Republic of the Philippines fy’ RECEIVED <A
House of Representatives [= oare, 01 AUS 2
Quezon City te
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Seventeenth Congress “ Ry
‘Third Regular Ts ss
House Bill No.

Introduced by Representative Estrellita B. Suansing
EXPLANATORY NOTE

The Philippines is an economy with abundant natural resources.
According to Asian Development Bank, the country is considered to be the
fifth most mineral endowed-country in the world. However, the overall
contribution of metallic mining to the gross domestic product (GDP) is small
at less than half a percent on average in the last five years!

‘The significant contribution of mining industry to national economy is
dependent upon the public policies implemented. Mining policies should allow
the industry to improve as well its contribution to economic growth and
development. The issuance of the Executive Order (EO) No. 79 set the platform
for reform including the amendment to the mining fiscal regime. EO 79
recognizes the need to increase the contribution of the revenues from the
mining industry as it mandates for a new law on mining fiscal regime to take
effect before granting mining permits to new and pending applicants. The
issuance of EO 79, therefore, is a catalyst to a more equitable sharing of
revenue between the industry and the government. It signals the need to
formulate an updated mechanism in promoting the social and economic
welfare of the country through a new legislation rationalizing existing fiscal
regime.

Presently, for large mines, mining contracts offer varying fiscal regimes
and therefore fiscal burden are differentiated. The fiscal regime depends on
whether the mine is operating in a mineral reservation and whether the mine
is operated under a Mineral Production Sharing Agreement (MPSA) or
Financial and Technical Assistance Agreement (FTAA). To date almost all
mining contracts are under MPSA, while those in mineral reservations are
composed mainly of nickel mines. All FTAA agreements are for mines outside
mineral reservations.

The complex and differentiated fiscal regime currently accorded to
mining sector is the reason for this proposed bill. A rationalized and a single

‘Source: The Fourth PH-EITI Report_December 2017



fiscal regime applicable to all mineral agreements and FTAA is sought as it
promotes fairness. The proposal under this bill shall be applicable to all
existing and prospective large metallic, non-metallic, and small-scale mines,
and shall be applied to all mines regardless of whether the mine is located
outside or inside a mineral reservation. This should be viewed as a package
where it is structured to satisfy the objectives of government for a reasonable
increased share without compromising the mining sector's need for
reasonable return on its investment.

Royalties are compensations to the State by mining companies for the
minerals that they extract as anchored under Section 2, Article XII of the
Philippine Constitution which provides that all lands of the public domain
with the emphasis that forest or timber, mineral lands, and all other natural
resources must remain with the State, except for agricultural lands which
alone may be alienated. Also, royalty as proposed secures revenue for the
government as soon as production commences as is easy to administer.
Notingly, the proposal retains the royalty rate of 5 percent for those currently
located inside a mineral reservation, and a phased-in rate for those outside
mineral reservation, to wit:

1. On the first three years upon the effectivity of this Act, three percent
(3%);

2. On the fourth year, four percent (4%);

3. On the fifth year and thereafter, five percent (5%).

The bill proposes to retain the imposition of the corporate income tax
(CIT) on the mining sector to level the playing field among all other sectors. It
is also proposed to impose an additional government share when the basic
government share is less than fifty percent (50%) of the net mining revenue.
The government currently gets an additional share under the FTA fiscal
regime only.

Further, thin capitalization will be introduced in order for the
businesses not to depend on excessive debt funding which would result in
high interest expense deductions, and thereby reducing corporate tax liability.
Furthermore, for the government to maximize its share, ring-fencing per
project is proposed. This is to prevent consolidation of income and expenses
of all mining projects by the same taxpayer, hence losses from other mining
projects could not be deducted from more profitable projects.

In light of the foregoing, the passage of this bill is earnestly sought.

