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Republic of the Philippines 2 oycJUL 09 2010
HOUSE OF REPRESENTATIVES nue. 1200

Queson City

EIGHTEENTH CONGRESS
First Regular Session

HOUSE BILL NO. 1637

Introduced by HON. LUIS RAYMUND “LRAY” F. VILLAFUERTE, JR.

EXPLANATORY NOTE

The Philippines is considered to be one of the mineral endowed countries in the world
Yet, the over-all contribution of metallic mining to our Gross Domestic Product (GDP)
is as small as less than half a percent on average in the last five years. This fact alone
begs for a revised mining tax structure that provides for a better revenue sharing
between the mining industry and the government.

However, the revision of our existing mining taxes should consider the over-all
intention of our government to reform our existing tax regimes. For example, the new
mining tax structure has to necessarily address the doubling of the Excise Tax from
2% to 4% of gross revenue as a result of the TRAIN law, which has in fact already
adversely affected mining operations.

Moreover, this proposal does away with small-scale mining operations as it would be
too complex to cover. It also does not include non-metallic producers to be consistent
as well with the government's Build Build Build program. For example, quarry
operators for limestone and aggregates are necessary for cement production. To
include these would simply result in further inflationary pressures on the economy.

Based on the foregoing, and over and above the doubling of Excise Tax Rate to 4%,
this measure proposes the following:

A margin based Royalty applied to net income from mining operators at a rate of
1% to 5%, and applicable to all metallic operations outside of mineral
reservations.

As previously mentioned, this proposal already considers other impositions. The
application of 5% Royalty across the board, on top of other impostions, would bring
the total to above 10%.

In addition, a margin-based Royalty applied to income is the same structure that is
used by large mining countries such as Chile, Peru, South Africa and Canada. In fact,


the proposed rate still results in a higher Average Effective Tax Rate (AETR) of 78.1%
compared to the aforementioned major mining countries.

This proposal likewise anticipates the impending passage of TRABAHO Bill, in which
there will be no incentives at all for the mining industry should it not be included in the
Strategic Investments Priority Plan.

This representation believes that this measure is a step towards furthering quality
investments in the mineral sector and preventing closure of big operations by
providing a tax scheme that is internationally competitive.

The approval of this bill is earnestly sought

LUIS RAY! ID “Lf ” F, VILLAFUERTE, JR.


Republic of the Philippines
HOUSE OF REPRESENTATIVES
Queson City

EIGHTEENTH CONGRESS
First Regular Session

HOUSE BILL No, 1687

Introduced by HON. LUIS RAYMUND “LRAY” F. VILLAFUERTE, JR.

AN ACT
ESTABLISHING A UNIFORM TAXATION OF METALLIC MINING OPERATIONS,
AND FOR OTHER PURPOSES

Be it enacted by the Senate and House of Representatives of the Philippines in
Congress assembled:

SECTION 1. The chapter title of Chapter VII Title VI of the National Internal Revenue
Code of 1997 (NIRC), as amended, is hereby changed to TAXATION OF MINERAL
PRODUCTS.

SECTION 2. A new section designated as Section 151-A under Chapter VII Title VI of
the NIRC, as amended, is hereby inserted and shall read as follows:

“SEC. 151-A. ROYALTY. -

A. FOR ALL METALLIC MINING OPERATIONS OUTSIDE OF MINERAL.
RESERVATIONS. - MINING CONTRACTORS OF METALLIC MINING
OPERATIONS OUTSIDE OF MINERAL RESERVATIONS SHALL PAY TO THE
GOVERNMENT A MARGIN-BASED ROYALTY ON INCOME FROM MINING
OPERATIONS IN ACCORDANCE WITH THE FOLLOWING TABLE:

| MARGIN ROYALTY
[4% up to 10% 1.00%

above 10% up to 20% | 1.50%

above 20% up to 30% | 2.00%

above 30% up to 40% | 2.50%
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(3) “INCOME FROM MINING OPERATIONS” SHALL MEAN THE GROSS OUT
PUT LESS DEDUCTIBLE EXPENSES, WHICH INCLUDE:

(a) MINING, MILLING, TRANSPORT AND HANDLING EXPENSES
TOGETHER WITH SMELTING AND REFINING COSTS OTHER THAN
SMELTING AND REFINING COSTS PAID TO THIRD PARTIES;

(b) GENERAL AND ADMINISTRATIVE EXPENSES ACTUALLY INCURRED BY
THE MINING CONTRACTOR IN THE PHILIPPINES;

