EVEN though its decision may have been correctly based on existing laws, the Commission on Audit’s (COA) ruling against the consortium that operates the Malampaya gas platform may have just upended the Philippines’ entire approach to attracting—and keeping—investments.
At issue is P53.14 billion in unpaid royalties the COA ruled the consortium of Shell Philippines Exploration B.V. (SPEX), Chevron Malampaya LLC, and Philippine National Oil Company-Exploration Corp. (PNOC-EC) owes to the government. The consortium had deducted the amount—which was equal to the contractors’ tax liabilities—from royalty payments to the government between 2002 and 2009.
In a ruling dated April 6, the COA declared that the amount had been improperly deducted from the 60 percent government share of Malampaya revenues, and cited two Marcos-era presidential decrees as the legal basis for the decision. The law makes the 60 percent an absolute minimum but not a maximum, the COA said, and does not specifically provide for the deduction of taxes.
The Department of Energy (DOE), on the other hand, sided with the contractors. The DOE asserted that the same two decrees (PD 87 and PD 1459) authorized the government to assume and pay the tax liabilities of the contractors as an investment incentive. Accordingly, allowing the contractors to deduct the amount from the revenue share (and then presumably paying their own taxes) was simply a practical interpretation of that provision.
The entire confusing mess boils down to a difference over whether the government’s share of Malampaya revenues includes taxes or not. The DOE (and the contractors) take the position that revenue is revenue, whether it is paid directly or in the form of tax payments. The COA defines revenue as far as the government is concerned as simply being the proceeds from the sale of the gas harvested by the facility, and that tax liabilities on the portion of those revenues the consortium gets to keep are a separate matter.
Last week, a spokesman from SPEX admitted that the companies were confused as to how to proceed, as they were apparently being subjected to two different sets of rules. Obviously, they would prefer the framework that represented business as usual before the COA ruling and avoid shelling out $1.2 billion they didn’t expect to spend. What will happen, of course, is that the issue will land in the Supreme Court for a decision.
To be sure, it is entirely appropriate, vital in fact, for the Supreme Court to weigh in on the matter, because it does concern a fundamental question of fiscal policy. Unfortunately, until the court rules on the matter – a process that could include a first stop at the Court of Appeals, and of course the de rigeur motions for reconsideration on any and all pertinent rulings issued by any court or court-like body – virtually all ongoing investment activities covered by some sort of incentive scheme, such as PPP projects, are at risk of being delayed.
This particular case put the COA in a difficult position, because it seems any decision it could have made will cause some kind of harm. Its ruling was cribbed in public interest terms; the deductions from government’s revenue share shortchanged the people of the Philippines. The COA’s interpretation may be the correct one, but in making it the commission might have shot itself in the foot. The benefit of additional tax revenue will be lost if investments do not create tax-generating enterprises, and that is precisely what is not going to happen while a case that will impact the financial structure of any large-scale project is still undecided.
And because the question pits business interests against public interests, the road to a final resolution will be a bumpy one, because any Supreme Court decision—or realistically, even no decision—will require the crafting of new investment rules that are at least a little bit less ambiguous than the current ones are. That might be possible through the issuance of an updated executive order, but is likely to require new legislation; either way, we can look forward to a lengthy process, one that can only begin after the protracted judicial process has concluded.
The only, and completely unacceptable, alternative to all this would have been for the COA to simply overlook the question of the payment of Malampaya revenue shares and related taxes. While we can rue the fact that the commission’s uncovering a serious discrepancy in the country’s investment incentive scheme and issuing a ruling to attempt to clarify it (and recover revenue lost as a result of what it deemed an incorrect interpretation of the law) may have thrown plans for increasing infrastructure and other large-scale investments into chaos, we can hardly criticize the COA for doing its job.
The disruption and loss of economic potential will be temporary, although it may seem to last much longer than it should; the resolutions to these kinds of policy conflicts are never swift. It is the unfortunate consequence of years of haphazard and inconsistent policy and governance. Whether it causes harm now or later, the harm is unavoidable if the country wishes to improve its institutions and economic prospects.