Mining Taxation: Between

Reason and Extortion

Bienvenido “Nonoy” Oplas Jr.

Presentation at the forum, “enlight EM up”

Sponsored by the UP Mining Engineering Society (UP MINERS)

UPSE Auditorium, UP Diliman, QC, 18 september 2014

OUTLINE

I. Basic Stats, PH Mining

II. Some Taxation Theory

III. Mining Tax: Rational vs

Irrational

IV.Conclusions

Source 2009 2010 2011 2012 2013 2014 Q1

Gross Production Value (P Bill.) 106.1 145.3 163.2 144.6 157.1 21.98

Large-scale metallic mining MGB 42.8 69.1 88.0 97.8 99.0 21.94

Small scale gold mining BSP 36.8 42.9 34.1 1.2 0.3 0.04

Non-metallic mining MGB 26.5 33.3 41.1 45.6 57.8 na

Taxes, Fees, Royalties (P Bill.) 12,696 13.365 22.230 19.942 21.480 1.415

Collections by DENR-MGB 0.396 0.801 1.381 1.647 1.517 1.410

Excise Tax collections by BIR 0.718 1.306 6.986 2.206 2.494 na

Taxes collected by NGAs 10.579 10.188 12.886 14.322 16.237 na

Collections by LGUs 1.002 1.071 1.179 1.767 1.232 0.005

Mining investment fr. Revitalization

Prog. Under EO 270 ($ Million)

MGB 719.5 1,053 1,148 812.5 1,311.4 na

Gross Value Added, Mining (P Bill) NSCB 65.8 88.2 96.9 79.5 77.8 22.4

Mining GVA share to GDP (%) 0.8 1.0 1.0 0.7 0.7 0.8

Exports of Mineral Prods. ($ Mill.) BSP 1,470 1,929 2,840 2,337 3,417 664

Mineral X / Total X (%) 3.9 3.8 6.0 4.5 6.3 4.6

Exports of Non-Metallic ($ Mill.) BSP 156 162 177 145 206 77

Non Metallic X / Total X (%) 0.4 0.3 0.4 0.3 0.4 0.5

Employment in Mining & Quarry. DOLE 169,000 197,000 211,000 250,000 250,000 222,000

Mining Empl. / Total Empl. (%) 0.5 0.5 0.6 0.7 0.7 0.6

Source: Mines and Geosciences Bureau (MGB), DENR,

http://www.mgb.gov.ph/Files/Statistics/MineralIndustryStatistics.pdf

I. Basic Statistics, Philippine Mining Industry

Mining Performance, in $

Indicator 2008 2009 2010 2011 2012

Gross

Production

Value

$ 1.958 B $ 2.227 B $ 3.221 B $ 3.768 B $ 3.358 B*

GDP

Contribution

$ 1.205 B $ 1.381 B $ 1.955 B $ 2.237 B $ 1.724 B

0.7 % 0.8 % 1.0 % 1.0 % 0.7 %

Export Share $ 2.498 B $ 1.470 B $ 1.929 B $ 2.840 B $ 1.588 B*

5.2 % 3.9 % 3.8 % 6.0 % 4.0 %

Employment 158,000 169,000 197,000 211,000 252,000

0.5 % 0.5 % 0.5 % 0.6 % 0.7 %

Taxes, Fees

& Royalties

from Mining

$ 172.87 M $ 259.87 M $ 296.28 M $ 509.81 M $485 M

The above numbers show:

1. The contribution of mining in PH economy looks small. Just 1%

of GDP, only 0.6% of total employment, mineral exports just 5%

of total exports.

Yes, because mining’s “multiplier effect” is not counted.

Almost all industrial (manufacturing, construction) and services

(transportation, telecom, IT, real estate, etc.) activities use mining

products . No mineral products means almost no industrial

production, very little services sectors. (Ex: Public transpo will be

horses and carabaos, not trains, buses or jeepneys)

Analogy: GVA of poultry and pork/meat is small, maybe around

2% of GDP. But without chicken and pork, there will be little or no

activities in many other sectors -- restaurants, carinderias, litson

manok/liempo stalls, chicken cubes/fillet, other manufactured and

processed food.

