THE Department of Energy (DOE) said it will honor the sanctity of contracts of the Malampaya gas project off northwest Palawan and urged the Commission on Audit (COA) to revise its decision.
The COA has issued a notice of charge to collect from the Malampaya consortium, composed of Shell Philippines Exploration B.V. (Spex), Chevron Malampaya LLC and PNOC Exploration Corp. a staggering P151 billion covering the period 2002 to 2016.
The calculation stems from COA’s interpretation that corporate income tax should not form part of the government’s share in the Malampaya project, the country’s biggest gas producing exploration project to date.
Energy Secretary Alfonso G. Cusi raised the matter to the Economic Cluster shortly after Spex filed a second arbitration case arising from the COA ruling.
On September 19, Cusi wrote the COA informing the commission that, “We are still adopting the aforementioned motion for recommendation [to honor the contract]as the official DOE position in the subject controversy.”
“First time it was raised, I said I need to study the full background of the issue. Then discussed it with the Economic Cluster and the Cabinet. We concurred with the DOE stand,”said Cusi in a separate comment.
Cusi said in the letter that the legal foundation of the DOE’s position is contained in Presidential Decrees 87 and Presidential Decree 1459 and “in light of these solid legal foundations, we entertain no doubt whatsoever on the legality of our position on this matter.”
The previous DOE administrations have been pushing for COA to honor the contracts of the Malampaya gas project, as failing to do so would have a damaging impact on the upstream exploration industry and send the wrong signal to foreign investors.
Cusi said petroleum exploration today dismally remains at 33 percent as compared to other Southeast Asian countries, which are relatively very much higher.
“In the face of these daunting challenges, of the foremost consideration in the mind of foreign investors in deciding where to invest is the predictability, certainty and consistency of investment rules and the regulatory regime of a country,” the energy chief said.
“It is therefore of funda0mental importance that we observe the sanctity of contracts in our commercial transactions,” Cusi said.
He added that the COA’s decision has eroded the country’s investment standing, but this can be reversed if “COA reconsiders and reverses its decision.”
“With all due respect and in deference to the Honorable Commission [COA], we maintain that the provision in SC [Service Contract] 38 stating that the income tax of the contractor shall form part of the government share is in accordance with the express provision of PD 87, as amended by PD 1459,” Cusi said.
DOE director for legal department Arthus Tenazas, for his part, said the COA’s decision “is an undue interference [on]the powers of the DOE to administer and implement Presidential Decree 87 and Presidential Decree 1459 and totally overstepped and exceeded the legal bounds of COA’s constitutionally mandated functions tantamount to a gross abuse of discretion.”
He said the DOE asserts that the 60 percent share of the government including income tax has legal basis in the following provisions of the law: Section 12 of PD 87 (a) which states that “the contractor is exempt from all taxes except income tax.”
It also has legal basis under Section 18 (b) of PD 87, which states that: “Provided, finally,” to quote: “That in no case shall the annual net revenue share of the government, including all taxes paid by or on behalf of the contractor, be less than 60 percent of the difference between the gross income and the sum of the operating expense and Filipino participation incentive.”
“So it is very clear in the law that the 60 percent share of the government may include all income paid by the contractor. Considering that the contractor is exempt from all taxes except income tax, the taxes that [are]referred to under Section 18 of the law, PD 87, refers to income tax,” Tenezas said.
The DOE official said the agency’s legal position is also anchored under PD 1459, Section 1 (a), which “provides that the share of the government including all taxes shall not be less than 60 percent of the difference between the gross income and the sum of the operating expenses and such allowances such as the secretary of Energy may deem proper to grant.”
“So the law practically provides that the 60 percent share of the government include all taxes out of the net income of the project,” he said.
Tenazas said COA’s decision “simply misconstrued, misapplied, and ultimately, disregarded Section 18 (b) of PD 87 and Section 1 (a) of PD 1459, which we already discussed earlier.”
“The decision, in our view, during that time in our pleading filed, is we stated that the decision was overly biased for the additional collection of tens of billions of pesos but disregarded the legality of the provisions of the service contract as well as the fairness and the sanctity of the contract between the two parties,” he said.
Tenazas stressed that the COA decision, “if not reconsidered and set aside, will cause irreparable harm to the country’s long-term interest as it will further erode the confidence of foreign petroleum industry investors in the stability and certainty of our rules and regulations.”