It’s about expanding the mining tax base

Vanessa Pepino, Environment Fellow of the Stratbase ADR Institute

Globally recognized, the Philippines is one of the most mineral-rich countries, with an estimated $840 billion worth of untapped mineral wealth. But unknown to most, it is subject to doubled excise taxes when the Tax Reform for Inclusion and Acceleration (TRAIN) Law took effect. Along with other local and national regulations and taxes from excise tax, royalty-mineral reservation, local business tax to registration fee, withholding tax and VAT, among others, it is a heavily taxed industry.

Mining industry statistics from the Mines and Geosciences Bureau (MGB) shows that total gross production value of mining is at P109.5 billion during the First Quarter of 2018. However, more recent data from the Philippine Statistics Authority notes that gross value added in mining and quarrying declined by 1.1% in the third quarter of 2018 from the same period in 2017 despite expansion of gold and copper subsectors by 9% and 7.7%, respectively.

Industry players and third-party observers blame the country’s unfriendly policy environment to its inability to tap the sector’s potentials. To add salt to injury, the House of Representatives recently passed on third reading House Bill (HB) 8400 which further increases mining taxes. The final version (HB 8400) imposes a range of royalties applied to income from mining operations. This includes a 1-5% margin-based royalty tax on large-scale mines, depending on operation margins, a 1-10% windfall profits tax on income from mining operations, and thin capitalization and ring-fencing.

In a recent roundtable discussion on this proposed mining fiscal regime organized jointly by independent think tank Stratbase ADR Institute (ADRI) Institute, Philippine Business for Environmental Stewardship the Department of Environment and Natural Resources, and the MGB, UP School of Economics professor Ramon Clarete said that high taxes will not amount to anything if the mining tax base remains stagnant. He adds that “the only way I can have a good base is to encourage investors to find it for me. You can’t do that if you have an onerous taxation.” Dr. Clarete advised that rather than imposing new higher taxes, it would be more beneficial to expand the tax base. This can be done by attracting more foreign investors especially with large upfront investments in exploration and development even before revenues from mining operations come in.

Introducing higher taxes not only disincentivizes legitimate business stakeholders, but possibly affects billions worth of what the government may be earning. With production value possibly to decline even more, imposing higher taxes is not really the rational solution. According to Dr. Clarete’s presentation, the proposed tax reform will raise the weighted average effective tax rate (AETR) on mining “by at least 16% to utmost 81%” which is already uncompetitive with other countries to begin with. Using an econometric model, he furthered that investments in mining may decline by at least 13% to at most 67%. Even with the TRAIN tax on mining, the increase of 2 to 4% in excise tax only resulted in P1.2 billion in government revenues, while deadweight loss is at P37.4 billion.

However, what government may want to consider, is an income-based tax scheme (e.g. corporate tax and resource rents taxes) compared to an output-based tax scheme. Since this depends on the net income of mining firms, he explained that this tax scheme may be more advantageous since it is more reliable, generally progressive and neutral. Though more complicated to administer, this seems to be preferred by the private sector too, since revenues from mining activities are very volatile. “If rates are fixed over the business cycle, [then] taxpayers and state are penalized or favored by the tax regime,” he adds.

As Stratbase ADRI President Dindo Manhit said, we need “a more balanced policy in close consultation with stakeholders and backed by scientific data must be crafted that carefully considers competitiveness not just in the volatile global market of metallic ores but also in attracting large foreign investments needed in legitimate mining operations.”

To wit, Dr. Clarete explained that five years ago, the country “lost about $6.2 billion of copper/gold mining investments in Mindanao, and other projects [that] failed to materialize because approval [was] tied to getting Congress to pass the proposed tax increase.” Perhaps it may be a better strategy to incorporate flexibility in its tax regime to fluctuating metal prices in the world market, rather than increasing its tax rates.

True, there may be a need to revisit tax regimes to make sure they reflect the current conditions, and translate to more equitable share of the government. However, this will be unlikely if our regulatory environment appears to drive away current and potential investors. This is an opportunity we cannot afford to miss, we need to take a closer look at how the proposed fiscal reform is with respect to the industry’s need to be competitive and very attractive to quality investments to develop the huge potential of our mineral resources. Of course, all in the context responsible mining.

 

 

This article was originally published in BusinessWorld.

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