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Final EITI Legal Framework Study

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LEGAL FRAMEWORK GOVERNING THE EXTRACTIVES INDUSTRIES AND

TRANSPARENCY

EITI PHILIPPINES1

I. Introduction

The Philippines, subject to reasonable conditions prescribed by law, adopts a policy of full

public disclosure of all its transactions involving public interest.2 Among the transactions

that the government enters into involve agreements relating to the exploration,

development, and utilization of minerals, coal, and petroleum.3 These transactions are

regarded with public interest not only because these involve the State’s acts of dominion of

public resources, but also because of their strong potential to generate revenues that the

government could use to enhance national development, and at the same time, because of

their impact on the welfare of communities and the environment.

In order to improve transparency, accountability, and governance in the coal, petroleum,

and mining sector, the Philippine government made its commitment in 2012 to participate

in the Extractive Industries Transparency Initiative (EITI), a set of international standards

for transparency and accountability in the extractive industries and in government.4 In

2013, the President instituted the Philippine EITI, which would be implemented through a

multi-stakeholder group (MSG) and a decision-making body (PH-EITI-MSG) chaired by the

Secretary of the Department of Finance (DOF), and assisted by a Secretariat.5

Part of the mandate of the PH-EITI-MSG is to set the strategic direction for effectively

implementing the EITI initiative in the country and to assess and seek the removal of

barriers to its implementation. It is also tasked to produce reports with contextual

information about the extractive industries.6

This paper presents the legal framework governing the extractive industries and

transparency in the Philippines as an input to the work of the PH-EITI-MSG.

1 Prepared by Atty. Brenda Jay Angeles Mendoza for the Multi-Stakeholder Group, EITI Philippines, under contract with the Embassy of Canada, Development Section. 2 CONST. Art.. II, Sec. 28. 3 Rep. Act No. 7942 (1995); Pres. Decree No. 87 (1973); Pres. Decree No. 972 (1976). 4 Exec. Order No. 79 (2012), Sec. 14. 5 Exec. Order No. 147 (2013), Sec. 1-2. 6 Id.,Sec. 4-5.


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II. Natural Resources Governance

The Constitution is the fundamental legal basis of Philippine law and policy. All laws must

conform to the provisions of the Constitution. Thus, Republic Acts passed by Congress,

Executive Orders issued by the Office of the President, Administrative Orders and Circulars

issued by the executive agencies, and decisions of the judiciary must be consistent with the

Constitution.

A. Constitutional Provisions

The 1987 Constitution of the Philippines provides the overall legal framework governing

natural resources in the Philippines. The Constitution adheres to the Regalian Doctrine,

which provides that the State is the owner of all lands of the public domain and natural

resources of the country. Natural resources include waters, minerals, coal, petroleum, and

other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora

and fauna.7

Lands of the public domain are classified into agricultural, forest or timber, mineral lands,

and natural parks.8 Save for agricultural lands of the public domain, all other natural

resources of the country shall not be alienated, which means that the State’s ownership

over these natural resources cannot be conveyed or transferred to other persons.9

However, the State may, under its full control and supervision, allow the exploration,

development, and utilization of natural resources. Natural resource use may be undertaken

directly by the State or it may enter into co-production, joint venture, or production-

sharing agreements with Filipino citizens, or with corporations or associations at least 60%

of whose capital is owned by Filipinos. This may be allowed for a maximum period of 25

years, and may be renewed for another period of not more than 25 years, under such terms

and conditions as may be provided by law.10

As an exception to the 60-40 ownership rule, the President may enter into agreements with

foreign-owned corporations involving either technical or financial assistance for large scale

exploration, development and utilization of minerals, petroleum, and mineral oils. Such

agreements must be made: (a) according to the general terms and conditions provided by

law; and (b) based on real contributions to the economic growth and general welfare of the

7 CONST. Art.. XII, Sec. 2. 8 Id., Art.. XII, Sec. 3. 9 Id., Art.. XII, Sec. 2. 10 Id.


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country. These agreements must also (c) promote the development and use of local

scientific and technical resources.11

Congress may, by legislation, allow small-scale utilization of natural resources by Filipino

citizens.12 In the case of small-scale use of mineral resources, the applicable law is Rep. Act

No. 7076 (1991) or the People’s Small Scale Mining Act.

In allowing the exploration, development, and use of natural resources, two constitutional

rights are considered:

1. Article XII, Section 5 on the protection of the rights of indigenous cultural

communities to their ancestral lands to ensure their economic and social being; and

2. Article II, Sections 16 and 15 on the protection and advancement of the people’s right

to a healthful and balanced ecology and the promotion of the people’s right to

health.

B. Law and Policy (mineral resources)

Rep. Act (RA) No. 7942, otherwise known as the Philippine Mining Act of 1995 (Mining Act),

governs the exploration, development, utilization, and processing of all mineral resources

in the country. The Act promotes mining through joint government and private sector

efforts as a means to enhance national growth and in a manner that effectively safeguards

the environment and protects the rights of affected communities. Together with its

Implementing Rules and Regulations (IRR), the Mining Act defines the agreements for

mineral resources development, provides the requirements for acquiring mining rights,

and outlines the responsibilities of the parties during the term of the mineral agreement.13

From 1936 to 1974, the mining industry was regulated by Commonwealth Act (CA) No. 137,

otherwise known as the Mining Act of 1936.

In 1974, Pres. Decree (PD) No. 463 or the Mineral Resources Development Decree of 1974

was promulgated. The decree adopted an index map that divided the country into

meridional blocks apparently to prevent claims from being located haphazardly. It pushed

claimants to actively develop their claim in order to prevent speculation in mining claims.

There were also provisions in the law that aimed to expedite the processing of claims as

well as those relating to pollution prevention and environmental protection.

11 Id. 12 Id. 13 Rep. Act No. 7942 (1995); DENR Adm. O. No. 2010-21 (2010).


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Among the changes that Pres. Decree No. 463 introduced were as follows:

CA 137 PD 463 A claimant has a preferential right over an area based on discovery, actual occupation, and registration. Minerals are located either as a lode or placer depending on the kind of minerals discovered.

A person’s preferential right over an area is based on the Registration of the Declaration of Location. The classification of location of claims was abolished. Mineral resources are divided into mining claims and quarry resources.

One claim is 9 or 8 hectares depending on whether it is lode or placer; corporations can claim up 9 hectares (lode) and 64 hectares (placer).

One claim or meridional block is 81 hectares more or less.

Maximum area that may be leased in any one province is 1,350 ha. (lode) and 400 ha. (placer) for individuals; and 400 ha. (lode) and 3,250 ha. (placer) for corporations.

Maximum area that may be leased in any one province is 500 hectares for individuals and 5,000 hectares for corporations.

Maximum area that may be leased in the entire country is 500 lode claims.

Maximum area that may be leased in the entire country is 1,000 hectares for individuals and 10,000 hectares for corporations.

Pursuant to the 1987 Constitution, then President Corazon Aquino issued Exec. Order (EO)

No. 279, which authorized the DENR Secretary to negotiate and conclude joint venture, co-

production or production-sharing agreements for the exploration, development and

utilization of mineral resources, and prescribed guidelines for such agreements and those

involving technical or financial assistance by foreign-owned corporations for large-scale

exploration, development and utilization of minerals in the country. Such agreements were

subjected to the President’s approval. The provisions of PD 463 that are not inconsistent

with EO 279 remained in force and effect.

In 1995, Rep. Act No. 7942, entitled “An Act Instituting a New System of Mineral Resources

Exploration, Development, Utilization, and Conservation” or the Philippine Mining Act of

1995, was passed by Congress. The law contains, among others, specific chapters on

exploration permits, mineral agreements, financial or technical assistance agreements,

small-scale mining, quarry resources; transport, sale and processing of minerals;

development of mining communities, science and mining technology; and safety and

environmental protection.


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The constitutionality of RA 7942 was challenged before the Supreme Court in La Bugal

B’laan Tribal Association vs. Sec. Victor O. Ramos.14 The case mainly involved the

interpretation of the phrase “agreements involving either technical or financial assistance”

under the Constitution for large-scale mining.

In December 2004,15 the Supreme Court reversed its earlier decision and ruled that the

provisions of the Mining Act involving foreign participation under the Financial and

Technical Assistance Agreement (FTAA) do not violate the general provisions of the

Constitution reserving to Filipino citizens and corporations the use and enjoyment of the

country’s natural resources. It explained that the phrase “involving either technical or

financial assistance” does not indicate the intent to exclude other modes of assistance, but

rather implies that there are other things being included or possibly being made part of the

agreement, apart from financial or technical assistance.

During the administration of President Gloria M. Arroyo, the government shifted its policy

from “tolerance to promotion of the mining industry”. In 2004, she issued EO 270 or the

National Policy Agenda on Revitalizing Mining in the Philippines. The issuance provided

guiding principles for pursuing the exploration, development and use of the country’s

mineral resources within the framework of sustainable development, which it says must

contribute to economic growth, environmental protection, and social equity and

development. Based on these principles, a Minerals Action Plan was subsequently

formulated as the government’s road map for the revitalization of the minerals industry.

In 2005, by virtue of EO 469, the government created an inter-agency Minerals

Development Council (MDC) under the Office of the President to mobilize the entire

government bureaucracy to support the operations and programs relative to minerals

development. It was given the primary responsibility of advancing the government’s policy

of “responsible and sustainable development” of mineral resources.

Until 2010,16 the MDC attempted to streamline government rules and regulations to

actively promote the mining industry. It also convened regional stakeholder meetings and

participated in international forums to deliver the message that the country was back in

the mineral resources business.17

14 G.R. No. 127882, January 27, 2004 and December 1, 2004. 15 Id. December 1, 2004 decision. 16 The MDC, along with 9 other agencies, was abolished in 2010 as part of President Benigno S. Aquino’s efforts to streamline the operations of the Office of the President and to cut perceived unnecessary spending by channeling its resources in areas where they are needed most. 17Keynote address of Ambassador Delia D. Albert, “Breaking Walls, Building Bridges: Public-Private Partnership in the Mining Industry,” at the 56th Annual Mine Safety and Environment Conference, November 14, 2009. http://www.mgb.gov.ph/pgs.aspx?pgsid=5, Accessed: October 1, 2014.

http://www.mgb.gov.ph/pgs.aspx?pgsid=5


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In 2012, Pres. Benigno Simeon C. Aquino III issued EO 79 providing for reforms that would

accordingly ensure environmental protection and responsible mining in mineral resource

use, and promote sustainable economic development and social growth at national and

local levels. EO 79 specifically seeks to improve mining environmental standards and

increase revenue from mining to promote sustainable economic development and social

growth. Among the important provisions of the Executive Order relate to the establishment

of additional No Go Zones for mining and the imposition of a moratorium on new mining

agreements pending the enactment of a law that would rationalize existing revenue sharing

scheme.

Under EO 192 (1987), the Department of Environment and Natural Resources (DENR) is the

primary government agency that is responsible for the conservation, management,

development, and proper use of the State’s mineral resources. The Mines and Geosciences

Bureau (MGB) of the DENR is directly in charge of the administration and disposition of

mineral lands and mineral resources. The Environmental Management Bureau (EMB) of

the DENR, on the other hand, administers all activities related to pollution prevention and

control as well as management and enhancement of the environment, including of the

Philippine Environmental Impact Statement (EIS) System.

The Philippine EIS system requires all proponents of environmentally critical projects

(ECPs) and projects within environmentally critical areas (ECAs) to first secure an

environmental compliance certificate (ECC) from the DENR.18 Among others, petroleum

and petro-chemical industries, including oil and gas, major power plants (fossil-fueled,

nuclear fueled, hydroelectric or geothermal), and major mining projects are considered as

environmentally critical projects.19

C. Law and Policy (oil and gas)

The governing law for oil and gas is PD 87 or the Oil Exploration and Development Act of

1972. This decree was issued to hasten the discovery and production of indigenous

petroleum using government and/or private resources under agreements that would yield

maximum benefit to the Filipinos and revenues to the government, and at the same time to

assure reasonable returns to companies that render financial and technical services. Its

predecessor law, RA 387 (1949), continues to be the basis for determining auxiliary rights

in petroleum projects. PD 87 was amended in 1983 by PD 1857 primarily to grant new

incentives to petroleum service contractors.

18 Pres. Decree No. 1586 (1978). 19 Proc. No. 2146 (1981).


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RA 7638 (1992) created the Department of Energy (DOE), the government agency in charge

of all programs and projects relative to energy exploration, development, utilization,

distribution, and conservation. In an earlier decree, PD 1459 (1978), the DOE Secretary,

subject to the President’s approval, was given the authority to enter into petroleum service

contracts, and re-negotiate or modify existing ones. Among the issues that the DOE

Secretary needs to look into in performing this task are the government’s share, including

all taxes, and the technical competence and financial capability of the petroleum operators.

In all cases, the Decree requires the DOE Secretary to consult with the Secretary of the

Department of Finance (DOF) on all matters involving revenue.

D. Law and Policy (coal)

PD 972, also known as the Coal Development Act of 1976, as amended by PD 1174, governs

coal resources. The decree promotes as state policy the accelerated exploration,

development, exploitation, production, and utilization of the country’s coal resources.

The decree introduced the coal operating contract system and established guidelines for

coal operations in the country. The government retains ownership of the resource, while

the operator, under the contract system, is assigned the right to explore, develop, exploit,

and market the coal based on certain terms and conditions within a specific period of time.

Like oil and gas, the authority to carry out the provisions of the Coal Development Act is

vested with the DOE (previously, Energy Development Board).20

III. Transparency

A. Constitutional Provisions

The 1987 Constitution does not have a straightforward provision on transparency. It

nonetheless contains Sections that characterize or can be associated with transparency,

such as those relating to public disclosure, public information, and public participation.

(1) Public disclosure

The Constitution lays down the State’s policy of full public disclosure of all its transactions

involving public interest, subject to reasonable conditions prescribed by law.21

20 Rep. Act No. 7638 (1992). 21 CONST. Art. II, Sec. 28.


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Specific disclosure requirements are addressed to the legislative branch and particular

officials and employees in the public sector, to wit:

1. Public officers and employees must submit a sworn declaration of their assets,

liabilities, and net worth upon assumption of office and as often thereafter;22

2. The President, Vice-President, members of the Cabinet, the Congress, the Supreme

Court, the Constitutional Commissions and other constitutional offices, and officers

of the armed forces with general or flag rank must disclose such declaration to the

public in the manner provided by law;23

3. Each House of Congress must keep a Journal of its proceedings, and from time to

time, publish the same, except only such parts that may affect national security.

Each House must also keep a Record of its proceedings, although the Constitution is

silent as to whether this can be published in the same manner as the Journal;24

4. Congress must preserve its records and books of accounts and must keep these

open to the public in accordance with law. The Commission on Audit shall audit the

books and publish every year an itemized list of amounts paid to and expenses

incurred for each Congressional member.25

(2) Public information and access to information

The Constitution recognizes the people’s right to information on matters of public concern.