The above numbers show:

2. Taxes, fees, royalties by mining looks small, only P20+ billion

out of around P1.5 trillion tax collections or just 1 percent of

total tax collections.

Again, because mining’s “multiplier effect” is not counted.

Mining output enables more agri, industrial and services

sectors to produce more, and government collects more.

Almost all of the taxes and fees mentioned are from large-scale

mining, very little from small scale mining.

Nickel Performance, Global Ranking

NICKEL PRODUCTION (000 MT)

COUNTRY Rank 2012 Rank 2011 RESERVES

Philippines 1 330,000 2 270,000 1,100,000

Indonesia 2 320,000 1 290,000 3,900,000

Russia 3 270,000 3 267,000 6,100,000

Australia 4 230,000 5 215,000 20,000,000

Canada 5 220,000 4 220,000 3,300,000

Brazil 6 140,000 7 109,000 7,500,000

China 7 91,000 8 89,800 3,000,000

Colombia 8 80,000 9 76,000 1,100,000

Cuba 9 72,000 10 71,000 5,500,000

South Africa 10 42,000 3,700,000

New Caledonia 6 131,000 12,000,000

Other Countries 332,000 200,600 7,667,100

TOTAL 2,127,000 1,939,400 74,867,100

Source: Mines and Geosciences Bureau (MGB)

II. Some Taxation Theory

• Deadweight loss arises bec. of monopolistic pricing incl. govt taxation,

externalities, price controls.

• At higher tax, people will either produce less even if a product is publicly

needed, or they will underdeclare actual output and pay lower taxes.

• Example: if taxes (corporate income, excise, royalty, LGUs’, …) are equiv. to

6% of gross mining revenues, mining output is 12 million tons.

• Raising the tax to 10% will result in that shaded area, Potential higher

revenues for govt but lower output to society. Players willing to supply only 8 M

tons. And govt will collect less.

Arthur Laffer (and JM Keynes): the higher the tax rate, the

lower the tax revenue/collection

At tax rates approach 100%, private enterprises will either stop working, or they work but

understate output; tax assessors/collectors allow it in exch. for personal and financial gains.

“But Mining causes lots of deforestation, soil erosion, river

pollution… It deserves to be taxed super high” – Anti mining lobby

B. LOCAL TAXES/FEES

• Business tax

• Real property tax

• Registration fees

• Occupation fees

• Community tax

• Other local taxes

C. OTHER PAYMENTS

• Special allowance as defined by

the Mining Act

• Royalties to indigenous cultural

communities

• Various documents/permits

required by MGB, LGUs

III. Mining Taxation: Rational vs Irrational

Other costs: SDMP & CSR

A. NATIONAL TAXES / FEES

* Corporate Income tax

* Excise tax

* Value-added tax

* Royalties (in mineral

reservations)

* Capital Gains tax

* Tax on interest payment to

foreign loan

* Tax on foreign stockholders

dividends

* Documentary stamp tax

* Vehicle registration tax

MPSA/FTAA

The difference between the cumulative present value of net

mining revenue and cumulative present value of total govt

share to achieve a 50%-50% sharing

Net Mining Revenue = Gross Output – Deductible Expenses

Gross Output = actual market value of minerals or mineral

products from its mining area as defined by the National

Internal Revenue Code

Deductible Expenses = Allowable expenditures incurred by the

Contractor directly, reasonably and necessarily related to the

mining operations as defined in Section 3 of DAO 99-56

PLUS: Additional Government Share

(Net Mining Revenue-Based)

Illustration: Breakdown of Tax Payment in 2010

source: Dr. Artemio Disini, presentation at the Philippine Economic Society

(PES) Conference, November 27, 2012, PICC, Manila.

The above table shows that:

* Actual contribution of large scale metallic mining (LSMM) to taxes

not just 9% but 13% of gross value production, as small scale gold

mining (SSGM) sub-sector does not pay any national tax, only small

local taxes and fees.

