THE consortium that operates the Malampaya Deep Water Gas-to-Power facility is in talks with the Department of Energy (DOE) to plan their next move after the Commission on Audit (COA) ruled that they have unpaid obligations to the government amounting to P53.14 billion.
The consortium consists of Shell Philippines Exploration B.V. (SPEX), Chevron Malampaya LLC, and Philippine National Oil Company-Exploration Corp. (PNOC-EC).
SPEX managing director Sebastian Quinones said they are consulting the DOE on what course of action they should take after the COA ruled that they owed the government P53.14 billion representing underpayment of the government’s 60 percent share in the Malampaya project.
“The DOE would guide us on this matter,” Quinones told reporters at a Malampaya 101 briefing held in Makati City.
In an 11-page decision, the COA Commission Proper junked the position of the DOE, SPEX, Chevron, and PNOC-EC that the contractors’ income tax was deductible from the government’s 60 percent share of Malampaya’s earnings.
A petition for review filed by the DOE and the contractors argued that the government’s 60 percent share of the net proceeds already included corporate income taxes.
But the COA affirmed the Notice of Charge issued on October 5, 2010 along with the audit findings that the DOE had an under-collection of P53.14 billion for the period covering 2003 to 2009.
The amount represents the income taxes that SPEX, Chevron and PNOC-EC were supposed to pay the government as contractors of the gas project.
The DOE and COA each have a different stand on the issue and both cited laws to justify their position.
The DOE claimed that under Presidential Decree 87 (PD 87), it may assume and pay the tax liabilities of the contractor as an incentive-oriented policy which has been “a long cherished standard provision of all service contracts,” and supported the contractors’ claim that deduction of income taxes from the government share was a “tax assumption, not a tax exemption.”
The COA, however, declared that Presidential Decrees No. 87 and 1459, issued during the Marcos administration, were clear that the minimum government share was 60 percent of the net earnings of the Malampaya gas project.
It stressed that the State’s share can go up but it cannot go down without violating the law.
With these opposing views, Quinones said the consortium is torn between two government agencies.
“COA is government, DOE is also government, so the private sector is torn what the government really wants,” he added.
Quinones maintained that the consortium has always been compliant of government regulations.
Tantamount to tax exemption
“Sourcing the payment of income taxes of contractors from the 60 percent government share is tantamount to tax exemption which is not provided or allowed by applicable laws,” COA said in its decision.
“With the inclusion of income tax in the 60 percent government share, contractors effectively became immune from the application of amendatory income tax laws,” it added.
The Commission said it was not questioning the legislative wisdom that 60 percent of net proceeds is the fair share of the government, but “further reducing said 60 percent share to pay for tax liabilities of the contractors without any legal basis is way too much to be ignored.”
“There is nothing therein that would suggest that the government cannot receive more than 60 percent. Thus, no law would be violated even if the government’s entire share, including all taxes, would exceed 60 percent. In this case, the government’s share ultimately became less than 60 percent as a result of the supposed “tax assumption”, in clear violation of the provisions of PD 87 and PD 1459,”the COA said.
Pursuant to PD 87, the government in 1990 entered into service contract (SC) 38 or the Malampaya Natural Gas Project, the predecessors-in-interest of SPEX, PNOC-EC and Chevron.
Under SC 38, 60 percent of the net proceeds shall be remitted to the government through the DOE, while the contractor retains 40 percent as service fee. The agreement adds that the contractor is exempt from payment of all taxes except income tax.
The DOE alleged that from 2002 to 2009, the government’s share included the contractors’ income tax. But COA said in its ruling, “There is no provision in the law which specifically provides that the income taxes of the contractors will be part of the share of the government.”
“[N]o law would be violated even if the government’s entire share, including all taxes, would exceed 60 percent. In this case, the government’s share ultimately became less than 60 percent as a result of the supposed ‘tax assumption,’ in clear violation of the provisions of PD 87 and PD 1459,” it said.
Govt share reduced
The commission likewise disagreed with petitioners’ argument that the tax assumption did not reduce the government’s share or that it did not increase the contractors’ 40-percent share.
“[A]llowing the deduction of the CIT and BPRT from the 60 percent government share increased the actual take of the contractors from 40 percent of the net proceeds to 65.97 percent,” COA said.
CIT is Corporate Income Tax and BPRT is Branch Profit Remittance Tax.
“In the same manner, the ‘tax assumption’ arrangement decreased the share of the government to only 34.03 percent. This is also a flagrant violation of law, particularly the provisions of Section 18(b) of PD 87 and Section 1(a) of PD 1459, fixing the minimum share of the government to 60 percent of the net proceeds,” it said.
“Indeed, in agreeing to assume the contractors’ taxes that resulted in the reduction of the government’s share, the contracting parties went beyond the intent of the law, as expressly written, to secure the 60 percent share of the government and put the entire Filipino nation, who allowed the exploration and utilization of its natural resources, on the losing end,” it added.
The 11-page decision dated April 6 was signed by COA Commissioners Heidi Mendoza (then Officer-in-Charge) and Jose Fabia.
It denied the Consolidated Petition for Review of SPEX, PNOC-EC, and Chevron Malampaya LLC, and the Department of Energy, dated August 22, 2011.
“We cannot close our eyes against the plight of many Filipinos who are stuck in poverty when the money that would have gone a long way in uplifting their living standards are not being collected from the rightful taxpayers. As the guardian of public funds, this Commission has to stand true to its mandate to protect this country and ensure that all revenues that properly pertain to the government are being collected, expended and properly accounted for,” COA said.