Filipino citizens are likewise afforded access to official records, and to documents and

papers pertaining to official acts, transactions, or decisions, as well as to government

research data used as basis for policy development, subject only to such limits as may be

provided by law.26 In particular, information on foreign loans obtained or guaranteed by

the government shall be made available to the public.27

However, the people’s right to information is not absolute. In his commentary to the 1987

Constitution, Fr. Joaquin Bernas S.J. explains that the right to information is restricted in

terms of national security matters, trade secrets, banking transactions, law enforcement,

22 Id., Art. XI, Sec. 17. 23 Id. 24 Id., Art. VI, Sec. 16 (4). 25 Id., Art. VI, Sec. 20. 26 Id., Art. III, Sec. 7. 27 Id. Art. XII, Sec. 21.


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and other confidential matters.28 The Supreme Court has also ruled that privileged

information (such as, diplomatic negotiations and inter-government exchanges prior to

conclusion of treaties and executive agreements); military and diplomatic secrets; and

matters affecting public order may not be covered by this constitutional precept.29 It also

cited that Congress has prescribed other limitations on the right to information in several

legislations.30

Nonetheless, the Supreme Court made an important distinction between the State’s duty to

disclose (Article II, Section 28) as discussed in the preceding section and this duty to permit

access to information on matters of public concern (Article III, Section 7). It explained that

the disclosure of information is mandatory under the Constitution, while the other aspect

of this right to information (also, right to know) requires a demand or request for a person

to obtain access to an agency’s documents. Further, the duty to disclose only concerns

transactions involving public interest, while the duty to allow access has broader scope of

information which embraces not only those dealings involving public interest, but any

matter contained in official communications and public documents of the agency.

According to the Court, relief must be granted to persons who request access to official

records, documents and papers relating to official acts, transactions, and decisions that are

relevant to a government contract.31

(3) Public participation

The Constitution guarantees the right of the people and their organizations to effective and

reasonable participation at all levels of social, political, and economic decision-making. The

State shall, by law, facilitate the establishment of adequate consultation mechanisms.32

B. Law and Policy (General)

(1) Transparency in government frontline services

The Anti-Red Tape Act of 2007 declares the State’s policy to promote integrity,

accountability, proper management of public affairs and public property and to establish 28 Bernas, J. The 1987 Constitution of the Republic of the Philippines: A Commentary, 2009 ed., Rex Bookstore, Manila, Philippines. 29 IDEALS vs. PSALM, G.R. No. 192088, October 9, 2012; Akbayan, et.al. vs. Aquino, G.R. No. 170516, July 16, 2008; Chavez v. Public Estates Authority, G.R. No. 133250, July 9, 2002. 30 Id. The decision in Chavez cited Section 270 of the National Internal Revenue Code; Section 14 of Rep. Act 8800 (Safeguard Measures Act); Section 3(n) of Rep. Act No. 8504 (Philippine AIDS Prevention and Control Act); Section 6(j) of Rep. Act No. 8043 (Inter-Country Adoption Act); and Section 94 (f) of Rep. Act No. 7942 (Philippine Mining Act). 31 Id. IDEALS v. PSALM. 32 CONST., Art. XIII, Sec. 16.


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effective practices aimed at preventing graft and corruption in government. To achieve this,

the law mandates the State to maintain honesty and responsibility among its public officials

and employees, and to take appropriate measures to promote transparency in each agency

with regard to the manner of transacting with the public. This covers the adoption of

simplified procedures that reduce red tape and expedite transaction in government, such

as posting of information billboards (Citizen’s Charter) about an agency’s process for

obtaining the service, the persons responsible, maximum processing time, amount of fees,

and procedure for filing complaints.33

The law applies only to government agencies that provide frontline services or those

transactions “between clients and government agencies involving applications for any

privilege, right, permit, reward, license, concession, or for any modification, renewal or

extension” of certain applications and/or requests which are acted upon in the ordinary

course of business of the agency or office concerned.34 It does not cover agencies that

perform judicial, quasi-judicial and legislative functions.35

(2) Transparency in government procurement process

RA 9184 (2003), otherwise known as the Government Procurement Reform Act, directs the

procurement of all infrastructure projects, goods, and consulting services by the

government, including government-owned and controlled corporations and local

government units. The procurement process is governed by the principles of transparency,

competitiveness, uniformity, and accountability. Among others, it calls for the posting of

bid invitations, notices of award, notices to proceed, and approved contracts in the

procuring entity’s premises, in newspapers of general circulation, the Philippine

Government Electronic Procurement Services (PHILGEPS), and the website of the

procuring entity.

(3) Transparency in local government budget and finances

RA 7160 or the Local Government Code of 1991 mandates the posting by local government

units (LGUs) of a summary of all revenues collected and funds they received, including the

appropriations and disbursements of such funds during the preceding fiscal year, in at least

three (3) publicly accessible and conspicuous places in the LGU within 30 days prior to the

end of each fiscal year.

33 Rep. Act No. 9485 (2007), Secs. 2-3. 34 Id., Secs. 3-4. 35 Id., Sec. 3.


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Based on this provision, and in line with the Government Procurement Reform law, the

Department of Interior Local Government (DILG) has directed all local chief executives at

the provincial, municipal and city levels to faithfully comply with the law and facilitate full

disclosure and public access to local government budget and spending. Among the items

that should be posted in various media include the (a) annual budget; (b) quarterly

statement of cash flows; (c) statement of receipts and expenditures; (d) utilization of the

trust fund (PDAF), special education fund, gender and development funds, and 20%

component of the internal revenue allocation; (e) statement of debt service; (f) annual

procurement plan or procurement list; (g) items to bid; (h) bid results on civil works, and

goods and services; and (i) abstract of bids as calculated.36

The above circular was amended in 2011 to provide guidance on the documents that need

to be posted on a quarterly basis, the modalities for posting, and the conspicuous places

where the documents may be posted. In addition, it provides for the sharing of such

financial documents with civil society organizations and the private sector.37

C. Transparency in the Extractives Industry (Revenue and Investments)

Except for a brief reference in EO 79 about the country’s commitment to participate in the

EITI, there is yet no overarching law that broadly governs transparency in transactions or

processes involving the extractive industries. Pertinent laws on mining, oil and gas,

revenue, and investments nonetheless provide the scope of specific matters that are either

protected by a confidentiality clause, allowed to be fully disclosed to the public, or are given

limited degree of disclosure and availability.

(1) Public disclosure

(a) Mining law

One of the investment guarantees given to mining contractors relates to the confidentiality

of information supplied by them pursuant to the Mining Act and its implementing rules and

regulations. The IRR elaborated that such information refers to those that have been

agreed upon by the parties in the negotiation as confidential. In this case, the information

shall be treated as confidential by the DENR and the government during the term of the

project to which it relates.38

36 DILG Memorandum Circular No. 2010-83 (2010). 37 DILG Memorandum Circular No. 2011-134 (2011). 38 Rep. Act No. 7942 (1995), Chap. XVI, Sec. 94 (f); DENR Adm. Order No. 2010-21 (2010).


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However, the Rules provide that the following information shall not be classified as

confidential:

production and sales of minerals;

employment;

royalty and tax payments;

metallic and non-metallic reserves;

operational parameters, such as mining and milling capacities and rates, mine and

mill recoveries, dilution factors, etc.; and

other data as may be agreed upon by the parties

The Rules qualified its use of the term “confidentiality” to the “act of divulging publicly any

information classified as such.” Thus, the confidential nature of any such information does

not prevent the DENR-MGB Director or his/her representative/s from using the data

internally within the Bureau for the purpose of monitoring and for policy, planning and

research studies.39

With respect to documents that are not covered by a valid Confidentiality Agreement

between the parties, the Rules state that the same shall be made available to the public

upon the filing of an appropriate request duly approved by the authorized officer.

Reproduction of such documents shall also be allowed upon presentation of an approved

written request in sufficient form and payment of reasonable fees.40

In order to ascertain compliance with the provisions of the law, implementing rules and

regulations, and the terms and conditions of their Mineral Agreement or FTAA, Contractors

are obliged to allow the MGB’s representatives to inspect and examine their books of

accounts and other pertinent records and documents. This is one of the conditions for

availing the incentives provided under the law.41

39 DENR Adm. Order No. 2010-21, Sec. 229 (2010). 40 Id. 41 Id., Sec. 228.


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The rules on confidentiality for the mining sector are summarized in the following table:

Confidential Information42 Non-Confidential Information43 Information supplied by mining contractors to DENR as part of investment guarantee

Documents not covered by a valid confidentiality agreement between the parties

Information agreed upon by the parties in the negotiations as confidential

Production and sales of minerals

Employment Royalty and tax payments Metallic and non-metallic reserves Operational parameters, such as mining and

milling capacities and rates, mine and mill recoveries, dilution factors, etc.

Other data agreed upon by the parties

Matters that are required to be reported to the DENR-MGB, including related reports that

should be prepared by the MGB/Regional Office and other groups, are discussed in the

Mandated Information section.

(b) Oil and gas law

In service contracts, the Contractor is obliged, among others, to allow examiners of the

Bureau of Internal Revenue (BIR) and the DOE full access to their accounts, books, and

records for tax and other fiscal purposes.44

The DOE Secretary or his representative has visitorial and examining authority over non-

government entities with contracts for the exploration, development, and utilization of

natural resources for energy purposes in order (a) to determine the government’s share in

the revenue or product thereof; and (b) to ascertain all funds and collectibles due to the

government, and whether those funds have actually been collected or delivered. The entity

concerned is obliged to produce all the reports, records, books of accounts, and other

papers that may be required during the examination.45

42 As discussed, the information is confidential during the term of the project. Said information should not be divulged to the public, but may be used by the DENR-MGB Director or his authorized representatives internally for purposes of monitoring, policy, planning, and research. 43 This means that the information may be made available to and reproduced by the public upon submission of an appropriate request to the DENR-MGB. 44 Pres. Decree No. 87 (1973), Sec. 8(j). 45 Rep. Act No. 7638 (1992), Sec. 24.


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Interest held in the contractor by domestic mining and petroleum companies and/or the

latter's stockholders may be allowed to any extent after full disclosure of such interest to,

and approved by the DOE.46

It is noted, however, that one of the privileges that may be given to contractors in service

contracts executed under PD 87 is the exemption from the publication requirements under

RA 545547 and RA 6173 with respect to the exploration, sale or disposition of crude oil

discovered and produced in the Philippines.48 Section 7 of RA 5455 requires the Board of

Investments (BOI) Secretary to publish applications filed with it in the Official Gazette and

in newspapers of general circulation, and to post the same in conspicuous places, in the BOI

office or in the building where the BOI office is located. The notices must state the

applicants’ name, business or proposed investment, and other data required by the BOI.

Without such publication and posting, any approval or certificate issued is considered as

not valid.

It is observed that Section 7 of RA 5455 refers to the publication of investment

applications, not duly executed service contracts, as a pre-requisite for the validity of an

investment approval or certificate. However, with its mention in PD 87 as a privilege that

may be given to a contractor, in an agreement executed under the Decree, the exemption

from such publication requirement appears to extend to the publication of data in service

contracts. Yet, such exemption from publication is not construed in this study as making

the said data confidential.

Negotiations of contracts with the government shall be given publicity that is consistent

with the government’s best interest.49 Currently, the DOE Circular DC2014-02-005 is the

basis for the competitive bidding of service contracts for the exploration of potential coal

and petroleum areas in the country under the Philippine Energy Contracting Round 5

(PECR-5) that was launched in May 2014.50 It applies to the determination of the legal,

technical, and financial qualification of applicants, the evaluation of their applications, and

46 Pres. Decree No. 87(1973), Sec. 14. 47 Id. Sec. 12 (d). Rep. Act No. 5455 (1968) is entitled “An Act to require that the Making of Investments and the Doing of Business within the Philippines by Foreigners or Business Organizations Owned in Whole or in Part by Foreigners should Contribute to the Sound and Balanced Development of the National Economy on a Self-Sustaining Basis, and for Other Purposes.” 48 Pres. Decree No. 87 (1973) Sec. 12. 49 Id., Sec. 29. 50 The Department Circular is entitled “Reiterating a Transparent and Competitive System of Awarding Service and Operating Contracts for Petroleum and Coal Prospective Areas, Repealing for this Purpose DC 2011-12-0010 and DC 2012-02-003.”


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the award of corresponding service and operating contracts for petroleum and coal

resources.51

Presumably based on the foregoing privilege under Section 12 (d) of PD 87, model

contracts under PECR-5 regard all documents, information, data, and reports related to

petroleum operations within the contract area as confidential. Without the written consent

of the DOE, the contractor and its assignees are prohibited from disclosing such

information to third parties,52 particularly to those not directly connected with the

implementation of the contract. The DOE is also obliged to maintain such confidentiality

within specific confidentiality periods.

By way of exception, the DOE, under the provisions of the model contracts, has the right to

provide any third parties with original information of the following:53

Raw and/or processed data generated and held by contractor for over 5

years from the date the data were generated; and

Interpretations of information and data generated and held by the contractor

for over 7 years from the date the data or report was generated (provided

the contract is still existing and active).

Further, the model contracts provide that any party to the service contract may disclose

confidential information in the following circumstances:

When required by law of any relevant jurisdiction;54

When required by any relevant authority to which the party making the disclosure

is subject, whether or not such requirement has the force of law;

When required by existing contractual obligations; 51 Id. A Review and Evaluation Committee (REC) is constituted to: (a) identify prospective petroleum and coal areas, including to notify LGUs of the offered areas within their territorial jurisdiction, prior to the inclusion to the PECR; (b) review the capabilities of the applicants and their applications; (c) recommend to the DOE Secretary the award of such contracts after evaluation; (d) address any questions that may be raised by the DOE Secretary; and resolve issues in relation to the capabilities of applicants, including motions for reconsideration. 52 Id. The third parties to whom a Contractor may disclose confidential information, with written consent of DOE, refer to: (a) banks or other credit institutions from which finance is sought by any party to the contract for the implementation of the contract; (b) third parties and affiliates which provide services for the petroleum operations, including subcontractors and service contractors; (c) a prospective assignee/s to whom rights and obligations under the contract are intended to be assigned; and (d) consultants, auditors, officers, or employees and persons engaged by the contractor, where necessary for the performance of its obligations and in pursuance of its rights under the contract. Such third parties receiving confidential information are also required to assume the same confidentiality obligations. 53 Id. 54 The model contract provides that this includes necessary confidential information to governments and stock exchanges in accordance with the laws of the relevant countries.


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When required to vest full benefit of the contract in any of the parties;

When disclosure is made to the professional advisers, auditors, and bankers of any

of the parties;

When confidential information has come into the public domain through no fault of

the contracting party;

When the other parties have given prior written approval to the disclosure.