ESTRELLITA B. SUANSING


Republic of the Philippines
House of Representatives
Quezon City

Seventeenth Congress
Third Regular Session

House Bill no. __?994

Introduced by Representative Estrellita B. Suansing

AN ACT
AMENDING CHAPTER VII TITLE VI AND SECTION 151, AND CREATING
NEW SECTIONS 151-A AND 151-B, OF REPUBLIC ACT NO. 8424,
OTHERWISE KNOWN AS THE NATIONAL INTERNAL REVENUE CODE OF
1997, AS AMENDED, AND FOR OTHER PURPOSES

Be it enacted by the Senate and the 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. The section title of Section 151 of the NIRC, as amended, is
hereby changed to EXCISE TAX ON MINERAL PRODUCTS.

SECTION 3. 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) ROYALTY RATES. - MINING CONTRACTORS FOR ALL
METALLIC AND NON-METALLIC MINING OPERATIONS,
WHETHER LARGE-SCALE OR SMALL-SCALE, SHALL PAY
TO THE GOVERNMENT A ROYALTY EQUIVALENT TO:

(1) IF WITHIN MINERAL RESERVATIONS, FIVE
PERCENT (5%) OF THE MARKET VALUE OF THE
GROSS OUTPUT OF THE MINERALS/MINERAL
PRODUCTS EXTRACTED OR PRODUCED BY THE
MINING OPERATIONS EXCLUSIVE OF ALL OTHER
TAXES;

(2) IF OUTSIDE MINERAL RESERVATIONS:


(a) ON THE FIRST THREE (3) YEARS UPON THE
EFFECTIVITY OF THIS ACT, THREE PERCENT
(3%);

(b) ON THE FOURTH YEAR, FOUR PERCENT (4%);
AND

(c) ON THE FIFTH YEAR AND THEREAFTER, FIVE
PERCENT (5%).

(B) FOR PURPOSES OF THIS SECTION —

()

(2)

(3)

‘GROSS OUTPUT’ SHALL MEAN THE ACTUAL
MARKET VALUE OF MINERALS OR MINERAL
PRODUCTS FROM EACH MINE OR MINERAL LAND
OPERATED AS A SEPARATE ENTITY, WITHOUT ANY
DEDUCTION FOR MINING, PROCESSING, REFINING,
TRANSPORTING, HANDLING, MARKETING OR ANY
OTHER EXPENSES: PROVIDED, THAT OF THE
MINERALS OR MINERAL PRODUCTS ARE SOLD OR
CONSIGNED ABROAD BY THE CONTRACTOR
UNDER C.I.F. TERMS, THE ACTUAL COST OF
OCEAN FREIGHT AND INSURANCE SHALL BE
DEDUCTED: PROVIDED, FURTHER, THAT IN THE
CASE OF MINERAL CONCENTRATES WHICH ARE
NOT TRADED IN COMMODITY EXCHANGES IN THE
PHILIPPINES OR ABROAD, SUCH AS COPPER
CONCENTRATES, THE ACTUAL MARKET VALUE
SHALL BE WORLD PRICE QUOTATIONS OF THE
REFINED MINERAL PRODUCTS CONTENT THEREOF
PREVAILING IN THE SAID COMMODITY
EXCHANGES, AFTER DEDUCTING THE SMELTING,
REFINING, ‘TREATMENT, INSURANCE,
‘TRANSPORTATION AND OTHER CHARGES
INCURRED IN THE PROCESS OF CONVERTING
MINERAL CONCENTRATES INTO REFINED METAL
TRADED IN THOSE COMMODITY EXCHANGES.

‘MINING CONTRACTOR’ SHALL MEAN A QUALIFIED
PERSON ACTING ALONE OR IN CONSORTIUM WHO
IS A PARTY TO A MINERAL 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 4. 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. ADDITIONAL GOVERNMENT SHARE. -

(A) IN ADDITION TO THE TAXES IMPOSED UNDER THIS
CHAPTER, THERE IS HEREBY IMPOSED FOR EACH
TAXABLE YEAR AN ADDITIONAL GOVERNMENT SHARE
WHICH SHALL BE THE AMOUNT TO BE PAID BY THE
MINING CONTRACTOR WHEN THE BASIC GOVERNMENT
SHARE IS LESS THAN FIFTY PERCENT (50%) OF THE NET
MINING REVENUE. THE ADDITIONAL GOVERNMENT
SHARE SHALL BE THE DIFFERENCE BETWEEN THE 50%
OF NET MINING REVENUE AND THE BASIC GOVERNMENT
SHARE DURING THE CALENDAR YEAR.