* After deducting production cost, 60% for metallic and 50% for non-

metallic, total taxes, fees and royalties paid to the government of

P11.9 billion in 2010 comprised 43% of LSMM’s net revenue.

* Government share of nearly P12 billion in 2010 alone, constituting

nearly one-half of LSMMs’ net revenue is big. It is hard to find other

sectors that are taxed this much.

* The statement that large scale mining is “not taxed enough” is not

valid. The phrase “not taxed enough” applies to small scale mining.

2010 2011

LSMM NMM Total LSMM NMM Total

Gross Revenue 69.1 33.3 102.4 88.0 41.1 129.1

Less Operating Cost

(60% LSMM, 50% NMM)

41.5 16.6 58.1 52.8 20.5 73.3

Net Revenue 27.6 16.7 44.3 35.2 20.6 55.8

Taxes and Fees Paid * 11.9 1.5 13.4 22.0

Taxes/Net Revenue,

Percent

43.1 9.0 30.2 39.4

Taxes and Fees Paid by LSMM and NMM, 2010 and 2011, P Bill.

* 2010 tax breakdown source: Disini. Presentation at PES Conf., 2012

No breakdown of tax payment among LSMM, NMM and SSM at the MGB data.

At 39.4% combined payment by LSMM and NMM in 2011, and seeing their

proportional payment in 2010, it is safe to assume that LSMM paid about 50 of

their net revenues to the government.

* On top of taxes and fees paid, LSMM also required by RA 7942,

Chapter X, and DENR Administrative Order (DAO) 2010-21 (IRR

of RA 7942) LSMM to have Social Development and Management

Program (SDMP) for the communities where they are operating. In

2010 alone, this was more than half billion pesos from members of

the Chamber of Mines of the Philippines (COMP).

* Since SDMP (school, hospital, livelihood trainings, tractors, etc.)

is not counted as part of operating expenses, then it can be

considered as additional tax and fee that goes direct to the people

in the communities, not to the BIR, Congress and LGUs.

Monsod computation Realistic nos.

Potential metallic

mineral value

P36.0 trillion P36.0 trilion

Gross taxable profit P14.4 trillion P14.4 trillion

Government share (a) Excise tax: 2%

(b) Malampaya: 60%

(c) Average taxes

+ fees payment:

46 %

Projected tax collection (a) P288 billion

(she wrote P720 B)

(b) P8.64 trillion

(c) P6.62 trillion

“Underpayment” to

government

(b) – (a) = P8.35 trillion

(she wrote P7.92 trillion)

(b) – (c) = P2.02

trillion

―Using the Malampaya formula, the share of the government/Filipino people

would come out to P8.64 trillion. Using the 2-percent formula of the Philippine

Mining Act, our share is P720 billion—or eight hundredths of one percent (0.08

percent) of what we would have gotten using Malampaya. In effect, if all those

mineral resources had been extracted, under RA 7942, the loss to the Filipino

people would be P7.92 trillion.‖ – Winnie Monsod (PDI, August 9, 2013)

Wrong. (1) Based on taxes and fees paid by LSMM in 2010 (43%) and 2011

(about 50%), the tax multiplier to be used should be around 46%, not 2%

(2) Assuming an amendment to RA 7942 in mining taxation, a move from

excise tax of 2% ++ existing taxes and fees to a Malampaya revenue

sharing (government 60%, private 40%), potential difference in revenue

collection will only be around P2.02 trillion and not P8.35 or P7.92 trillion.

And if SDMP spending is included, difference will narrow down to perhaps

only P1.8 trillion.

(3), “adverse environmental effects of mining” applies mainly to practices by

SSM (Mt. Diwalwal for instance) and not by LSMM. Prof. Monsod was silent

about SSM in her article.

Source: Roberto Mayorga, Chile Ambassador to the Philippines.

Presentation at Mining Conference, Manila, September 14, 2011.

Chile,

Mining

Taxation and

Regulations

Foreign investments and mining taxation policies, Chile vs

PH, the latter is far out more complicated, more extortionary.

Source: Roberto Mayorga,, 2011.

