The Department of Energy (DOE) lauded the Supreme Court’s ruling that the government’s 60-percent share from the Malampaya Natural Gas Project includes the income taxes of its private contractors.
It said the decision promotes investment stability in the country.
Energy Secretary Sharon Garin said over the weekend that the high court’s ruling would encourage further investment in the country’s petroleum and gas exploration sector.
“We’re happy that the issue has been resolved because it gives stability and security to the exploration of our investors. So it will encourage more,” Garin said, adding that the clarity provided by the decision would attract more investors.
The landmark decision overturned previous rulings by the Commission on Audit (COA), which had held contractors Shell Exploration B.V., PNOC Exploration Corporation and Chevron Malampaya LLC liable for failing to remit P53.14 billion in income taxes to the government from 2002 to 2009. The Supreme Court’s ruling absolves the contractors of the liability.
The high tribunal upheld a provision of the Oil Exploration and Development Act (Presidential Decree No. 87), which states that income taxes paid by or on behalf of the contractors are included in the government’s 60-percent share of net proceeds from petroleum operations.
The ruling said that while contractors are still liable for income tax, the government pays it on their behalf as part of its share in the project’s income, a provision designed to encourage private investment in petroleum exploration.
The ruling also respected an earlier arbitral award from the International Chamber of Commerce (ICC), which upheld the validity of the tax assumption provision in the Service Contract.
The Supreme Court said the COA committed grave abuse of discretion when it declared that the Malampaya project contractors should be held liable for their failure to remit the income taxes. The decision, penned by Associate Justice Japar Dimaampao, overturned the COA’s April 6, 2015 decision and Jan. 24, 2018 resolution.
“The Court is on all fours with COA to zealously ensure that the Government is never placed at a disadvantage and that it rightfully receives what is due it in all its transactions,” the Supreme Court said.
“Nevertheless, remaining bound by the Constitution and the laws of the land, the Government cannot be allowed to renege on its obligation, especially when such has been distinctly outlined in the contract it freely entered into and agreed to,” it said.
Court records showed that in 1990, the government signed a service contract with the three companies for the Malampaya Project. Under the contract, the contractors should remit 60 percent of the project’s net proceeds to the government, and this share was stated to cover the contractors’ income taxes from 2002 to 2009.
After a post-audit, the COA found that P53.14 billion in income taxes had been deducted from the government’s share. COA ruled that the contractors were liable, arguing there was no law explicitly stating their income taxes should be part of the government’s share. The contractors then challenged the COA ruling before the Supreme Court.
While the case was pending, the International Chamber of Commerce issued an arbitral award upholding the validity of the tax assumption provision in the service contract.
Resolving the petitions, the Supreme Court cited Presidential Decree No. 87, which states that income taxes paid by or on behalf of the contractors are included in the government’s guaranteed 60% share of net proceeds. It also noted that the law provides for the government assuming and paying the contractors’ income taxes to encourage private investment.
The Supreme Court pointed out that this provision was reiterated in Presidential Decrees No. 1206 and No. 1459, confirming that the government’s share includes all taxes. The Court clarified that tax assumption is not tax exemption, as contractors are still liable for income tax, but the government pays it on their behalf as part of its share.
The court noted its respect for the ICC’s arbitral ruling but added that it would have reached the same conclusion based on its own review.