(B) FOR PURPOSES OF THIS SECTION ~

(1) THE ‘BASIC GOVERNMENT SHARE’ SHALL
CONSIST OF ALL DIRECT TAXES, ROYALTIES, FEES
AND RELATED PAYMENTS REQUIRED BY EXISTING
LAWS, RULES AND REGULATIONS TO BE PAID BY
THE CONTRACTOR. IT SHALL BE THE MINIMUM
SHARE THAT THE GOVERNMENT SHALL RECEIVE
DURING ANY CALENDAR YEAR. THE FOLLOWING
NATIONAL AND LOCAL TAXES, ROYALTIES AND
FEES PAID BY THE CONTRACTOR TO THE
GOVERNMENT DURING A CALENDAR YEAR
CONSTITUTE THE BASIC GOVERNMENT SHARE:

(a) CONTRACTOR'S INCOME TAX;

(b) CUSTOMS DUTIES AND FEES ON
IMPORTED CAPITAL EQUIPMENT;

(c) VALUE-ADDED TAX ON IMPORTED GOODS
AND SERVICES;


(2)

(4) WITHHOLDING TAX ON __ INTEREST
PAYMENTS ON FOREIGN LOANS;

(e) WITHHOLDING TAX ON DIVIDENDS TO
FOREIGN STOCKHOLDERS;

() DOCUMENTARY STAMPS TAXES;

(g) CAPITAL GAINS TAX;

(h) EXCISE TAX ON MINERALS;

() | ROYALTIES FROM MINING OPERATIONS
AND TO INDIGENOUS PEOPLES, IF
APPLICABLE;

() LOCAL BUSINESS TAX;

(k) REAL PROPERTY TAX;

() | COMMUNITY TAX;

(m) OCCUPATION FEES;

(n) REGISTRATION AND PERMIT FEES; AND

(0) ALL OTHER NATIONAL AND LOCAL
GOVERNMENT TAXES, ROYALTIES, AND
FEES AS OF THE EFFECTIVE DATE OF THE
MINERAL AGREEMENT OF FTAA.

RELATED PAYMENTS MADE BY THE CONTRACTOR
FOR SPECIAL ALLOWANCE AND ROYALTY TO
INDIGENOUS PEOPLES OR INDIGENOUS CULTURAL
COMMUNITIES, IF APPLICABLE, AND WHICH ARE
SUBJECT OF AGREEMENTS ENTERED INTO BY AND
BETWEEN THE CONTRACTOR AND CONCERNED
INDIVIDUALS OR PRIVATE PARTIES, AND WERE
DULY APPROVED BY THE GOVERNMENT, SHALL BE
CONSIDERED AS PART OF THE _ BASIC
GOVERNMENT SHARE.

ANY VALUE-ADDED TAX ON EXPORTED PRODUCTS
REFUNDED BY OR _ CREDITED TO THE
CONTRACTOR SHALL NOT FORM PART OF THE
BASIC GOVERNMENT SHARE.

THE ‘NET MINING REVENUE’ SHALL MEAN THE
GROSS OUTPUT LESS DEDUCTIBLE EXPENSES.

THE FOLLOWING CASH EXPENSES SHALL BE
ALLOWED FOR DEDUCTION FROM THE GROSS
OUTPUT TO DETERMINE THE NET MINING
REVENUE:


(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
CONTRACTOR IN THE PHILIPPINES;

(c) ENVIRONMENTAL EXPENSES OF THE
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 CLAIM OWNERS
OR SURFACE LAND OWNERS RELATING
TO THE CONTRACT AREA DURING THE
OPERATING PERIOD, IF ANY;

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

(g) INTEREST EXPENSES CHARGED ON
LOANS OR SUCH OTHER FINANCING-
RELATED EXPENSES INCURRED BY THE
CONTRACTOR SUBJECT TO THE


FINANCING REQUIREMENT IN THE 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.