The standards of confidentiality and disclosure for oil and gas are summarized below:

Information Exempt from Publication

Requirement

Publicity consistent with government’s best interest

Confidential Information55

Exceptions56 (Information that may be

disclosed)

Investments data required by BOI

Negotiations of contracts

Documents, information, data, and reports related to petroleum operations within the contract area

With written consent of DOE, confidential information that a contractor or its assignee discloses to specific third parties57

Data on exploration, sale or disposition of crude oil discovered and produced in the Philippines

Specific data or confidential information58 that the DOE discloses as a matter of right to any third parties

Information required by law of any relevant jurisdiction

Information required by any relevant authority to which the party making the disclosure is subject, whether or not such requirement has the force of law

Information required by existing contractual obligations

Information required to vest full benefit of the contract in any of the parties

Information disclosed to professional advisers, auditors, bankers of any of the parties

55 Confidentiality clause found in the model contract and presumably based on Sec. 12 (d) of Pres. Decree No. 87 on exemption from the publication requirement. 56 Under the model contracts, certain documents, otherwise held confidential, may be disclosed to specific or general third parties. 57 Id. See Note 52. 58 Id. See Note 53.


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Confidential information that has come into the public domain through no fault of the contracting party

Information disclosed with prior written approval of the other parties

(c) Coal resources law

Like oil and gas contracts, the operator of coal operating contracts is obliged, among others,

to allow authorized DOE representatives full access to their accounts, books, and records

for tax and other fiscal purposes. It is also obliged to promptly furnish the DOE with all

information, data and reports which it may require.59

Further, interest held in coal operating contracts by domestic mining companies and/or its

stockholders may be allowed after there is full disclosure of such interest and approval by

the DOE.60

(d) Revenue law

Section 270 of the National Internal Revenue Code of 1997 is the relevant provision on

transparency and divulgence of tax-related information. Except in three instances, the

Code declares it unlawful for any officer or employee of the BIR to divulge to any person or

make known in any other manner than that provided by law the following information: (a)

information regarding the business, income, or estate of any taxpayer; (b) the secrets,

operation, style or work, or apparatus of any manufacturer or producer; or (c) confidential

information regarding the business of any taxpayer. The law requires that such knowledge

must have been acquired by the officer or employee in the discharge of his official duties. 61

The exceptions to the above confidentiality rule are as follows:

1. When the BIR Commissioner exercises its authority to inquire into bank

deposit accounts and other related information held by financial institutions

of: (a) a decedent to determine his gross estate; (b) a taxpayer who has filed

an application for compromise of his tax liability by reason of financial

incapacity to pay the tax assessed, upon written waiver of his privilege from

public disclosure of tax information; and (c) a specific taxpayer/s subject of

59 Pres. Decree No. 972 (1976) Sec. 9 (i) and (e). 60 Id., Sec. 12. 61 Rep. Act No. 8424, as amended by Rep. Act No. 10021 (2009).


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request for the supply of tax information from a foreign tax authority

pursuant to a tax treaty or convention to which the Philippines is a signatory

or party, on which basis the BIR may use the information obtained for tax

assessment, verification, audit, and enforcement purposes. In the last case,

the Code requires that the exchange of information between the two tax

authorities is done in a secure manner to ensure confidentiality.62

2. Income tax returns filed with the Office of the BIR Commissioner constitute

public records and are open to inspection as such upon order of the

President of the Philippines, under rules and regulations prescribed by the

Finance Secretary. In each year, the BIR Commissioner may also cause to be

prepared and published in any newspaper the lists of names and addresses

of persons who have filed income tax returns.63

3. An individual who files a sworn Certificate of Candidacy for an electoral post

is required to provide income tax information for the last two years

immediately preceding the election. This must include a waiver of the

privilege from public disclosure of the candidate’s income tax return and tax

census statement for the said two-year period. However, for financial

statements attached to the certificates, the waiver is effective only during the

period of the candidacy.64

(e) Investments law

The Omnibus Investments Code of 1987 declares the confidential nature of all applications

and supporting documents that are filed under the Code. Disclosure of such information to

any person is prohibited, except (a) with the consent of the applicant; or (b) on orders of a

court of competent jurisdiction.65

Applications filed under the Code include those that relate to the registration of enterprises

with the BOI in preferred areas of investment or under the Investment Priorities Plan.

These are evaluated according to information submitted on the extent of ownership and

control of the enterprise by Filipino citizens, economic rates of return, measured capacity,

foreign exchange earned, used or saved in operations, and use of labor, among others.66

62 Tax Code, Sec. 6 (f), as amended by Rep. Act. No. 10021 (2009). 63 Id., Sec. 71, as amended by Rep. Act No. 10021(2009). 64 Rep. Act No. 6388, Sec. 26. 65 Exec. Order No. 226 (1987), Art. 81. 66 Id., Art. 33.


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Once an application is processed and subsequently approved, a registered enterprise is

issued a Certificate of Registration which states, among other matters, the name of the

registered enterprise, the preferred area of investment, the nature of activity it will

undertake, its registered capacity, and other terms and conditions of such registration.67

These terms and conditions may include refund of incentives, restrictions in availing

certain incentives, requiring performance bonds and other guarantees, limitation in

availing tax holiday incentive, and other terms and conditions deemed necessary to

promote the objectives of the Code.68

While applications and supporting documents filed with the BOI are clearly confidential,

the Code is silent about the nature of the documents that are issued following the approval

of such applications, such as those stated in the Certificate of Registration.

(2) Public information and access to information

The MGB is supposed to have established a national and regional filing and recording

system, including a mineral resource database system. It is mandated to publish, at least

annually, a national mineral gazette containing a current list of mineral rights, their

location in a map, mining rules and regulations, official acts affecting mining, and other

information relevant to mineral resources development.69

To increase public information and encourage public participation, the MGB Director is

tasked to conduct public hearings on the establishment, disestablishment, or modification

of boundaries of mineral reservations. Such public hearings are announced through

publication in a newspaper of general circulation in the province, or by posting in all

affected municipalities and barangays.70

Applicants of exploration permit, mineral agreement, or FTAA are required by the Rules to

cause the publication of their application once in two (2) newspapers, one of general

circulation and another in the municipality or province where the proposed permit area is

located. The MGB Regional Office shall then cause the posting of the Notice on its bulletin

board, and those of the concerned political units, in a language generally understood in the

relevant locality. Radio announcements shall also be made in a local radio program. The

various media are intended to inform the public and to give opportunity to anyone to raise

67 Id., Art.. 37. 68 Id., Art.. 7(3). 69 Rep. Act No. 7942 (1995), Sec. 14. 70 DENR Adm. O. No. 2010-21, Sec. 9 (2010).


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any adverse claim, protest or opposition to the application. No application shall be

approved unless these requirements are complied with.71

The Rules further provide that any Order approving the declaration of mining project

feasibility must be posted on the bulletin boards of the MGB and concerned Regional Office

for at least a week.72

In securing the free and prior informed consent (FPIC) of indigenous communities, the

process must meet the minimum requirements of public notice through various media,

such as, but not limited to newspaper, radio or television advertisements, and sector

consultation. The Rules require the Contractor to fully disclose the activity to be

undertaken through a community assembly, notice of which should also announced or

posted in a conspicuous place in the area for at least a month before the assembly.73 This

provision must be implemented in accordance with RA 8371 or the Indigenous Peoples

Rights Act of 1997 and related rules.

The EIA rules also emphasize the importance of timely, full, and accurate disclosure of

relevant information in conducting an effective regulatory review of the EIS submitted by

proponents of environmentally-critical projects like mining, oil and gas.74

(3) Public participation

Public participation through local community consultations and consent is required before

starting any project or activity that affects communities and the environment.

Under the Local Government Code of 1991, proponents of projects that may cause pollution,

climate change, depletion of non-renewable resources, loss of land, and extinction of

animal or plant species are obliged to consult with LGUs, non-governmental organizations

(NGOs), and other concerned sectors to explain the project’s goals, its environmental

impact upon the people and the community and the proposed measures to prevent or

minimize its adverse effects. Aside from the consultation requirement, prior approval of

the local legislative body must also be obtained.75 This approval is typically expressed in

the form of a local ordinance or resolution.

71 Id., Secs.21, 38 and 55. 72 Id., Sec. 30. 73 Id., Sec. 16. 74 DENR Adm. O. No. 2003-30 (2003). 75 Rep. Act. No. 7160 (1991), Secs. 26-27.


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The Department of Justice (DOJ), in a query about the validity of LGU ordinances and

resolutions declaring a ban on large-scale mining in their respective areas, opined that it is

not within its authority to declare an ordinance, other than a tax or revenue measure, as

invalid..76 The DOJ nonetheless issued guidance to the DENR-MGB on what constitutes a

valid ordinance. It also explained that while LGUs have the power to pass ordinances,

which may express views different from that of the national government, this does not

mean that LGUs may enact ordinances that go against national laws.77

In line with the Local Government Code provisions, the mining rules mandate an

Exploration Permit holder to conduct local consultations prior to the implementation of its

Exploration Work Program.78

The review of the EIS submitted by proponents of environmentally-critical projects like

mining, oil and gas projects includes an assessment of its social acceptability that is based

on informed public participation. This public participation process in the EIA envisions the

involvement of the broadest range of stakeholders, commencing at the earliest stage of

project design and development and continuing until post-assessment monitoring.79

For projects that affect the ancestral lands of indigenous communities, their FPIC must be

secured. This relates to the process of fully disclosing the intent and scope of the proposed

activity, in a language and process understandable to the community, after which

consensus of all its members is determined without any restraint according to their

customary laws and practices.80

D. Mandated Information

Under DAO 2010-21, mining contractors are required to submit several reports to the

DENR-MGB, as follows:

Type of Report Date of Submission Submitted to Basis 1 Monthly report on production,

sales, and inventory of metallic minerals and employment

Within 15 working days after the end of each calendar month

MGB Director Section 270 (a)

2 Integrated Annual Report Within 2 months after MGB Director Section

76 DOJ Opinion No. 008, series of 2005. (February 2, 2005) It explains that in order for local ordinances to be valid, it must not contravene the Constitution or any law; it must not be unfair or oppressive; it must not be pArt.ial or discriminatory; it must not prohibit but may regulate trade; it must be general and consistent with public policy; and it must not be unreasonable. 77 Id. 78 DENR Adm. O. 2010-21 (2010), Sec. 23. 79 Pres. Decree No. 1586 (1978) and DENR Adm. O. No. 2003-30 (2003). 80 Rep. Act No. 8371 (1997) and NCIP Adm. O. No. 3 (2012).


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the end of each calendar year

270 (g)

3 Quarterly Energy Consumption Report

Within 15 working days after the end of each calendar quarter

MGB Director Section 270 (h)

4 Quarterly Drilling Report Within 30 calendar days after the end of each calendar quarter

MGB Director Section 270 (i)

5 Annual Mineral Reserve Inventory Report

On or before the end of the first quarter of each calendar year

MGB Director Section 270 (j)

6 Monthly General Accident Report Within 15 working days after each calendar month

Regional Office and MGB

Section 270 (k)

7 Accidents Reports Within 24 hours, in case of incident or accident causing or creating danger of loss of life or serious physical injuries; monthly

Regional Office (copy to MGB)

Section 155

8 Monthly Explosive Consumption Report

Within 15 working days after each calendar month

Regional Director (copy to MGB Director)

Section 270 (l)

9 Reports of explosives transactions and explosives and accessories consumption (as Purchaser’s License Holders)

Within 15 working days after every calendar month

MGB Director Section 162

10 Report on Mine Waste and Tailings Generated

Semi-annual MGB Sections 191 and 270 (m)

11 Semi-Annual Status Report on the Environmental Work Program (EWP) detailing environmental impact control and rehabilitation activities, including costs

Within 30 days from the end of 6 months after approval of the EWP and every 6 months thereafter

MGB/ Regional Office (copy to Provincial Government concerned)

Sections 168 and 270 (n)

12 Report on pollution control devices and facilities used or built

To avail incentive for pollution control devices


13 Annual Land Use Report Within 60 days after each calendar year

MGB Director Section 270 (p)

14 Report on fixed assets relevant to operation

To avail incentive for income tax –accelerated depreciation


15 Semi-Annual Status Report on the Exploration Work Program

Within 30 calendar days after the end of each semester

MGB/Regional Office

Sections 22 (d) and 270 (s)

16 Final Report of Exploration Work Program findings, including

Upon the expiration or relinquishment of an

MGB/Regional Office

Section 22 (h)


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detailed expenditures incurred during exploration

exploration permit or its conversion into Mineral Agreement or FTAA

17 Progress report on Final Mine Rehabilitation/Decommissioning Plan (FMRD/P)

Within 30 days from the end of the term of the preceding work and financial plan

MRF Committee Section 187-D

18 Final Rehabilitation Report (with 3rd Party Environmental Audit)

For evaluation and approval

MRF Committee then to CLRF Steering Committee

Section 187-F

Should mining contractors fail to submit or delay in submitting the above reports, the MGB

is authorized to impose basic and daily fines depending on the type and occurrence of the

violation.81 Such non-submission or delay also constitutes a ground for MGB to withhold

pending transactions or processing of other mining applications, and to deny renewal of

applications.82

In addition, reports are required to be submitted by the MGB/Regional Office and other

relevant committees:

Type of Report Schedule of Submission

Person Responsible

Office to Submit Report

Basis

1 Report of confiscation or seizure of minerals/mineral products

Monthly Quarterly

MGB Regional Director MGB Director

MGB DENR Secretary

Section 126, IRR

2 Report of accomplishments on Annual Social Development and Management Program (ASDMP)

Quarterly Annual

Community Relations Office (CRO) CRO

MGB Regional Office MGB Regional Office (copy to MGB)

Section 136-D

3 Monitoring Report on implementation of approved programs

Semi-Annual Regional Office MGB Section 136-D

4 Mine Safety Inspection Report

Quarterly Regional Director or representative


5 Environmental monitoring report (of EPEP and AEPEP)

Quarterly Multi-partite monitoring team (MMT)

Mine Rehabilitation Fund (MRF)

Section 174

81 DENR Adm. O. 2010-21 (2010) Sec. 271. 82 Id.


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Committee CLRF Steering Committee

6 Accomplishment Report Annual CLRF Steering Committee

DENR Secretary

Section 193 (o)

IV. Regulatory Framework

Apart from being the primary government agency tasked with the conservation,

management, development, and use of the country’s environment and natural resources,

the DENR is also in charge of the licensing and regulation of all natural resources. The

DENR Secretary promulgates relevant rules, regulations, and other issuances to carry out

its mandate.83

Among its bureaus, the MGB advises the DENR Secretary on all matters pertaining to

mineral resources exploration, development, and conservation.84 With the passage of the

Mining Act in 1995, MGB became a line bureau, effectively giving it the power to directly

implement mining-related programs of the DENR. The MGB Director now exercises direct

supervision and control over all units, including the regional offices of the Bureau,

establishes policies and standards for its operations, and promulgates rules and regulations

needed to carry out its functions.85

With respect to oil and gas, the DOE takes charge of all programs and projects relative to

the exploration, development, utilization, distribution, and conservation of all forms of

energy products and resources. Specifically, it regulates private sector activities in all

energy projects and formulates such rules and regulations to implement the provisions of

the law.86

Other government agencies are likewise involved in regulating the activities of the

extractives industry. The following paragraphs describe the specific mandate and role of

the DENR-MGB, DOE, and other regulatory agencies as these may relate to EITI (collection,

payment, reporting of revenue, and other matters relevant to the EITI report):

83 Exec. Order No. 192 (1987), Sec. 4 and Sec. 7 (c). 84 Id., Sec. 15. 85 Rep. Act No, 7942 (1995) and Exec. Order No. 192 (1987). 86 Rep. Act No. 7638 (1992), Secs. 4-5.


