"That is only part of the story as far as the Malampaya Project is concerned."
P146 billion is the amount ordered by the Commission on Audit to be reimbursed to the government by the foreign contractors, Shell Exploration B. V. (SPEX) and Chevron Malampaya LLC, operating the Malampaya Deepwater Gas-to-Power Project, one of the biggest industrial projects in the country, for underpayments of the government’s share in the project’s net earnings since its operation in 2001.
This amount is as of January 24 this year. It is bound to increase annually until the end of the concession period less than 10 years from now. Unless the Supreme Court and the arbitration tribunals in Singapore and Washington DC decide otherwise in the cases which SPEX and Chevron filed contesting the 2015 COA ruling ordering them to pay P53 billion in income taxes which were heretofore absorbed by government on the mistaken notion, as now ruled by the auditors, that it forms part of government’s 60-percent share in the project’s net earnings.
Since 2001, the contractors have passed on, as it were, and insisted that their income tax payments form part of the government’s share. Indeed, the Arroyo and PNoy administrations actually supported the contractors’ claim that the deduction of income taxes from the government’s share was a “.. tax assumption, not a tax exemption,” since the provision governing their case, Section 12 (b) of PD 87 issued by then President Marcos specified that the contractor is granted “…exemption from all taxes except income tax..”. This thinking was reinforced by a legal opinion issued by the lawyers of the Petroleum Association of the Philippines, but of course, that the corporate income taxes was “supposed to be taken from the government’s 60-percent share rather than from the contractor’s 40-percent share of net earnings “in consideration of the huge investments they injected to make the project a reality. Why the past administrations allowed themselves to be suckered into this highly irregular proposition is beside me. But that is another story. What is important is the auditors flatly rejected this pro-contractors’ proposition.
Said COA: “There is no provision in the law which specifically provides that the income taxes of the contractors will be part of the government. PD 87 and 1459 issued during the Marcos administration ere clear that the minimum government share was 60 percent of the net earnings of the Malampaya gas project. It can go up but it cannot go down without violating the law.”
Indeed, the COA clarified that under Section 8(2) of PD 87, it was made clear that the contractors’ service fee “shall not exceed 40 percent of the balance of the gross income” after the required deductions, including Filipino participation incentives and operating expenses.
Thus, the auditing body insisted that the contractors’ income taxes should not have been passed on to the government as “it decreased its share from the project to 34.03 percent while the contractors’ share increased to 65.97 percent.”
But that is only part of the story as far as the Malampaya Project is concerned. Service Contract 38 under which it the foreign contractors undertook the project and its subsequent interpretations including opinions and related implementation instruments are “awash with stories of fraud, abuse of political power, usurpation of authority, illegal arrangements and, worse, violation of the Constitution.” (To be continued)
