CTRP PACKAGE 2+ AND THE PENDING MINING TAX BILLS
By: Euney Marie J. Mata-Perez on August 22,2019
With the passage of Republic Act 11346, which increases the excise tax on tobacco products to P45 per pack by 2020 from the current P35, Congress is quickly working on the passage of the other bills comprising the so-called Package 2+ of the Comprehensive Tax Reform Program (CTRP).
Package 2+ of the CTRP includes proposed reforms on mining and sin taxes, all aimed to generate additional revenues, and make the tax system simpler, fairer, and more efficient. The goal is also to align with President Duterte’s priority programs on social and environmental protection.
Last Tuesday, the House of Representatives passed by third and final reading House Bill (HB) 1026 which seeks to amend the Tax Code (Republic Act 8424, as amended) by raising the excise tax rates on alcohol products, heated tobacco and vapor products. The Committee on Ways and Means Chairman, Rep. Joey Salceda, the principal author of HB 1026, said the excise taxes on vapor products will generate P800 million in revenue to the government.
Expectedly, the House of Representatives no longer conducted extensive discussions on HB 1026 because counterpart version passed third reading in the previous 17th Congress.
The last batch of amendments of Package 2+ are the proposed amendments to the excise taxation of mineral products. As of writing this article, there are five new bills filed in the 18th Congress on these amendments. These are Senate Bill (SB) 240 (by Sen. Tito Sotto), SB 313 (by Sen. Migz Zubiri), House Bill ( HB) 560 (by Rep. Rodrigo Abellanosa), HB 2557 (by Rep. Sharon Garin), and HB 288 (by Rep. Horacio and Rep. Estrellita Suansing)
SB 240 of Sen. Sotto is faithful to the original proposal filed in the 17th Congress (SB 1979) to impose a new 5 percent royalty on all metallic and non-metallic minerals, whether small- or large-scale mines, and whether inside or outside mineral reservations, in a new Section 151-A of the Tax Code. The royalty tax on those outside the mineral reservations is imposed gradually for a 5-year period, starting at a 3 percent rate for the first 3 years, 4 percent on the 4th year and 5 percent on the 5th year onwards. It also proposes the imposition of an additional government share which shall be the amount to be paid by the mining contractor when the basic government share is less than 50 percent of the net mining revenue, as an amendment to new Section 151-A of the Tax Code.
SB 313 of Sen. Zubiri, on the other hand, presents a different regime. It distinguishes large scale mining operations from small scale mining operations. It imposes a margin-based royalty tax ranging from 1 percent to 5 percent % on all large-scale metallic mining operations outside of mineral reservations. (Margin is defined as the ratio of income from mining operations before corporate income tax to gross output).
For large-scale metallic mining operations within mineral reservations, SB 313 proposes a royalty equivalent to 3 percent based on the gross output of the minerals or mineral products extracted or produced by the mining operations.
For small-scale metallic mining operations within or outside mineral reservations, it proposes the imposition of a royalty equivalent to 1/10 of 1 percent of gross output. It also imposes a margin-based “windfall profits tax”, at rates ranging from 1 percent to 10 percent, depending on margins.
HB 288, 560 and 2557 basically track SB 313, except that they include non-metallic mining operations in the imposition.
All these bills though seek to impose thin capitalization and ring-fencing provisions to control tax avoidance. Thin capitalization provisions seek to put a limit on the excessive debt funding of businesses in their operations, which would result in high interest expense deductions and thereby reducing corporate income tax liability. Ring-fencing provisions, on the other hand, prevent consolidation of income and expenses of all mining projects by the same taxpayer, resulting in losses from other mining projects.
As we have mentioned in an earlier article, there should be a valid distinction between non-metallic and metallic mining operations, as such operations are entirely different from each other as to the nature, use, importance and end-consumers of minerals produced.
Metallic minerals are usually high-end and require further processing, such as smelting, etc. Such processes generally create more wastes. In contrast, non-metallic minerals usually require no further processing, other than crushing or grinding, to make them useful. These non-metallic minerals are used in the manufacture of different domestic products, such as cement (which is highly composed of limestone, shale and silica), fertilizers (which uses limestone, phosphate and pozzolan) and soap (sulphur). Silica together with limestone is also used for water filtration.
Also, it goes without saying that there is a large difference between large-scale and small-scale mining operations.
Considering the disparity of the pending measures on the imposition of new mineral excise taxes, we do not expect that a final bill will be approved as swiftly as the bill for the alcohol excise taxes. We do believe though that for taxes on minerals, valid distinctions should be made between large-scale and small-scale mining operations, as well as those for metallic and non-metallic mining operations.