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Agency Mandate Role Basis DENR-MGB Promulgate rules and

regulations pertaining to mineral resources exploration, development, and utilization.

Collect payment of royalty in mineral reservations87 Allocate 10% share of all royalties and revenues derived from the development and utilization of the mineral resources within mineral reservations to special projects and administrative expenses related to the exploration and development of other mineral reservations. Collect annual occupation fees from contractor or permit holder on public or private lands.

Exec. Order No. 192 (1987); Rep. Act No. 7942 (1995); DAO 2010-21

DOE Supervise and control all government activities relative to energy projects; regulate private sector activities in all energy projects; formulate rules and regulations necessary to implement the law

Collect annual rent on area retained by contractor after exploration period (if petroleum in commercial quantity has been discovered) and during the effectivity of the contract. Devise ways and means of giving direct benefits to the province, city or municipality, especially community and people affected, and equitable and preferential benefit to the region that hosts the energy resource and/or energy-generating facility; provided that other provinces, cities, municipalities or regions shall not be deprived of their energy requirements. Its Compliance Division formulates plans, policies and programs related to compliance by service contractors with their financial obligations under their contracts and ensures effective implementation thereof and compliance with government regulations and standards. Its Petroleum Division formulates fiscal policy recommendations relative to petroleum service

Rep. Act No. 7638, Sec. 5; Pres. Decree No. 87, Sec. 9(e), (i) DOE website , date accessed June 8, 2014

87 “Mineral reservations” are areas established and proclaimed as such by the President of the Philippines upon the recommendation of the MGB Director through the DENR Secretary, including all submerged lands within the contiguous zone and Exclusive Economic Zone. [Sec. 5 (bg), DAO 2010-21]


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contracts, conducts detailed audit of their books of accounts, evaluates their compliance with their financial and other contractual obligations, prepares and maintains a database on government shares service contractors revenues, expenditures and performance bonds, remits to the DOE’s treasury division all monies due from petroleum service contractors. Its Geothermal and Coal Division formulates and implements policies, plans, programs and regulations relating to exploration, development, exploitation and market development of geothermal and coal resources. Its Special Compliance Concerns Division formulates policy recommendations relative to DOE-administered energy funds, allocates LGU shares on national wealth taxes from service contractors, assists in the interpretation of pertinent government fiscal policies relative to the national wealth taxes, benefits to host communities, and other DOE-administered energy funds, conducts periodic audit of electricity sales of power producers/energy resource developers and expenses from the ER 1-94 fund and other DOE-administered energy funds, prepares and maintains database on national wealth taxes, benefits to host communities and other DOE-administered energy funds, monitors reports submission by the LGUs on receipts and utilization of the national wealth taxes, and coordinates with various DOE unties and concerned government agencies on national wealth taxes, ER 1-94 and other DOE-administered energy funds.


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DOF Manage the financial resources of the government

Institutionalize and administer fiscal policies in coordination with other government agencies. Generate and manage the financial resources of the government. Supervise the revenue operations of all LGUs. The DOF Secretary, in consultation with the DBM Secretary: promulgate the necessary rules and regulations for a simplified disbursement scheme for the speedy and effective enforcement of the internal revenue allotment provisions of the Code.

Exec. Order No. 292 (1987) Rep. Act No. 7160 (1991), Section 288

DOF-BIR Assess and collect all national internal revenue taxes, fees, and charges; enforce all related forfeitures, penalties, and fines, including execution of judgments in cases decided in its favor by the Court of Tax Appeals and ordinary courts.

Obtain information from any person or entity other than the person whose tax liability is subject to audit or investigation, summon any person, examine any data relevant to the inquiry, and take testimony of persons in ascertaining the correctness of any return, or in making a return, or in determining the liability of any person for any internal revenue tax, or in collecting any such liability, or in evaluating tax compliance. Make assessments of correct amount of tax due and prescribe additional requirements for tax administration and enforcement. Conduct inventory of goods to determine tax liability and place business under surveillance if with reason to believe that income, sale, or receipt is not correctly declared for tax purposes. Prepare an annual report containing detailed statement of the collection of the BIR and specifying sources of revenue by type of tax, manner of payment, by revenue region and by industry group and its disbursement by classes of expenditures.

National Internal Revenue Code of 1997, Sections 5, 6, 19, 20


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Notwithstanding Section 270 of the Code (on confidentiality of tax information), upon request of Congress and in aid of legislation, furnish the appropriate Committee pertinent industry audits, collection performance data, status reports in criminal actions initiated against persons and taxpayer’s returns. Provided that, if the return information can be associated with or identify a particular taxpayer, the information shall be furnished only to the Committee when sitting in an executive session, unless taxpayer otherwise consents in writing in such disclosure.

DOF-BOC Collect customs duties, taxes, and corresponding fees, charges, and penalties, account for all customs revenues collected, exercise police authority for the enforcement of tariff and customs laws, prevent and suppress smuggling, pilferage and all other economic frauds within all ports of entry, supervise and control exports, imports, foreign mails and clearance of vessels and aircrafts in all ports of entry administering all appropriate legal requirements, prevent and prosecute smuggling and other illegal activities in ports under its jurisdiction, exercise supervision and control over its constituent units.

Its Collection Districts are tasked to: Collect duties, taxes, fees, charges, penalties and fines accruing to the Government under the Tariff and Customs Code and related laws. Exercise police powers conferred by the Code which include enforcement of penalties and fines. Examine goods, assess duties, fees, charges, penalties, and fines accruing to the Government under the Code. Its Customs Revenue Collection Monitoring Group is tasked to: Maintain an updated accounting of all Customs revenues collected; Provide the Commissioner with accurate and timely information and analysis of collection statistics.

Exec. Order No. 127 (1987), Sections 33, 36, 37

DOTC-PPA88

Establish, develop, regulate, manage, and operate a rationalized

Collect all dues, fees, and rates collectible under Title VII but excluding Part VII of the Tariff and

Exec. Order No. 513 (1978), which amended

88

Department of Transportation and Communications – Philippine Ports Authority.


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national port system in support of trade and national development.

Customs Code, as amended, regardless of the port or place of call of the vessel, whether government or private port.89 Supervise, control and regulate all matters and affairs pertaining to the operation of and issuance of permits or licenses to construct ports, port facilities, warehouses, and other facilities within port districts. Exercise all powers pertaining to all matters concerning port facilities, port operations or port works. Exact reasonable administrative fines in specific amounts for specific violations arising out of the use of the port. Note: all revenues of the PPA generated from the administration of its port or port-oriented services and from whatever sources shall be used exclusively for the operations of the PPA, as well as for the maintenance, improvement, and development of its port facilities, upon approval of the PPA Board of Directors of its budget requirements, as exemption to PD 1234 and the budgetary processes in PD 1177, as amended.

Pres. Decree No. 857 (1975), Sections 8 and 9. Exec. Order No. 159, as amended (1987)

DTI-BOI90 Regulate and promote investments in the country

Prepare investments priority plan (IPP), promulgate rules and regulations to implement law, approve applications for registration (including refund and limit of incentives), inspect books and compliance, cancel or suspend enjoyment of incentives, regulate investment/doing of business by foreigners/business organizations owned in whole or in part by

Exec. Order No. 226 (1987), Chap. III

89 Title VII, Parts I-VI of the Code deal with harbor fees, wharfage due, berthing charge, storage charge, arrastre charge, and tonnage due. This modified and amended the provisions of the Tariff and Customs Code to the extent that all the powers, duties, and jurisdiction of the Bureau of Customs concerning these matters were transferred to and vested with the PPA. 90

Department of Trade and Industry – Board of Investments.


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foreigners NCIP Formulate and

implement policies, plans, and programs to promote and protect the rights and well-being of the indigenous peoples and indigenous cultural communities (IPs/ICCs), including recognition of their ancestral domain as and rights thereto.

Through its Ancestral Domains Office, issue, upon the free and prior informed consent (FPIC) of the ICCs/IPs concerned, appropriate certification prior to any grant of any license, lease or permit for the exploitation of natural resources affecting the interests of ICCs/IPs.91 Promulgate rules and regulations to implement the provisions of the law. Register the indigenous people’s organization that will be authorized to receive and manage the royalties. Give its concurrence to the release of royalties to the IP organization or its trustee bank to check on the use of the funds. Direct financial and management audits of IP organizations managing its royalties and other benefits, or exercise visitorial powers as provided for by law.

Rep. Act No. 8371 (1997), Sections 44, 46 NCIP Admin. Order No. 3 (2012), Part VIII

LGUs Exercise its power to create its own sources of revenue and to levy taxes, fees, and charges subject to the Local Government Code, consistent with the basic policy of local autonomy. Exercise its right to receive a just share in the national taxes and an equitable share in the proceeds of the utilization and development of the

Through an appropriate ordinance, impose tax, fee, or charge or generate revenue under the Local Government Code. Collect local taxes, fees, and charges (to be done by its city, municipal, or barangay treasurer, or their duly authorized deputies)92 Observe process for the approval of local tax ordinances and revenue measures, and conduct public hearings prior to its enactment. Publish all local tax ordinances or

Rep. Act No. 7160 (1991), Sections 129, 130, 132, 170, 186, 188, 189; Sections 3, 18

91 The phrase free and prior informed consent is defined under the Act as the “consensus of all members of the ICCs/IPs, to be determined in accordance with their respective customary laws and practices, free from any external manipulation, interference, and coercion, and obtained after fully disclosing the intent and scope of the activity, in a language and process understandable to the community.” 92 Sections 133 – 141 of the Local Government Code of 1991 provides the scope of and limitations to the local taxing authority of the LGUs.


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national wealth within their respective areas, and to share the same with their inhabitants by way of direct benefits.

revenue measures in full for 3 consecutive days in a newspaper of local circulation, or if no such local newspaper, post the same in least two conspicuous and publicly accessible places. Furnish all tax ordinances and revenue measures to their respective local treasures for public dissemination. Note: Revenue collected shall inure solely to the benefit of, and subject to the disposition by, the LGU levying the tax, fee, charge or other imposition, unless otherwise specifically provided. Receive their share in the national internal revenue taxes (IRA) and in the proceeds from the development and utilization of national wealth, and share the same with the local inhabitants by way of direct benefits.

Rep. Act No. 7160, Title III, Chapters I-II,

In March 2009, the DOF, DBM, DILG, and DENR issued a joint circular to streamline the

procedures for the release of the shares of LGUs from mining taxes. The circular aims to

expedite such process, enhance the accuracy of mining tax collections, and clarify the roles

and responsibilities of the concerned government agencies in this aspect.93

To achieve these objectives, all the concerned agencies are urged to establish and share

among themselves information and an updated database to facilitate the exchange of

information. Specifically, their respective roles and corresponding timeframe are outlined

as follows:

Agency Role in expediting release of LGU shares from mining taxes

Timeframe

DOF-BIR Submit to DOF, for budget preparation purposes, the estimated or projected mining tax to be collected for the current year and the corresponding 40% share of the LGUs. Note: Such estimated tax collection shall be equivalent to the amount of excise tax from the mining industry allocated from the total revenue target of BIR.

On or before March 15

93 DOF-DBM-DILG-DENR Joint Circular No. 2009-1(2009).


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Prepare and approve a Joint Certification with the Bureau of Treasury, for budget execution purposes, the actual collections from mining taxes during each calendar year and the schedule of corresponding shares of the beneficiary LGU.

Transmit to Bureau of Treasury for validation and approval within 75 days after the end of the quarter

Determine the correct mining taxes paid and collected during the immediately preceding year based on the estimated and actual volumes and value of the minieral products submitted by the DENR-MGB

DOF-Bureau of Treasury

Validate (based on reports of its regional offices and authorized agents/government depositary bank) and approve the Joint Certification from BIR

Within 30 days from receipt

Transmit to DBM the validated and approved Joint Certification


Furnish BIR a copy of the validated and approved Joint Certification, together with a summary of recorded mining tax deposits/collection and the Journal Entry Voucher of total BIR collections

Within 15 days from transmittal to DBM

DENR-MGB Furnish BIR the estimated volume and values of metallic mineral production of mining companies for the current year

Before the end of February

Furnish BIR the actual annual volume and values, on a per project basis, of metallic minerals produced during the immediately preceding year.

Before the end of March

Provide BIR with the list of new metallic permit holders, actual volumes and values of their production and extraction sites

Within 60 days after the end of each quarter

DENR-LMB94 After coordination with DBM, furnish BIR with an updated copy of the consolidated master list of land area

Before December 15 of every third year after CY 2001

DILG-BLGS95 Prepare and submit to BIR the validated list of actual extraction sites of all non-metallic mineral products, with a summary of LGUs where such production or extraction originated

Before May 15

Enjoin local chief executives to ensure submission by mining permit holders of quarterly production and sales report form to the MGB Regional Offices

Furnish the DBM, BIR, Bureau of Treasury with the updated master list of LGUs during the first quarter of the year.

DBM-Regional Operations and Coordination

For budget preparation purposes, program the amount representing LGU shares of mining taxes in the budget of the following year (based on estimated/projected mining

94

DENR-Land Management Bureau. 95

DILG-Bureau of Local Government Supervision.


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Services and Regional Offices (ROCS/ROs)96

taxes to be collected for the current year and the corresponding 40% share of the LGUs submitted by BIR).

Release the shares of the LGUs on the mining taxes by issuing the allotment and corresponding cash allocation, based on the Joint Certification. Funding check to be deposited to the government servicing banks for direct credit to the LGU’s account

For mining taxes collected during the first 3 quarters, in February of the ensuing year; for those collected during the 4th quarter, in May of the ensuing year.

In a similar effort, the four (4) departments issued in 2010 another joint circular that

would govern the timely release of the LGU shares derived by the national government from

royalty income in mineral reservations.97

Agency Role in expediting release of LGU shares from royalty income in mineral reservations

Timeframe

DENR-MGB For budget preparation purposes, submit to DBM the estimated or projected royalty income to be collected for the current year and the corresponding 40% share of the LGU

On or before March 15 of every year

For budget execution purposes, prepare a Joint Certification of the actual collection from royalty income during each calendar year and transmit to BTr for validation and approval purposes.

