A regressive approach to the mining fiscal regime
Eight months since the first phase of the Tax Reform for Acceleration and Inclusion (TRAIN) Law was implemented, inflation hit a neardecade-high 6.4%, well beyond government forecasts and, more crucially, something that may upend years’ worth of significant economic growth.
While the administration’s ambitious infrastructure agenda is long overdue and surely worth the investment, tinkering with something as sweeping and overarching as taxation demands care and meticulous attention to its effects as we have seen with TRAIN.
The second phase of the tax package is looking to generate the same level of controversy, if not more. Barely ten months ago, TRAIN 1 doubled the excise tax on mining from 2% to 4%. A specific mining tax reform bill, filed in the House of Representatives and backed by the Department of Finance, proposes a 5% royalty for all large-scale and small-scale metal and non-metal operations regardless of whether they are located within or outside mineral reservations.
While retaining the corporate income tax for mining, the bill also requires an additional government share of the difference when the basic government share is less than 50% of the net mining revenue for the calendar year. It also proposes to limit interest expense deductions of mining contractors, for instance, if the contractor has a debt-to-equity ratio higher than 1.5 to 1 at any time during the taxable year.
The proposal’s claimed intent is to “satisfy the objectives of government for a reasonable increased share without compromising the mining sector’s need for a reasonable return on its investment.”
What is not said, of course, is that the imposition of the additional 5% royalty, on top of the various other charges on gross revenues, would make the total impositions on gross revenues the highest in the world at close to 12% all in all.
Contrary to the said intentions, the proposal runs the risk of making the sector even more uncompetitive in terms of attracting quality investments. As the mining industry demands intensive capital and sophisticated technology, it requires nothing less than quality investments. This means large, responsible companies with a lot of resources, technical knowhow, and experience.
Already, the regulatory environment in the Philippines is far from agreeable. A prohibitive tax structure threatens to drive
If the impositions of the mining tax reform bill are poised to sound the death knell for the industry, the other elements in the Tax Reform for Attracting Better and High-Quality Opportunities (TRABAHO) bill promise to be the proverbial final nail in the coffin.