(c) ENVIRONMENTAL EXPENSES OF THE MINING CONTRACTOR,
INCLUDING SUCH EXPENSES NECESSARY TO FULLY COMPLY WITH
ITS ENVIRONMENTAL OBLIGATIONS AS STIPULATED IN THE
ENVIRONMENTAL PROTECTION PROVISION OF THE MINERAL
AGREEMENT OR FTAA AND IN THE APPLICABLE IMPLEMENTING
RULES AND REGULATIONS;

(d) EXPENSES FOR THE DEVELOPMENT OF HOST AND NEIGHBORING
COMMUNITIES AND FOR THE DEVELOPMENT OF GEOSCIENCES AND
MINING TECHNOLOGY, INCLUDING TRAINING COSTS AND EXPENSES
AS STIPULATED IN THE MINERAL AGREEMENT OR FTAA AND IN THE
APPLICABLE IMPLEMENTING RULES AND REGULATIONS;

(e) ROYALTY PAYMENTS TO CLAIMOWNERS OR SURFACE LAND
OWNERS RELATING TO THE CONTRACT AREA DURING THE
OPERATING PERIOD, IF ANY;

(f) CONTINUING EXPLORATION AND DEVELOPMENT EXPENSES WITHIN
THE CONTRACT AREA AFTER THE PRE-OPERATING PERIOD;

(g) INTEREST EXPENSES CHARGED ON LOANS OR SUCH OTHER
FINANCING RELATED EXPENSES INCURRED BY THE MINING
CONTRACTOR SUBJECT TO THE FINANCING REQUIREMENT IN THE
MINERAL AGREEMENT OR FTAA, WHICH SHALL NOT BE MORE THAN
THE PREVAILING INTERNATIONAL RATES CHARGED FOR SIMILAR
TYPES OF TRANSACTIONS AT THE TIME THE FINANCING WAS


ARRANGED, AND WHERE SUCH LOANS ARE NECESSARY FOR THE
OPERATION;

(hb) DEPRECIATION, DEPLETION, AND AMORTIZATION;
(i) TAXES, DUTIES, FEES, AND CHARGES.

(@) ALL OTHER COSTS AND EXPENSES RELATED TO MINING
OPERATIONS AND SALE OF MINERALS AND MINERAL PRODUCTS.

(4) ‘MINING CONTRACTOR’ SHALL MEAN A QUALIFIED PERSON ACTING
ALONE OR IN CONSORTIUM WHO IS A PARTY TO AMINERAL AGREEMENT
OR FINANCIAL OR TECHNICAL ASSISTANCE AGREEMENT (FTAA)

EACH MINING OPERATIONS, WHICH ARE SUBJECT TO A MINERAL AGREEMENT
OR FTAA, SHALL BE TREATED AS A SEPARATE TAXABLE ENTITY. A MINING
CONTRACTOR SHALL BE TREATED AS IF A SEPARATE TAXPAYER WITH
RESPECT TO EACH AND EVERY MINERAL AGREEMENT OR FTAA IT HOLDS OR
IS A PARTY TO.

IF A MINERAL AGREEMENT OR FTAA IS RENEWED, THE RENEWAL SHALL BE
TREATED AS PART OF THE ORIGINAL AGREEMENT.”

SECTION 3. A new section designated as Section 151-B under Chapter VII Title VI of
the NIRC, as amended, is hereby inserted and shall read as follows:

"SEC. 151-B. WINDFALL PROFITS TAX -

(A) IN ADDITION TO THE TAXES IMPOSED UNDER THIS CODE, THERE IS
HEREBY IMPOSED FOR EACH TAXABLE YEAR A MARGIN-BASED
WINDFALL PROFITS TAX ON INCOME FROM MINING OPERATIONS
BEFORE CORPORATE INCOME TAX, IN ACCORDANCE WITH THE
FOLLOWING TABLE, PROVIDED THAT IT SHALL BE DEDUCTIBLE FROM
TAXABLE INCOME, AS DEFINED IN SECTION 31, CHAPTER V, TITLE II OF
THIS CODE:


MARGIN ] RATE
more than 35% upto 40% | 1%

more than 40% to 45% | 2%
more than 45% to 50% [3%
more than 60% to 55% a
more than 55% to 60% 5%

more than 60% to 65% 6%
[more than 65% to 70% T%

more than 70% to 75% 8%
more than 75% to 80% 9%
more than 80% 10%

SECTION 4. The NIRC, as amended, is hereby further amended by introducing a new
Paragraph (4) under Section 34 (B), Chapter VII, Title Il, which shall read as follows:

(4) LIMITATION OF INTEREST EXPENSE DEDUCTIONS FOR MINING
CONTRACTORS

i)

IF AMINING CONTRACTOR HASA DEBT-TO-EQUITY RATIO IN
EXCESS OF 3 TO 1 ATANY TIME DURING A TAXABLE YEAR,
A DEDUCTION IS DISALLOWED AS A TAX-DEDUCTIBLE
EXPENSE FOR THE INTEREST PAID BY THE MINING
CONTRACTOR DURING THAT YEAR ON THAT PART OF THE
DEBT THAT EXCEEDS THE 3 TO 1 RATIO FOR THE PERIOD
THE RATIO WAS EXCEEDED.

IF THE DEBT-TO-EQUITY RATIO OF A MINING CONTRACTOR
EXCEEDS 3 TO 1 FOR AN INCOME YEAR, SUBSECTION (1)
DOES NOT APPLY IF, AT ALL TIMES, DURING THE YEAR, THE
AMOUNT OF THE DEBT OF THE MINING CONTRACTOR DOES
NOT EXCEED THE ARM'S LENGTH DEBT AMOUNT.

IN THIS SECTION -

"ARM'S LENGTH DEBT AMOUNT’, IN RELATION TO A MINING CONTRACTOR,
MEANS THE AMOUNT OF DEBT THAT A BANK THAT IS NOT AN ASSOCIATE OF


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ALLOTMENT, HAVE A SHARE OF FIFTY PERCENT (50%) OF THE GROSS.
COLLECTION DERIVED BY THE NATIONAL GOVERNMENT FROM THE
PRECEDING FISCAL YEAR FROM EXCISE TAXES ON MINERAL PRODUCTS,
ROYALTIES, AND SUCH OTHER TAXES, FEES OR CHARGES, INCLUDING
RELATED SURCHARGES, INTERESTS OR FINES, AND FROM ITS SHARE IN ANY
COPRODUCTION, JOINT VENTURE OR PRODUCTION SHARING AGREEMENT
IN THE UTILIZATION AND DEVELOPMENT OF THE NATIONAL WEALTH WITHIN
THEIR TERRITORIAL JURISDICTION.”

SECTION 6. Pollution contro! devices. - Pollution control devices acquired,
constructed or installed by mining contractors shall not be considered as
improvements on the land or building where they are placed, and shall not be subject
to real property and other taxes or assessments: Provided, however, that payment of
mine wastes and tailings fees is not exempted.

SECTION 7. Depreciation of Properties Used in Mining Operations. - An allowance

for depreciation in respect of all properties used in mining operations, shall be
computed as follows:

(a| At the normal rate of depreciation if the expected life is ten (10) years or less;
or

(b) Depreciated over any number of years between five (5) years and the
expected life if the latter is more than ten (10) years, and the depreciation
thereon allowed as deduction from taxable income: Provided, That the
contractor notifies the Commissioner at the beginning of the depreciation
period which depreciation rate allowed by this Section will be used.

SECTION 8. The fiscal regime and revenue sharing arrangement provided herein and
the applicable terms and conditions provided under existing laws shall be embodied
in the mineral agreements and FTAAs entered into by the government.

SECTION 9. Valid mineral agreements and FTAAS existing prior to the effectivity of
this Act shall continue to be governed by their respective terms and conditions,


including their recovery period in fiscal regimes, unless such mineral agreements and
FTAAs expressly provide that any terms and conditions resulting from repeal or
amendment of any existing laws or regulations or from the enactment of a new law or
regulation shall be considered a part of said mineral agreement and FTAAs, Provided,
further, that the application of the provisions of this Act to existing mineral agreements
and FTAAs shall not have the effect of impairing or reducing vested rights

SECTION 10. Implementing Rules and Regulations. - The Department of Finance,
in consultation with other concerned government agencies, shall, within ninety (90)
days from the effectivity of this Act, promulgate rules and regulations to implement the
intent and provisions of this Act.

SECTION 11. Separability Clause. - Should any provision herein be declared

unconstitutional, the same shall not affect the validity of the other provisions of this
Act.

SECTION 12. Repealing Clause. — All laws, decrees, orders, rules, and regulations
or other issuances or parts inconsistent with the provisions of this Act are hereby
repealed, amended, or modified accordingly.

SECTION 13. Effectivity Clause. - This Act shall take effect in fifteen (15) days after

publication in the Official Gazette or in one (1) newspaper of general circulation in the
Philippines.

Approved,