SECTION 5. The NIRC, as amended, is hereby further amended by
introducing a new Paragraph (4) under Section 34 (B), Chapter VII, Title II,
which shall read as follows:

“(4) LIMITATION OF INTEREST EXPENSE DEDUCTIONS FOR
MINING CONTRACTORS

(i) IF AMINING CONTRACTOR HAS A DEBT-TO-EQUITY
RATIO IN EXCESS OF 1.5 TO 1 AT ANY TIME DURING
A TAXABLE YEAR, A DEDUCTION IS DISALLOWED
FOR THE INTEREST PAID BY THE CONTRACTOR
DURING THAT YEAR ON THAT PART OF THE DEBT
THAT EXCEEDS THE 1.5 TO 1 RATIO FOR THE
PERIOD THE RATIO WAS EXCEEDED.

(ii) IF THE DEBT-TO-EQUITY RATIO OF A MINING
CONTRACTOR EXCEEDS 1.5 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 CONTRACTOR DOES NOT EXCEED
THE ARM’S LENGTH DEBT AMOUNT.

(iii) 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
THE CONTRACTOR WOULD BE PREPARED TO LEND
TO THE CONTRACTOR HAVING REGARD TO ALL
THE CIRCUMSTANCES OF THE CONTRACTOR;

‘ASSOCIATE’, IN RELATION TO A PERSON, MEANS
ANY OTHER PERSON WHO ACTS OR MAY ACT IN
ACCORDANCE WITH THE DIRECTIONS, REQUESTS,
SUGGESTIONS, OR WISHES OF THE FIRST-


MENTIONED PERSON, AND THE FIRST-MENTIONED
PERSON IS AN ASSOCIATE OF THE SECOND-
MENTIONED PERSON;

‘DEBT’, IN RELATION TO A CONTRACTOR, MEANS
THE GREATEST AMOUNT, AT ANY TIME DURING AN
INCOME YEAR, OF THE DEBT OBLIGATIONS OF THE
CONTRACTOR ON WHICH INTEREST IS PAYABLE AS
DETERMINED ACCORDING TO INTERNATIONAL
FINANCIAL REPORTING STANDARDS;

‘DEBT OBLIGATION’ MEANS AN OBLIGATION TO
MAKE A REPAYMENT OF MONEY TO ANOTHER
PERSON, INCLUDING AN OBLIGATION ARISING
UNDER A PROMISSORY NOTE, BILL OF EXCHANGE,
OR BOND, BUT NOT INCLUDING ACCOUNTS
PAYABLE OR AN OBLIGATION TO MAKE A
REPAYMENT OF MONEY IN RESPECT OF WHICH NO
INTEREST IS PAYABLE;

‘EQUITY’, IN RELATION TO A CONTRACTOR, MEANS
THE GREATEST AMOUNT, AT ANY TIME DURING AN
INCOME YEAR, OF THE EQUITY OF THE
CONTRACTOR AS DETERMINED ACCORDING TO
INTERNATIONAL FINANCIAL REPORTING
STANDARDS AND INCLUDES AN OBLIGATION TO
MAKE A REPAYMENT OF MONEY IN RESPECT OF
WHICH NO INTEREST IS PAYABLE.

SECTION 6. 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 7. Valid mineral agreements and FTAAs existing prior to the
effectivity of this Act that do not 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, shall continue to be
governed by their existing terms and conditions.

SECTION 8. 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 9. Repealing Clause. - All laws, decrees, executive orders,
rules and regulations, or parts thereof, which are contrary to or
inconsistent with this Act are hereby repealed, amended or modified
accordingly.

SECTION 10. Separability Clause. - If any provision of this Act is
declared unconstitutional or invalid, other parts or provisions hereof
not affected thereby shall continue to be in full force and effect.

SECTION 11. Effectivity. - This Act shall take effect fifteen (15) days
after its publication in the Official Gazette or in a newspaper of general
circulation in the Philippines.

Approved,