Within 60 days after end of the year.

Inform the LGUs of their share from the proceeds of the royalty income from the mineral reservations of the preceding year.

Within 30 days after receipt of a copy of the validated and approved Joint Certification

DOF-BTr98 Validate (based on confirmed royalty collections and reports of BTr regional offices and government depositary bank) and approve the Joint Certification from BIR


Transmit to DBM the validated and approved Joint Certification, together with validated collections and schedule of corresponding LGU shares

Within 30 days from receipt of documents from MGB

Furnish MGB a copy of the validated and approved Joint Within 15 days

96

Department of Budget and Management. 97 DOF-DBM-DILG-DENR Joint Circular No. 2010-1(2010). 98

DOF-Bureau of Treasury


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Certification from transmittal to DBM

DILG-BLGS Enjoin local chief executives to ensure submission by contractors and permit holders of the quarterly production and sales report form to the MGB Regional Offices

Furnish the DBM and MGB with the updates of the master list of LGUs during the first quarter of the year as a result of creation, conversion, merger, and abolition of LGUs.

DBM Budget and Management Bureau and Regional Offices

For budget preparation purposes, program the amount representing LGU shares on the royalty income in the budget of the following year (based on DENR-MGB estimated/projected royalty income to be collected for the current year and the corresponding 40% share of the LGUs).

Release the shares of the LGUs in royalty by issuing the allotment and corresponding cash allocation, based on the Joint Certification by MGB and BTr. Funding check to be deposited to the government servicing banks for direct credit to the beneficiary LGU’s account.

Within 30 days

V. Payments

In allowing the exploration, development, and use of the country’s natural resources, the

Government looks at the extractives sector to make certain payments as a means to

generate wealth in terms of taxes, promote fair sharing of its benefits, and enhance national

growth in a way that effectively safeguards the environment and protect the rights of

affected communities.99

In a broad sense, mining, coal, oil, and gas companies are required to make payments to the

national government and to relevant local government units in the form of national internal

revenue taxes (taxes, fees, and charges); and to concerned indigenous cultural

communities/indigenous peoples (IPs/ICCs) in the form of royalty payments.

Mechanisms required by law to be set up with funds coming from the companies, or

expenditures that need to be allocated, spent, and reported by them for specific use, such as

for environmental protection, enhancement, and rehabilitation or for social development

and management purposes, shall not be considered in this paper as payments per se. These

will be discussed in the Social and Environmental Provisions section.

99 Rep. Act No. 7942 (1995), Sec. 2; DENR Adm. O. No. 2010-21, Sec. 4 (2010).


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A. Payments to the national government (by mining companies)

1. Income Taxes – paid after the lapse of the income tax holiday as provided for in the

Omnibus Investments Code.100 Domestic corporations pay this tax at the rate of 30%

upon taxable income derived during each taxable year from all sources within and

outside the Philippines; foreign corporations pay the same rate upon taxable income

derived from all sources within the country.101

A minimum corporate income tax of 2% of the gross income as of the end of the

taxable year is paid, starting on the fourth taxable year immediately following the

year that business commenced, when the minimum income tax is greater than the

tax computed in the preceding paragraph for the taxable year.102

It is noted that the income tax holiday granted to mining companies has been

suspended by the Board of Investments in 2012. The suspension applies to mining

firms that are applying or renewing their permits with the government.103

2. Excise Taxes – paid on mineral products as provided for under Section 151 of the

National Internal Revenue Code. With respect to mineral production sharing

agreements (MPSA), the excise tax on mineral products shall already be the

government share under the MPSA.104

Referring to the Revenue Code, the implementing rules of the Mining Act provide

that the excise tax on locally extracted or produced metallic mineral or mineral

products, a tax based on the actual market value of the gross output thereof at the

time of its removal, shall be paid in accordance with the following schedule:105

100 Rep. Act No. 7942, (1995), Sec. 83; DENR Adm.O No. 2010-21, Sec. 217 (2010). 101Beginning in 2000, the President upon the recommendation of the Finance Secretary may allow corporations the option to be taxed at 15% of gross income after satisfaction of certain conditions. Rep. Act No. 9337 (2005); Rep. Act No. 8424 (1997), Secs. 27 and 28, as amended by Rep. Act No. 9337 (2005). 102 Rep. Act No. 8424 (1997), Sec. 27, as amended. 103K. Manlupig, Mining income tax holiday suspended – BOI Chief. Rappler. Sept. 17, 2012. http://www.rappler.com/business/special-report/whymining/whymining-latest-stories/12579-mining-income-tax-holiday-suspended-boi-chief Accessed: October 10, 2014. 104 Rep. Act No. 7942 (1995), Sec. 84; DENR Adm. O. No. 2010-21, Sec. 217 (2010); Rep. Act No. 7229, amending Sec. 151 (e) of the Tax Code. 105 For purposes of Section 151 of the NIRC, the term gross output means the “actual market value of minerals or mineral products or of bullion from each mine or mineral land operated as a separate entity, without any deduction from mining, milling, refining (including all expenses incurred to prepare the said minerals or mineral products in a marketable state), as well as transporting, handling, marketing or any other expenses: Provided, That if the minerals or mineral products are sold or consigned abroad by the lessee or owner of the mine under C.I.F. terms, the actual cost of ocean freight and insurance shall be deducted: Provided, however, That in the case of mineral concentrate, not traded in commodity exchanges in the Philippines or abroad, such as copper concentrate, the actual market value shall be the world price quotations of the refined mineral

http://www.rappler.com/business/special-report/whymining/whymining-latest-stories/12579-mining-income-tax-holiday-suspended-boi-chief

http://www.rappler.com/business/special-report/whymining/whymining-latest-stories/12579-mining-income-tax-holiday-suspended-boi-chief


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Metallic mineral Period of Production Excise Tax Rate Copper and other metallic minerals (except gold and chromite)

June 24, 1994 - June 23, 1997

1.0%

June 24, 1997 – June 23, 1999

1.5%

June 24, 1999 – onwards 2.0% Gold and chromite 2.0%

Mining companies are obliged to file a return and pay such excise tax within 15 days

after the end of the calendar quarter when such products were removed, subject to

conditions that may be prescribed by the Secretary of Finance, upon the

recommendation of the BIR Commissioner.106

3. Mine Wastes and Tailings Fees – paid semi-annually (or within 45 calendar days

after the end of each semester) to the MGB by operating mining companies based on

the amount of mine waste and mill tailings that companies generate for the

period.107

The fees collected shall accrue to a Reserve Fund and deposited in a government

depositary bank for the exclusive purpose of paying compensation for damages

caused by the operations of the mine.108 The Mining IRR, however, added that the

Reserve Fund can also be used for duly approved research projects needed to

further the objectives of the fees.109

The MGB currently pegs the basic fee at PHP0.05/MT of mine waste produced and

PHP0.10/MT of mill tailings generated from mining operations. It nonetheless

makes exceptions when the mine waste and mill tailings are used, under certain

conditions, as filling materials for underground or surface mine openings,

products content thereof prevailing in the said commodity exchanges, after deducting the smelting, refining and other charges incurred in the process of converting the mineral concentrates into refined metal traded in those commodity exchanges.” [Section 151(b)] DENR Adm. O. No. 2010-21, Sec. 217; Rep. Act No. 8424 (1997) Sec. 151. 106 Rep. Act. No. 8424 (1997), Sec. 130. 107 Rep. Act. No. 7942 (1995), Sec. 85; DENR Adm. O. No. 2010-21 (2010), Secs. 189-191. 108 The damages contemplated under the law involve those that cause damage to personal lives and safety; lands, agricultural crops and forest products, marine life and aquatic resources, cultural resources; and infrastructure and the re-vegetation and rehabilitation of silted farms and other areas devoted to agriculture and fishing caused by mining pollution. Rep. Act No. 7942 (1995), Sec. 85. 109 DENR Adm. O. No. 2010-21 (2010), Secs. 189-190.


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engineered tailings, dams, roads, and housing areas; for concreting and manufacture

of concrete products; or, are impounded for future use. Companies that use mine

waste and tailings disposal systems with zero-discharge of materials or effluent

and/or with wastewater treatment plants consistent with DENR standards are

likewise exempt from paying these fees.110

The DENR Secretary, upon the recommendation of the MGB Director, has the

authority to increase these fees, when public interest so requires.111

4. Customs Duties and Fees – paid on imported articles, upon each importation, even

though previously exported from the country. Importation begins when the

carrying vessel or aircraft enters the country’s jurisdiction with the intention to

unlade therein, and terminates upon payment of such duties and fees due upon the

articles, or secured to be paid at a port of entry and the legal permit for withdrawal

is granted, or in case the articles are free of duties, taxes, and charges, until they

have legally left the jurisdiction of the BOC. For mining companies, relevant

customs duties on imported capital equipment vary depending on the article, such

as whether these are chemicals, explosives, mechanical and electrical equipments,

vehicles, aircraft or vessels.112

5. Value-Added Tax (VAT) – paid on every sale, barter or exchange of goods or

properties, on the sale of services, and on the importation of goods in the country.

The standard VAT rate is 12% of the gross selling price or gross receipts.113

6. Royalty in Mineral Reservations – amount paid to the MGB which is not less than 5%

of the market value of the gross output of the minerals/mineral products extracted

or produced from the mineral reservations excluding of all other taxes.114

It should be noted that the IRR directs that 10% of the said royalty and 10% of other

revenues (e.g., administrative, clearance, exploration, and other related fees)

derived by the government from the exploration, development, and utilization of

mineral resources within mineral reservations shall accrue to the MGB as a trust

fund. The trust fund shall be deposited in a government depositary bank and shall

be allocated for special projects and other administrative expenses related to the

110 Id., Sec. 190. 111 Id. 112 Rep. Act. No. 1937, as amended. 113 Rep. Act No. 8424, as amended (1997), Secs. 106-108. 114 DENR Adm. O. No. 2010-21 (2010), Sec. 13.


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exploration, development, and environmental management of minerals in

government reservations.115

7. Documentary Stamp Tax – paid upon any document subject to tax under Title VII of

the NIRC (on documentary stamp tax).116

8. Capital Gains Tax – domestic corporations pay 6% on gains presumed to have been

realized on the sale, exchange or disposition of lands and/or buildings which are not

actually used in its business and are treated as capital assets, based on the real

property’s gross selling price or fair market value, whichever is higher.117

All corporations also pay this tax upon the net capital gains realized from the sale,

barter or exchange of shares of stock in a domestic corporation not traded through

the local stock exchange. Tax is 5% if the net capital gains are not over PHP 100,000

and 10% on any amount in excess of PHP 100,000.118

A return on capital gains tax from sale of shares of stock not traded in the local stock

exchange must be filed within 30 days after each transaction and a final

consolidated return of all transactions during the taxable year on or before the 15th

day of the fourth month following the close of the taxable year.119

9. Tax on Branch Profit Remittances – paid by resident foreign corporations whenever

any profit is remitted by a branch to its head office at the rate of 15% based on the

total profits applied or earmarked for remittance without any deduction for the tax

component thereof (except those activities registered with the Philippine Economic

Zone Authority or PEZA).120

10. Harbor Fees, Wharfage Dues, Berthing Charge, Storage Charge, Arrastre Charge,

Tonnage Dues – paid on vessels and cargoes, regardless of the port or place of call of

the vessel, whether on government or private port.121

115 Id. 116 Rep. Act No. 8424 (1997), Sec. 200 and Title VII. 117 Id., Sec. 27. 118 Id., Sec. 27, Sec. 28 (7). 119 Id., Sec. 52. 120 Rep. Act. No. 8424, as amended (1997), Sec. 28. 121 Harbor fee is paid for every entrance or departure from a port of entry in the Philippines; wharfage due is assessed against a vessel engaged in foreign trade, based on the quantity, weight or measure received and/or discharge by the vessel; berthing charge is assessed for mooring or berthing at a pier or wharf or river at any port in the country; storage charge is assessed on articles for storage within the premises of the PPA; arrastre charge for handling, receiving, and custody of imported or exported article; and tonnage dues is assessed


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11. Other Fees – The Mining Act authorizes the DENR Secretary to prescribe reasonable

filing fees and other charges, which the IRR qualifies as fees and charges for services

rendered by the MGB and/or its Regional Offices.122

Pursuant to the foregoing provision, the DENR has imposed the payment of

clearance fees if the proposed contract area is open for mining applications; and

processing fees for the issuance of a Certificate of Environmental Management and

Community Relations Record (CEMCRR).123

Payments made by mining companies to the national government are summarized in the

following table:

Type of Payment Collecting Agency Rate Corporate income tax BIR 30% of taxable income Excise tax BIR 2% on actual market value of gross output

at time of removal Mine wastes and tailings fee MGB P0.05/MT of mine wastes and P0.10/MT of

mine tailings generated from mining operations

Customs duties and fees BOC Rate depends on type of article Value-added tax BIR 12% of gross selling price or gross receipts Royalty in mineral reservations

Not less than 5% of the market value of the gross output of the minerals/mineral products extracted or produced excluding all other taxes

Documentary stamp tax BIR Rate depends on type of transaction Capital gains tax BIR 6% of gross selling price or fair market

value of real property, whichever is higher (domestic corporations) 5-10% of value of shares (all corporations)

Tax on branch profit remittances

BIR 15% of total profits applied for remittance (resident foreign corporations)

Harbor fees, wharfage dues, berthing charge, storage charge, arrastre charge, tonnage dues

PPA Rate varies

Other fees MGB

based on the net tonnage of the vessel or weight of the articles discharged or laden. (Tariff and Customs Code, Sec. 2800-3202) 122 Rep. Act. No. 7942 (1995), Sec. 89; DENR Adm. O. No. 2010-21 (2010), Sec. 221. 123 DENR Adm. O. No. 2010-21 (2010), Secs. 37,167-A.


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B. Payments to the national government (by oil and gas companies)

The law clearly makes it an obligation for oil and gas contractors to pay their income tax to

the government.124 Insofar as these are not inconsistent with this decree, all the provisions

of the National Internal Revenue Code (NIRC) and its rules and regulations apply to the

contractors.125

However, a contract executed under this special law may give the contractor the privilege

of being exempt from the payment of: (a) all taxes, except income tax; and (b) tariff duties

and compensating tax on the importation of machinery and equipment, and spare parts

and all materials required for petroleum operations, subject to certain conditions.126 A

review of current contracts (including the model contracts) pertaining to oil and gas shows

that the industry, save for income taxes, enjoys absolute exemption from the payment of all

taxes.

