SC Malampaya ruling expected to spice up investor confidence

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THE SUPREME COURT (SC) ruling confirming that the income taxes of personal contractors within the Malampaya natural gas project are included in the federal government’s share of proceeds is anticipated to reassure investors, in keeping with the Department of Energy (DoE).

“We’re pleased that the difficulty has been resolved since it gives stability and security to our investors,” Energy Secretary Sharon S. Garin said in an interview last week.

Ms. Garin said that the choice could attract more exploration investment.

In a call dated July 30, the SC overturned the fees against Shell Philippines Exploration B.V., Chevron Malampaya LLC, and state-run PNOC Exploration Corp. for unpaid taxes.

In 1990, the federal government awarded a service contract to the Shell Philippines, Chevron, and PNOC for the Malampaya project. Under the contract, the contractors are required to remit 60% of the project’s net proceeds to the federal government.

While they were exempt from all taxes except income tax, the contract included a tax assumption provision, specifying that their income taxes from 2002 to 2009 could be covered by the federal government’s share.

Following a post-audit, the Commission on Audit (CoA) found that over P53 billion in income taxes had been deducted from the federal government’s share. The agency argued that contractors were accountable for these taxes on account of the absence of an express legal provision that states that their income taxes must be a part of the federal government’s share.

While the case was pending, the International Chamber of Commerce issued an arbitral award affirming the validity of the tax assumption provision within the service contract.

The SC reversed the CoA’s ruling citing Presidential Decree (PD) No. 87, or the Oil Exploration and Development Act, which says that income taxes paid by or on behalf of petroleum contractors form a part of the federal government’s guaranteed 60% share of net proceeds from petroleum operations.

It said that the law seeks to encourage private investment in petroleum exploration by allowing the federal government to assume contractors’ income tax obligations.

That is stated in PD 1206 and PD 1459, which confirm that the state’s share includes all taxes.

The SC said that the tax assumption clause under the Malampaya contract doesn’t constitute a tax exemption as the federal government assumes the duty. — Sheldeen Joy Talavera

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