, contracts, and other documents that establish a trail. If you have leads, email lian.buan@rappler.com or tweet @lianbuan.

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