Details of the required payments, including exemptions or qualifications, under the law are

herein discussed:

1. Income Taxes – paid by contractors for income derived from its petroleum

operations under its contract of service and computed as follows:

The gross income of service contractors consists of the: (a) gross proceeds from the

sale of crude oil at the posted price, in case of crude oil exported; (b) gross proceeds

from the sale of crude oil at market price per barrel, in case of crude oil sold for

consumption in the Philippines; (c) total quantity sold at the prevailing market

price, in case of natural gas and/or casinghead petroleum exported or sold for

consumption in the country; and (d) such other income which are incidental to

and/or arising from any petroleum operations.127

The law further provides that in computing the taxable net income, the following

shall be deducted from gross income: (a) Filipino participation incentive;128 and (b)

operating expenses of not more than 70% of the gross proceeds from production in 124 Pres. Decree No. 87 (1973), Sec. 8 (k). 125 Id., Sec. 25. 126 Id., Sec. 12 (a) and (b). 127 Id., Secs. 8(k), 19 and 20. 128This is an allowance (FPIA), which may be given to a service contractor in which Filipino citizens or corporations have a minimum participating interest of 15% in the contract areas. Subject to DOE conditions, this is a government subsidy, commensurate with the scope of Filipino participation, not exceeding 7-1/2%, which shall be computed by deducting the said allowance from the posted or marked price, whichever is higher, of crude oil exports produced in the contract area, and form the market price of crude oil produced in the contract area, sold or disposed of for consumption in the Philippines. (Pres. Decree No. 87, Sec. 28)


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any year, which includes amortization and depreciation.129 On the contrary, any

interest or other consideration paid in respect of financing the contractors’

petroleum operations is not an allowable deduction.130

For each taxable year, all contractors are required to provide the DOE with a return

specifying its gross income and allowed deduction. The DOE shall then file the

return with the BIR within the period specified in the NIRC and its rules. Every party

to a service contract is subject to tax separately on its share of taxable income

arising from such contract.131

2. Excise Taxes – paid on locally manufactured petroleum products and indigenous

petroleum under Sections 148 and 151 (A) (4) of the NIRC. For excise tax on coal, a

tax of PHP 10 per metric ton shall be paid; and for indigenous petroleum, 3% of the

fair international market price thereof, on the first taxable sale, barter, exchange or

such similar transaction.132

With the amendment of the Tax Code in 2005, locally extracted natural gas and

liquefied natural gas is no longer subject to the 2% excise tax originally imposed

therein. The tax is paid by the buyer or purchaser before removal from the place of

production.133

3. Value-Added Tax – transactions involving the sale or importation of coal and natural

gas, in whatever form or state, and petroleum products (except lubricating oil,

processed gas, wax and petrolatum) subject to excise tax; and the sale or import of

raw materials to be used by the buyer or importer in the manufacture of petroleum

products subject to tax (except lubricating oil, etc.) are exempt from the payment of

this tax.134

129 Pres. Decree No. 87, Sec. 8(1) obliges the DOE on behalf of the government to reimburse the contractor for all operating expenses not exceeding 70% of the gross proceeds from production in any year. Should the operating expenses exceed 70% of such gross proceeds in any year, the unrecovered expenses shall be recovered from the operations in the next years. Section 22 also explains that with respect to deduction of amortization and depreciation costs, intangible explorations costs may be deductible in full, while tangible explorations costs (like capital expenditures and other recoverable capital assets are to be depreciated for 10 years. 130 Pres. Decree No.87 (1972), Sec.23. 131 Id., Sec. 24. 132 The “first taxable sale, bArt.er, exchange or similar transaction” means the transfer of indigenous petroleum in its original state to a first taxable transferee; and “indigenous petroleum” includes locally-extracted mineral oil, hydrocarbon gas, bitumen, crude asphalt, mineral gas and all other similar or naturally associated substances, except coal, peat, bituminous shale and/or stratified mineral deposits. (NIRC, Section 151) 133 Rep. Act No. 8424, as amended (1997), Secs. 130 and 151 (A) (4). 134 Rep. Act. No. 8424 (1997), Sec. 109.


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4. Tax on Branch Profit Remittances – paid by resident foreign corporations whenever

any profit is remitted by a branch to its head office at the rate of 15% based on the

total profits applied or earmarked for remittance without any deduction for the tax

component thereof (except those activities registered with the Philippine Economic

Zone Authority or PEZA).135

5. Tariff Duties and Compensating Tax on the importation of machinery and

equipment, and spare parts and all materials required for petroleum operations –

contractors may be exempt from paying these tax and duties as a privilege in their

contracts, on the condition that the machinery, equipment, spare parts, and

materials of comparable price and quality are: (a) not available domestically; (b)

directly and actually needed and will be used exclusively by the contractor in its

operations; (c) covered by shipping documents in the name of the contractor whom

the shipment will be delivered directly by the BOC; and (d) DOE’s prior approval

was obtained before such importation.

The contractor or its subcontractor is prohibited from making any sale, transfer, or

disposition of these imported items without the prior approval of the DOE and taxes

due to the government are paid. Should the contractor or its subcontractor sell,

transfer, or dispose of these imported items without the prior consent of the DOE, it

shall pay twice the amount of the tax exemption granted.

Such sale, transfer, or disposition of the said items without tax may be allowed and

approved by the DOE if made (a) to another contractor; (b) for reasons of technical

obsolescence; or (c) for purposes of replacement to improve and/or expand the

operations of the contract.136

6. Rental Fee on Retained Areas – paid by the contractor annually when petroleum in

commercial quantity has been discovered and the contractor opted to retain after

the exploration period and during the contract period 12.5% of the initial area in

addition to the delineated production area. The annual rent shall not be less than

PHP 10 per hectare or fraction thereof for onshore areas and not less than PHP 20

as determined by the DOE per hectare or fraction thereof for offshore areas. Such

rentals may be offset against exploration expenditures actually spent on the area.137

135 Rep. Act No. 8424, Section 28. 136 Pres. Decree No. 87 (1973), Sec. 12 (b). 137 Id., Sec. 9 (e).


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The following is a summary of the national government taxes and fees (including

exemptions or qualifications) related to the oil and gas industry:

Type of Payment138 Collecting Agency Rate Corporate income tax BIR 30% of taxable income Excise tax BIR PHP 10/MT (coal)

3% of fair international market price (indigenous petroleum) Exempt (locally extracted natural gas and liquefied natural gas)139

Value-added tax BIR Exempt (sale/importation of coal and natural gas and petroleum products; raw materials used in manufacture of petroleum products subject to tax)

Branch profit remittances tax BIR 15% of total profits applied for remittance (resident foreign corporations)

Tariff and compensating tax BOC May be exempt, subject to conditions Rental fee on retained areas DOE Not less than P10/hectare (onshore)

Not less than P20/hectare (offshore)

In all cases, contractors are expected to allow the BIR examiners and authorized

representatives of the DOE full access to their accounts, books and records for tax and

other fiscal purposes.140

C. Payments to the national government (by coal companies)

In a coal operating contract, the operator provides the service, technology, and financing,

hence the law entitles it to receive a stipulated fee and to reimburse its operating expenses

from the national government.141 There are not many provisions that require coal

companies to make payments to the national government. Among these are as follows:

1. Performance Guarantee – in order to guarantee compliance with its contractual

obligations, the operator posts a bond or other guarantee of sufficient amount in

favor of the government, and with surety or sureties satisfactory to the DOE,

conditioned upon the faithful performance by the operator of its obligations under

the said coal operating contracts.142

138 As discussed, contracts for oil and gas may provide for exemption from all taxes (except income taxes) and, subject to conditions, from tariff duties and compensating tax on the importation of machinery and equipment, and spare parts and all materials required for petroleum operations. 139 Since 2005 Tax Code amendment, the buyer or purchaser pays tax before removal from the place of production. 140 Pres. Decree No. 87 (1973)., Sec. 8 (j). 141 Pres. Decree No. 972 (1978) Sec. 8. 142 Id., Sec. 14.


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2. Income tax – the law provides that the coal operating contracts may provide

incentives, including exemption from all taxes. One clear exception to that

discretion is the payment of income taxes.143

3. Tariff duties and compensating tax on importation of machinery and equipment and

spare parts and materials required for coal operations – as a general rule, coal

operating contracts may also exempt the operator from paying this tax subject to

the following conditions: (a) that the machinery, equipment, spare parts and

materials of comparable price and quality are not manufactured in the country; (b)

that the same are directly and actually needed and will be used exclusively by the

operator in its operations or in operation for it by a contractor; (c) that they are

covered by shipping documents in the name of the operator to whom the shipment

will be delivered directly by the customs authorities; and (d) prior approval of the

DOE was obtained before such importation.

However, any sale, transfer, or disposition of the above imported items requires the

prior approval of the DOE and the payment of tariff duties and compensating tax.

Should the operator or contractor eventually sell, transfer, or dispose of the

imported items without DOE’s prior approval, it shall pay twice the amount of the

taxes and duties thereon.

The DOE, nonetheless, may allow and approve such sale, transfer or disposition

without tax if made to another operator under a coal operating contract; for reasons

of technical obsolescence; or for purposes of replacement to improve and/or expand

its operations under the coal operating contract.144

D. Payments to the local governments

1. Local Business Tax – paid to the municipal government for the conduct of one’s

business. For any business subject to the excise, value-added or percentage tax

under the NIRC, as amended, the tax rate shall not exceed 2% of gross sales or

receipts of the preceding calendar year.145

2. Real Property Tax – annual ad valorem tax paid on real property (land, building,

machinery, and other improvements not specifically exempted by law), which

143 Id., Sec. 16. 144 Id. 145 Rep. Act. No. 7160 (1991), Secs. 14-146.


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should not exceed 1% and 2% of the assessed value of the property in case of a

province and of a city or municipality, respectively. 146

3. Occupation Fees – paid on public or private land. The amount of fees to be paid on

an annual basis depends on the type of agreement or contract and whether the land

is within or outside mineral reservations.147 The amount may be increased by the

DENR Secretary, upon the recommendation of the MGB Director, when national

interest and public welfare so require.

The fees shall be paid on the date of registration of the mining agreement and on the

same date every year after to the municipal or city treasurer where the onshore

mining areas are located, or to the MGB director for offshore mining areas. Should

the fees remain unpaid on the specified date, the amount of occupation fees shall be

increased by 25%.148

The law mandates that the proceeds from the collection of occupation fees should

accrue to the concerned LGUs. Of the total occupation fees collected from

contractors in onshore mining areas, 30% must be allocated to the province, and

70% to the municipality in which the mining areas is located. In a chartered city, the

full amount accrues to the city concerned.149

4. Community Tax – paid by a corporation regardless of its nature and manner of

organization in the place where its principal office is located. This consists of an

annual community tax of PHP500 and an annual additional tax in accordance with a

schedule.150

5. Toll fees or Charges – paid when the concerned LGU prescribes the terms and

conditions for the use of any public road, pier, or wharf, waterway, bridge, ferry or

telecommunication system funded and constructed by the LGU.151

6. Other local taxes – paid to the concerned LGU when it exercises its power to impose

a tax, fee, or charge or to generate revenue through a local ordinance, including fees

146 Id., Sec. 232-233. 147 For areas outside mineral reservation, the occupation fee for an exploration permit is PHP10 per hectare or a fraction thereof per year; for mineral agreements and FTAA, PHP50 per hectare or a fraction thereof per year. In areas inside mineral reservation, regardless of the type of mineral agreement, the amount of the occupation fee is PHP100 per hectare or a fraction thereof per annum. (DAO 2010-21, Sec. 218) 148 Rep. Act No. 7942 (1995), Secs. 86-87. 149 Id., Sec. 88. 150 Rep. Act No.7160 (1991), Sec. 158. 151 Id., Sec. 155.


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and charges for services rendered.152 The extent of the LGUs’ local taxing powers is

however limited by Section 133 of the Code.153

E. Other payments

1. Special Allowance – paid to claim owners or surface right owners, particularly

during the transition period from PD 463 and EO 279 (1987).154

2. Royalty payments for indigenous peoples – given to the concerned IP/ICC when

they have agreed, through the FPIC process, that their ancestral land may be opened

for mining operations.155 The royalty, made upon the use of the minerals within

ancestral lands, shall form a trust fund for the socio-economic well-being of the

IP/ICC community. The concerned IP/ICC is expected to manage and use the royalty

payment.156

While subject to negotiations and consequent agreement between the concerned

parties, the Mining IRR qualifies that such royalty payment must not be less than 1%

of the gross output.157 Expenses for community development may also be credited

or charged against the said royalty.

The NCIP provides further details on how these royalties should be released to the

concerned IP/ICC and how these should consequently be managed, used, and

reported.158

VI. Revenue Sharing Scheme

A. Mineral resources

The Mining Act provides that the total government share in a Mineral Production Sharing

Agreement (MPSA) shall be the excise tax on mineral products.159

152 Id., Secs. 132, 147, and 153. 153 The local tax authority of LGUs does not extend to the levy of certain taxes, e.g., income tax, documentary stamp tax, estate and inheritance tax, customs duties, taxes, fees or charges on goods carried into or passing through territorial jurisdiction of LGUs in the guise of toll fees or charges for wharfage dues, taxes on certified pioneer or non-pioneer business enterprises, excise taxes, VAT, etc. 154 Rep. Act No. 7942 (1995) Sec. 3; DENR Adm. O. No. 2010-21 (2010) Sec. 5. 155 It is observed that the NCIP regards the “royalties” not as an economic benefit due to the IP/ICC, but as a social justice measure. (NCIP Admin. Circular No. 3, series of 2012, Sec. 58) 156 Rep. Act No. 7942 (1995), Secs. 16-17. 157 DENR Adm. O. No. 2010-21 (2010), Sec. 16. 158 NCIP Adm. Circular No. 3 (2012), Part. VIII.


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With respect to other mineral agreements, specifically co-production and joint venture

agreements, the government’s share is negotiated by the government and the contractor. In

such negotiations, the parties are expected to consider the: (a) project’s capital investment;

(b) risks involved; (c) its contribution to the economy; and (d) other factors that will

provide for a fair and equitable sharing between the parties.160

In addition, the government is entitled to compensation for its other contributions which

shall be agreed upon by the parties. Among others, this consists of the taxes and fees

previously discussed, namely, contractor’s income tax, excise tax, special allowance,

withholding tax due from the contractor’s foreign stockholders arising from dividend or

interest payments to said foreign stockholders, in case of a foreign national, and such other

taxes, duties, and fees provided under existing laws.161

In case of FTAA, the government’s share is likewise negotiated by the parties. In addition

to the above four (4) factors, the parties also take into consideration the technical

complexity of the project in their negotiations. At the minimum, the government’s share in

FTAA consists of the contractor’s corporate income tax, excise tax, special allowance,

withholding tax due from the contractor’s foreign stockholders, arising from dividend or

interest payments to said foreign stockholders, in case of a foreign national, and such other

taxes, duties, and fees provided under existing laws.162

However, the collection of the government’s share in FTAA will start after the contractor

has fully recovered its pre-operating, exploration, and development expenses, inclusive.