• Compared with: PH’s $2-3 B a year mineral exports, only around 5% of total X

• And PH’s 1% share of GDP, 1% share of tax revenues,.

• Positive results in Chile, up to $67 B of new mining investments by 2017.

• PH only $12.3 B by 2017. The single biggest proj. in the PH, Tampakan

mine by Sagitarrius Mining Inc. (SMI) still uncertain due to LGU

opposition and disapproval of the project.

Projected mining investments, Chile vs. PH.

High-Potential

Potential High Tax Base: Of the country’s total land area of

30 million hectares…

Of which only 2%

currently covered by

LSMM contracts/permits

About 30% or 9 million

hectares are considered

high mining potential

With estimated inventory of: * 8.03 B tons COPPER; * 480.26 M tons IRON;

* 4.91 Bi tons GOLD; * 39.66 Mi tons CHROMITE;

* 0.81 Bi tons NICKEL; * 433.88 Mi tons ALUMINUM.

Worth some $1 trillion

Source:

Recidoro,

COMP

Projections for New Mining Projects, as of 2012

2011* 2012 2013 2014 2015 2016 2017 2018

Investments

(Million $) 730 1,369 2,072 3,352 4,045 2,892 812

Revenues

(Million $) 3,768 3,768 4,878 5,167 7,959 10,675 13,114 14,036

Taxes**

(Million $) 400 400 555 596 987 1,367 1,707 1,837

Total investments (2011 to 2018): $15 billion

Total Annual Revenue: $3.8b in 2011, ramps up to $14b in 2018

Taxes Collected: $400m in 2011, increases to $1.8B in 2018

Mining share in GDP: 1.7% in 2011, increases to 5-6% in 2018

*Based on MGB Sep 2012 Figures

**Estimated figures is without ITH

source: Dr. Artemio Disini, presentation at the Philippine Economic Society

(PES) Conference, November 27, 2012, PICC; basic data from MGB Sept 2012

Anti-mining Claims:

(1) “From 2000 to 2009, ave. contribution of mining only 0.91 % of GDP,

2.5 % of total investments, and only 0.38 % of total employment.”

Philippine GDP by industrial origin at constant prices, % distribution

Source: computed from NSCB table 1,

http://www.nscb.gov.ph/beyondthenumbers/2013/04122013_jrga_agri.asp#tab1

True that share of raw mining production/GDP ratio is small.

BUT check that if the multiplier effect of mining is included, its contribution to

agri, industrial and services sectors is huge.

(2) “Better develop agriculture than mining.”

Should be no conflict between the two. But labor productivity and

income per worker in LSMM larger than those in agriculture in

general. Thus, the sector already provides social and economic

services to the poor more than in agriculture in general

Table 4. Some comparison between Agriculture and Mining

Source: Alonzo, Emmanuel, Issues Affecting the Mining Industry, Senate

STSR Taxbits, July-August 2012.

34.5%

40.8%

52.6%

54.7%

58.3%

58.8%

79.3%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0%

Papua New Guinea

Chile

South Africa

Peru

Canada

Australia

MICC Tax Structure

Source: Halcon, Nelia, COMP’s EVP. “The MICC Proposed Fiscal Regime for Mining: An

Assessment”, July 2014

Computed Average Effective Tax Rate (AETR *), Selected Countries

* AETR is the ratio of the Net Present Value (NPV) of total tax collections over the

projected life of the mine to the NPV of the total project pre-tax net cash flows (discount

rate of 10%).

• People benefit from mining even if taxes are zero. From spoon

and fork to nails and hammer, cellphones and laptops, cars and

airplanes, they all came from mining.

• “No to mining whatsoever” is a non-option. “Tax mining as

prohibitively as possible” is next to non-option. It will drive away

the legal, large, responsible mining companies. Small-scale

mining that are hardly taxed and regulated will flourish.

• Chile’s simple investments and low mining tax policies should

be considered by the PH government.

• A high AETR of 79% as proposed by the MICC will worsen the

tax environment to an outright extortionary system.

• Any tax hike proposal should compensate it with streamlining

and abolition of other taxes and charges.

IV. Concluding Notes