The recovery period, counted from the date of commencement of commercial operation,

shall not exceed 5 years or at a date when the aggregate of the net cash flows from the

operations is equal to the aggregate of its pre-operating expenses, whichever comes earlier.

This period may be extended upon negotiation with the FTAA negotiation panel and

subject to approval by the DENR Secretary in case of projects determined by the MGB as

incurring huge investments with high production rate and extensive mine life. After the

recovery period, additional government share shall be paid by the contractor pursuant to

separate guidelines on the matter.163

159 Rep. Act No. 7942 (1995), Sec. 80, DENR Adm. O. No. 2010-21 (2010), Sec. 212; Rep. Act No. 7729, amending Sec. 151 (a) of the Tax Code. 160 Rep. Act No. 7942 (1995), Sec. 81; DENR Adm. O. No. 2010-21 (2010), Sec. 213. 161 Id. 162 Rep. Act No. 7942 (1995) sec, 81, DENR Adm. O. No. 2010-21 (2010) Secs. 213 and 214. 163 Rep. Act No. 7942 (1995) sec, 81, DENR Adm. O. No. 2010-21 (2010) Sec. 214.


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For mineral agreements and FTAAs within mineral reservations, the government share is

on top of the royalties payable to the government.164 This is in addition to the royalty

payment of not less than 5% of the market value of the gross output of the

minerals/mineral products extracted or produced from the mineral reservations exclusive

of all other taxes.165 As discussed, 10% share of this royalty and 10% of other revenues

(administrative, clearance, exportation, and other related fees) derived by the government

from the exploration, development, and utilization of mineral resources within mineral

reservations accrues to the MGB as a trust fund, deposited with a government depositary

bank, and allotted for special projects and administrative expenses related to the

exploration, development, and environmental management of minerals in government

reservations.166

In almost all the foregoing cases, the government share is paid to the nearest BIR office

where the mining/contract area is located and in accordance with BIR rules and

regulations. For those derived from mining operations within mineral reservations,

however, the government share is paid directly to the MGB in addition to the royalty

payment. The share of the MGB from the royalty is paid separately and directly to the MGB.

On the other hand, the additional government share is paid to the MGB within 30 days after

the filing and payment of final income tax return to the BIR.167

The government share from the use and development of mineral resources is allocated

according to the provisions of the Local Government Code, which ensures equitable sharing

among LGUs of such proceeds within their respective areas, including sharing the same

with their inhabitants by way of direct benefits.168

The Code provides that, in addition to the internal revenue allotment, LGUs have a 40%

share of the gross collection by the national government from the preceding fiscal year

from mining taxes, royalties, and such other taxes, fees, or charges, including related

surcharges, interests, or fines, and from its share in any co-production, joint venture or

production sharing agreement in the use and development of the national wealth within

their territorial jurisdiction. The 40% LGU share is distributed as follows:169

164 DENR Adm. O. No. 2010-21 (2010) Sec. 215. 165 Id., Sec. 13. 166 DENR Adm. O. No. 2010-21 (2010) Sec. 13. 167 Id., Sec. 216. 168 Rep. Act No. 7942 (1995), Sec. 82; DENR Adm. O. No. 2010-21 (2010), Sec. 216; Rep. Act No. 7160, (1991) Sec. 289. 169 Rep. Act No. 7160 (1991), Secs. 290 and 292.


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Location of natural resources

Province City or Municipality

Barangay Remarks

In the province 20% 45% 35% In 2 or more provinces, or in 2 or more component cities or municipalities, or in 2 or more barangays

Shares computed according to population (70%) and land area (30%)

In highly urbanized or independent component city

65% 35%

In 2 or more cities Same formula as above

In instances where a government-owned or controlled corporation is involved in the

exploration, development and utilization of mineral resources, the share of the LGUS shall

be based on the following formula, whichever produces a higher share for the LGU:170

(a) 1% of the gross sales or receipts of the preceding calendar year; or

(b) 40% of the mining taxes, royalty, forestry, and fishery charges, and such other taxes,

fees, or charges, including related surcharges, interests, or fines the GOCC would

have paid if it were not otherwise exempt.

Occupation fees are likewise allocated as follows: 30% of all such collections from mining

rights holders in onshore mining area accrue to the province, while 70% to the

municipality where the mining area is located. In a chartered city, the full amount of

occupation fees accrues to the concerned city.171

In terms of remitting the share of LGUs from national wealth use and development, the

Code provides that such share shall be automatically released to each LGU, without need of

any further action, directly to the provincial, city, municipal, or barangay treasurer, as the

case may be, on a quarterly basis within 5 days after the end of each quarter. The national

government is not allowed to subject such share to any lien or holdback.172

Out of its share from the proceeds derived by the government from such national wealth

use and development, LGUs are directed to finance local development and livelihood

projects.173

170 Rep. Act No. 7942 (1995), Sec. 82; Rep. Act No. 7160 (1991), Secs. 291-292. 171 Rep. Act. No. 7160 (1991) Sec. 88. 172 Id., Secs. 286 and 293. 173 Id., Sec. 294.


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A more detailed set of guidelines and procedures governing the release of LGU shares from

collections derived by the national government from mining taxes was issued in 2009.174

Finally, notwithstanding the grant of incentives by other government agencies to mining

contractors, the payment of the government share is expressly guaranteed.175

B. Petroleum and Coal

One of the key conditions that the DOE Secretary needs to consider when he enters into a

petroleum service contract is that the government share, including all taxes, should not be

less than 60% of the difference between the gross income and the sum of operating

expenses and such allowances as the DOE Secretary deems proper to grant.176 By

implication, it is construed that the income tax (and any other applicable taxes) forms part

of the government share in oil and gas.

There is no equivalent provision under Pres. Decree No. 972 on sharing of revenue.

The preceding section on the allocation of the government share from the use and

development of mineral resources likewise applies to energy resources.177 For projects

involving hydrothermal, geothermal, and other sources of energy, however, LGUs are

further directed to apply at least 80% of such proceeds to lower the cost of electricity in the

LGU where such a source of energy is located.178

VII. Sanctions

This part discusses the sanctions related to disclosure and payment/non-payment.

A. Under the Mining Act

The following constitutes grounds for the cancellation, revocation, and termination of any

mining agreement:

Failure to comply with any of the requirements provided in the Mining Act or its IRR

without a valid reason.179

174 DOF-DBM-DILG-DENR Joint Circular No. 2009-1 (2009). 175 DENR Adm. O. No. 2010-21 (2010), Secs. 38 and 52. 176 Pres. Decree No. 1459 (1978). 177 Rep. Act No. 7160 (1991), Secs. 289-294. 178 Id., Sec. 294. 179 Rep. Act No.7942 (1995), Sec. 95.


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Violation of the terms and conditions of the agreement.180

Non-payment of taxes and fees due to the government for 2 consecutive years shall

cause the cancellation of the agreement and the re-opening of the subject area to

new applicants.181

Failure to abide by the terms and conditions of tax incentives and credits shall cause

the suspension or cancellation of said incentives and credits.182

As part of its penal provisions, the Mining Act provides the following:

Any person who knowingly presents any false application, declaration, or evidence

to the government or publishes or causes to be published any prospectus or other

information containing any false statement relating to mines, mining operations or

mineral agreements, financial or technical assistance agreements and permits shall,

upon conviction, be penalized by a fine of not exceeding PHP 10,000.183

Any other violation of the Mining Act and its IRR constitutes an offense punishable

with a fine not exceeding PHP 5,000.184

The DENR Secretary is authorized to charge fines for late or non-submission of

reports in accordance with the IRR.185

There are no equivalent provisions under PD 87 and PD 972 on coal, oil, and gas.

B. Under the National Internal Revenue Code

Procuring unlawful divulgence of trade secrets - any person who causes or procures

an officer or employee of the BIR to divulge any confidential information regarding

the business, income or inheritance of any taxpayer, knowledge of which was

acquired by him in the discharge of his official duties, and which it is unlawful for

him to reveal, and any person who publishes or prints in any manner whatever, not

provided by law, any income, profit, loss or expenditure appearing in any income tax

180 Id., Sec. 96. 181 Id., Sec.97. 182 Id., Sec. 98. 183 Id., Sec. 101. 184 Id., Sec. 110. 185 Id., Sec. 111.


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return, shall be punished by a fine of not more than PHP2,000), or suffer

imprisonment of not less than 6 months nor more than 5 years, or both.186

Civil penalties – for failure to file any return and pay tax due under the Code on the

date prescribed, or failure to pay the deficiency tax within the time prescribed for its

payment in the notice of assessment, or failure to the full or part of the amount

shown in the return, a penalty equivalent to 25% of the amount due shall be

imposed. This is in addition to the tax required to be paid.187 In general, an interest

at the rate of 20% per annum, or such higher rate as prescribed in the rules, from

the date prescribed for payment until amount is fully paid, shall be assessed and

collected on any unpaid amount of tax.188

Criminal liability - The Code also provides penalties, among others, for the crime of

tax evasion and failure to file return, supply correct and accurate information.189

The penal liability imposed upon the responsible corporate officers, partners, or

employees can, upon conviction for the act or omission, extend to the corporation

itself.190

C. Under the Tariff and Customs Code

Concealment or destruction of evidence of fraud – any person who willfully conceals

or destroys, any invoice, book or paper relating to any article liable to duty, after an

inspection thereof has been demanded by the Collector of any Collection district, or

at any time conceals or destroys any such invoice, book or paper for the purpose of

suppressing any evidence of fraud therein contained, shall be punished by a fine of

not more than two thousand pesos, or by imprisonment for not more than one year,

or both.191

Violation of tariff and customs law and regulations in general - Any person who

violates a provision of the NIRC Code or its regulation, for which delinquency no

specific penalty is provided, shall be punished by a fine of not more than PHP 400 or

by imprisonment for not more than six months, or both.192

186 Tax Code (1997) Sec. 278. 187 Id., Sec. 248. 188 Id., Sec. 249. 189 Id., Sec. 254-255. 190 Id., Sec. 256. 191 Tariff and Customs Code Sec. 3605. 192 Id., Sec. 3610.


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D. Under Exec. Order No. 513 (Philippine Ports Authority)

Penalties. Any person who violates any of the provisions of the law or any of its rules shall be punished by imprisonment for not less than 1 day but not more than 6 years, and pay a fine of not less than PHP 200 but not more than PHP 1,000.

If the offender is a government official or employee, he shall, in addition to imprisonment and fine, be perpetually disqualified to hold any public office.

If the offender is a juridical person, the penalty of imprisonment and fine shall be imposed upon its manager, director, representative or employee thereof responsible for the violation.

If the offender is an alien he shall be deported immediately without further proceedings, after serving his sentence and paying the fine.193

E. Under the Joint DOE-DILG Circulars (Guidelines on the LGU use of proceeds from

energy sources)

In case of violation or non-compliance with the provisions of the Joint DILG-DOE

Circular 95-01, 98-01, and other relevant issuances, the DILG may, upon prior notice

of said hearing, order the project proponent through DOE the non-remittance of the

royalty payment to the host LGU concerned pending the completion of the

investigation of the concerned LGU. The unremitted funds shall be deposited in a

government bank under escrow.194

VIII. Incentives (Fiscal and Non-Fiscal Incentives)

A. Mining Investments Incentives

Prior to 2012,195 contractors of mineral agreements and FTAA are entitled to applicable

fiscal and non-fiscal incentives provided under EO 226 (Omnibus Investments Code of

1987), while exploration permit holders registered with the BOI may be entitled to fiscal

incentives under the Code for the duration of their permit.196 The implementing rules

193 Exec. Order No. 513 (1978), Sec. 43 194 DOE-DILG Circular No. 98-01 (1998), Sec. 6. 195 In 2012, the BOI has suspended the grant of mining income tax holiday. In 2013, the BOI’s Investment Priority Plan explicitly stated that the incentives for mining are limited only to zero-duty on importation of capital equipment, spare parts, and accessories by BOI-registered enterprises under Exec. Order No. 70. http://www.gov.ph/downloads/2013/11nov/20131113-MO-0059-2013-IPP.pdf. See also, GMA News Online: No more tax breaks for new mining projects under the proposed IPP – Trade Dept. July 19, 2013. http://www.gmanetwork.com/news/story/318295/economy/agricultureandmining/no-more-tax-breaks-for-new-mining-projects-under-proposed-ipp-trade-dept Accessed: October 20, 2014. 196 Rep. Act No.7942 (1995), Sec. 90.

http://www.gov.ph/downloads/2013/11nov/20131113-MO-0059-2013-IPP.pdf

http://www.gmanetwork.com/news/story/318295/economy/agricultureandmining/no-more-tax-breaks-for-new-mining-projects-under-proposed-ipp-trade-dept

http://www.gmanetwork.com/news/story/318295/economy/agricultureandmining/no-more-tax-breaks-for-new-mining-projects-under-proposed-ipp-trade-dept


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provide that such investments incentives are available to mining contractors subject to

their compliance with the provisions of the Code and prior approval of the BOI.197

In order to take advantage of these incentives, mining contractors must first register with

the BOI and comply with its requirements.198 Under the Mining Act, all mining activities

are always included in the BOI’s list of Investment Priorities Plan (IPP). Hence, BOI

registration and enjoyment of incentives are governed by the IPP, subject to EO 226, as

amended, and its applicable rules.199 The law also makes it clear that the incentives accrue

only upon (not before) approval of the mineral agreement or FTAA and/or date of BOI

registration.200 Once registered, a company engaged in mining activities is regarded under

the law as a pioneer enterprise.201

Under the 1987 Omnibus Investments Code, as amended by RA 7918 (1995), an enterprise

registered with the BOI is entitled to the following incentives, among others, subject to BOI

rules and regulations:

(1) Fiscal Incentives

1. Income Tax Holiday – BOI registered enterprises shall be exempt from the payment

of income taxes reckoned from the start of commercial operations. New projects

with a pioneer status, such as mining, shall be exempt for 6 years, while those of

non-pioneer firms shall be exempt for 4 years, and expanding firms for 3 years.

Subject to BOI guidelines, the income tax exemption may be extended for another

year in certain instances.202 Pioneer firms may not avail of this incentive for more

than 8 years. Any further extension of this incentive is not allowed.203

As discussed, this incentive has been suspended in 2012 and is no longer included

under the 2013 Investment Priority Plan for new mining projects.204

2. Tax and duty exemption on imported capital equipment and its accompanying spare

parts and accessories – 0% duty with corresponding 12% VAT until the effectivity of

197 DENR Adm. O. No. 2010-21 (2010), Sec. 222. 198 Id., Sec. 223. 199 Rep. Act No. 7942 (1995) Sec. 90; DENR Adm. O. No. 2010-21 (2010), Sec. 223. 200 DENR Adm. O. No. 2010-21 (2010), Sec. 223. 201 Exec. Order No. 226 (1987), Art. 17. 202 This is done when (a) the project meets the prescribed ratio of capital equipment to number of workers set by BOI; (b) use of indigenous raw materials at rates set by the BOI; (c) net foreign exchange savings or earnings amount to at least USD 500,000 annually during the first 3 years of operation. 203 Exec. Order No. 226, as amended, Art. 39 (a). 204

See Note 195.


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Exec. Order No. 528 in 2011. This incentive is retained under the 2013 Investment

Priorities Plan for new mining projects.205

3. Exemption from taxes and duties on imported spare parts – for export producers

with customs bounded warehouse exporting at least 70% of production.

4. Tax credit on domestic capital equipment – equivalent to 100% of the value of the

tax and customs duties that would have been waived had these items been

imported.206

5. Exemption from wharfage dues and export tax, duty, impost and fees – limited to

export of non-traditional export products.

6. Tax and duty free importation on breeding stocks and genetic materials.

7. Tax credit – on portion of domestic breeding stocks and genetic materials, and for

taxes on raw materials.

8. Additional deductions from taxable income (a) for labor expense, available for the

first 5 years from registration, equivalent to 50% of the wages of additional skilled

and unskilled workers in the direct labor force. Deduction is doubled when the

activity is located in a less developed area; and (b) for necessary and major

infrastructure work.

(2) Non-fiscal incentives

1. Employment of foreign nationals - foreign nationals may be employed in

supervisory, technical or advisory positions within 5 years from a project’s

registration or extendible for limited periods at BOI’s discretion; if majority of the

capital stock is owned by foreign nationals, key management positions may be

retained by foreign nationals beyond the terms.207

2. Simplification of customs procedures for the importation of equipment, spare parts,

raw materials, and supplies and exports of processed products of registered

enterprises in the operations of their bonded warehouses.208

3. Unrestricted use of consigned equipment209

205

See Note 195. 206 Exec. Order No. 226, as amended, Art. 39. 207 Id., Art.. 39 (g). 208 Id., Art.. 39 (e). 209 Id., Art.. 39 (f).


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4. Access to bonded manufacturing/trading warehouse system.

Aside from the foregoing BOI incentives, the Mining Act makes available the following

additional incentives to all mining contractors:210

1. Incentives for pollution control devices – when acquired, constructed or installed by

contractors, they shall not be considered as improvements on land or building

where they are placed, and thus not subject to real property and other taxes or

assessments. This incentive may be availed of by writing and submitting a sworn

report to the MGB Director detailing the devices, its cost, and amount of tax

exemption availed of. After evaluation, the MGB Director may issue a Certificate of

Tax Exemption for the purpose of availing the exemption from local government

taxes and assessment.

2. Income tax–carry forward of losses – a net operating loss without the benefit of

incentives in any of the first 10 years of operations may be carried over as a

deduction from taxable income for the next 5 years immediately following the year

of loss. The full amount of the loss shall be carried over to the first of the 5 taxable

years following the loss, and any portion of the loss exceeding the taxable income of

such first year shall be deducted in the same manner from the taxable income of the

remaining 4 years. The implementing rules clarified that only losses incurred in

activities attributable to mining operations may be carried over. Applications to

avail of this incentive are filed with the MGB within a month from the date of filing

with the BIR of the contractor’s income tax return where net operating loss was

deducted.

3. Income Tax-Accelerated Depreciation – contracts are allowed to have their fixed

assets depreciated to the extent of not more than twice as fast as the normal

depreciation rate or normal rate of depreciation if the expected life is 10 years or

less; or depreciated over any number of years between 5 years and the expected life

if the latter is more than 10 years, and the depreciation thereon allowed as

deduction from taxable income.

Mining contractors are given the option to avail either the incentive on income tax-carry

forward or losses under the Mining Act or the income tax holiday provided under the

Omnibus Investments Code. Once a choice is made, the contractor cannot avail of the other

option, and cannot switch these two incentives within the entire prescribed period.211 On

210 Rep. Act No. 7942 (1995) Secs. 91, 92 and 93; DENR Adm. O. No. 2010-21 (2010) Secs. 22, 224 – 226. 211 DENR Adm. O. No. 2010-21 (2010) Sec. 227.


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the other hand, the incentives on income tax-accelerated depreciation in the Mining Act

may be availed of simultaneously with the income tax holiday under the BOI.212

In order to avail of the foregoing incentives, mining contractors are subjected to some

conditions. Contractors must comply with all its obligations under the law and with all the

directives of the MGB. They must also allow the duly-authorized representatives of MGB to

inspect and examine its books of accounts and other pertinent records and documents to

determine compliance with the Mining Act, its implementing rules, and the terms and

conditions of the mineral agreement.213

Despite such grant of incentives, it is noted that the payment of the government share is

guaranteed under the rules.214

The foregoing paragraphs must be read with the 2013 Investment Priorities Plan, which has

limited the incentives granted to mining corporations.

B. Oil and Gas Investments Incentives

The relevant provision is Section 12 of PD 87 on the privileges of service contractors.

Notwithstanding any contrary provisions of any law, a contract executed under the said

decree may provide that the contractor shall have the following privileges:

1. Exemption from all taxes except income tax;

2. Exemption from payment of tariff duties and compensating tax on the importation

of machinery and equipment, and spare parts and all materials required for

petroleum operations subject to the conditions that the said items of comparable

price and quality are not manufactured domestically; are directly and actually

needed and will be used exclusively by the contractor in its operations or in

operations for it by a subcontractor; are covered by shipping documents in the

contractor’s name to whom shipment will be delivered directly by the customs

authorities; and prior approval of the DOE was obtained before such importation.

Any sale, transfer, or disposition of such items is not allowed unless there is prior

DOE approval and payment of taxes due.

3. Exemption upon approval by the DOE from laws, regulations, and/or ordinances

restricting the (a) construction, installation, and operation of power plant for its

exclusive use if no local enterprise can provide such power within a reasonable

212 Id. 213 Id., Sec. 228. 214 Id., Secs. 38 and 52.


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period and at reasonable cost in its operations; (b) export of machinery and

equipment which were imported solely for its petroleum operations when such is

no longer needed.

4. Exemption from publication requirements under RA 5455 on investments and doing

of business in the country by foreigners and foreign-owned organizations, which

makes any approval or certificate granted under the Act not valid without the

required publication;215 and the provisions of RA 6173 on the exploration or sale or

disposition of crude oil discovered and produced in the country.

5. Exportation of petroleum subject to the prior filing pro-rata of domestic needs as

elsewhere provided in the Act.

6. Entry, upon sole approval of the DOE which shall not be unreasonably withheld, of

alien technical and specialized personnel (including their immediate family

members), who may exercise their professions solely for the operations of the

contractor as prescribed in its contract with the government under the Act.

7. Rights and obligations in any contract concluded pursuant to the Act shall be

deemed as essential considerations for its conclusions and shall not be unilaterally

changed or impaired;

8. The above privileges and benefits shall also be made available to concessionaires

under the Petroleum Act of 1949 and their authorized contractors and/or service

operators, if they so elect.

When PD 87 was amended in 1983, a new incentive was added to the above list, to wit:216

9. Exemption from the investment requirements of foreign corporations under Section

125 in relation to Section 148 of the Corporation Code of the Philippines, which

deals with pertinent corporate information that must be specified by a foreign

corporation in its application for license to transact business in the Philippines.217

215 Section 7 of RA 5455 mandates the BOI Secretary, upon filing of any application under the Act, to publish such application at the expense of the applicant once a week for 3 consecutive weeks in the (a) Official Gazette and (b) in one of the newspapers of general circulation in the province or city where the applicant has its principal office. The BOI Secretary is further required to post copies of such application in conspicuous places, in the BOI office or in the building where the BOI office is located. The notices must state the applicant’ name, business or proposed business/investment, and other data required by the BOI. The provision states that no approval or certificate shall be valid without the publication and posting of such notices. 216 Pres. Decree No. 1857 (1983). 217Section 125 of the Corporation Code requires a foreign corporation applying for a license to transact business in the Philippines to submit to the Securities and Exchange Commission a certified copy of its


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C. Coal Investments Incentives

Coal operators and coal users are provided with considerable incentives to be able to lend

its technical and financial service capabilities.

Notwithstanding contrary provisions of any law, a coal operating contract executed under

the Coal Development Act may provide the operator with the following incentives:218

1. Exemption from all taxes except income tax;

2. Exemption from payment of tariff duties and compensating tax on importation of

machinery and equipment and spare parts and materials required for the coal

operations subject to certain conditions (discussed under Payments section);

3. Accelerated depreciation - At the option of the taxpayer and in accordance with the

procedures established by the BIR, fixed assets owned by the coal units in the

performance of its coal operating contract may be: (a) depreciated to the extent of

not more than twice as fast as normal rate of depreciated or depreciated at normal

rate of depreciation if expected life is 10 years or less; or (b) depreciated over any

number of years between 5 years and expected life if the latter is more than 10

years, and such depreciation is allowed as a deduction from taxable income;

4. Foreign loans and contracts - the right to remit at the prevailing exchange rate at the

time of remittance of such sum as may be necessary to cover principal and interest

of foreign loans and foreign obligations arising from technological assistance

contracts relating to the performance of the coal operating contract, subject to the

regulations of the Bangko Sentral ng Pilipinas.

5. Preference in grant of government loans - government financial institutions and

other government institutions engaged in financing on investment operations shall,

in accordance with and to the extent allowed by the enabling provisions of their

respective charters or applicable laws, accord high priority to applications for articles of incorporation and by-laws, and their translation to an official language in the county, if needed. The application must specify the following information: (1) date and term of incorporation; (2) principal office address of the corporation in the country or state of incorporation; (3) name and address of its resident agent authorized to accept summons and process in all legal proceedings; (4) place of operations in the country; (5) specific purpose in pursuing business in the country; (6) names and addresses of the present directors and officers of the corporation; (7) statement of its authorized capital stock and aggregate number of shares which it has authority to issue, if any; (8) a statement of its outstanding capital stock and the aggregate number of shares which it has issued, if any; (9) a statement of account actually paid in; and (10) such additional information as may be needed or appropriate in order to enable the SEC to determine whether such corporation is entitled to a license to transact business in the Philippines, and to determine and assess the fees payable. 218 Pres. Decree No. 972 (1976), Sec. 16.


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financial assistance submitted by operators in the performance of coal operating

contracts, whether such financial assistance be in the form of equity participation in

preferred, common or preferred convertible shares of stock, or in loans and

guarantee, and shall facilitate the processing and release of the funds for such

purpose. This incentive is extended only to operators which are nationals of the

country.

6. Entry upon the sole approval of the DOE of alien technical and specialized personnel

(including their immediate family members) who may exercise their profession only

for the operation of the operator as prescribed in its coal operating contract;

Several incentives are also given to enterprises that convert their existing oil fired plants

facilities to make the same adaptable for coal burning, to wit:219

1. Tax exemption on imported capital equipment – exempt from tariff and customs

duties and compensating tax within 7 years from the date of approval of the

conversion plan the importation of machinery and equipment, and its accompanying

spare parts when the important items are: (a) not manufactured in the Philippines

in reasonable quantity and quality at reasonable prices; (b) directly and actually

needed and will be used exclusively in the implementation of the conversion plan;

(c) covered by shipping documents in the name of the enterprise to whom the

shipment will be delivered direct by customs authorities; (e) prior approval, before

such importation, was obtained.

Like the provision for coal operators, any sale, transfer or disposition of such

imported items without the required prior approval shall make the importer liable

to pay twice the amount of the tax and duty thereon. The same conditions regarding

exceptions on the sale, transfer or disposition without tax and duty apply to coal

users.

2. Tax credit on domestic capital equipment – within 7 years from the date of approval

of the conversion plan, a tax credit equivalent to 100% of the value of the

compensating tax and customs duties that would have been paid on machinery,

equipment and spare parts necessary to implement the conversion plan had these

items been imported, shall be given to the coal user that purchases said machinery,

equipment, and spare parts from a domestic manufacturer, subject to the same

conditions as in availing tariff duty exemption.

219 Id., Sec. 17.


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3. Net operating loss carryover – a net operating loss incurred in any of the first 10

years after the start of implementing the coal conversion program may be carried

over as a deduction from taxable income for 6 years immediately following the year

of such loss.

4. Capital gains tax exemption - exemption from income tax on the proceeds of the

gains realized from the sale, disposition or transfer of capital assets which are sold

or disposed of as a result of the conversion of facilities to a coal burning plant,

subject to certain conditions.

5. Accelerated depreciation - same provisions as incentive to coal operators.

6. Foreign loans and contracts - same provisions as incentive to coal operators.

7. Preference in grant of government loans - same provisions as incentive to coal

operators

The foregoing incentives to enterprises converting to coal are administered and

implemented by the BOI. It also has the power to process and approve plans for

conversion to coal burning and applications for availing the incentives.220

IX. Contracts

A. Mining Contracts

The Mining Act provides for the various modes of acquiring mining rights:

1. Exploration Permit - gives the holder the right to conduct exploration for all mineral

resources in specified areas. The law defines exploration as the “searching or

prospecting for mineral resources by geological, geochemical or geo-physical

surveys, remote sensing, test pitting, trenching, drilling, shaft sinking, tunneling or

any other means for the purpose of determining the existence, extent, quality and

quantity thereof and the feasibility of mining them for profit.”

The permit is usually given for a period of two (2) years, subject to annual review

and relinquishment or renewal upon recommendation of the MGB Director.

The law, however, limits the areas for issuing an exploration permit onshore. At any

one time, in any one province, a qualified individual may explore a maximum of 20

220 Id.


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blocks, while a partnership, corporation, cooperative or association may explore

200 blocks at the most. In the entire country, individuals may explore up to a

maximum of 40 blocks, and partnerships, corporations, cooperatives or

associations, 400 blocks. Beyond 500 meters from the mean low tide level, the

maximum area for exploration can go as high as 100 blocks for individuals, and

1,000 blocks for partnerships, corporations, cooperatives or associations.

Once the commercial viability of a project is determined by the permit holder, the

individual or firm may, within the term of the permit, file with the MGB a

Declaration of Mining Project Feasibility together with a work program for

development. Its approval usually entitles the holder the exclusive right to other

mineral agreements or FTAA.221

2. Mineral Agreement - a contract between the government and a contractor involving

any of the following modes of mining operation: mineral production-sharing

agreement (MPSA), co-production agreement, or joint venture agreement.

Mineral agreements are granted for a term not exceeding 25 years and may be

renewed for another term not exceeding 25 years under the same terms and

conditions of the original agreement, but without prejudice to changes mutually

agreed upon by the parties. After the renewal period, the operation of the mine may

be undertaken by the government or through a contractor in a public bidding.

Under a mineral agreement, a qualified individual may hold onshore a maximum

area of 10 blocks at any time in any one province. A partnership, cooperative,

association or corporation, on the other hand, may hold a maximum area of 100

blocks in a province. In the entire Philippines, onshore, the limit is 20 blocks for

individuals and 200 blocks for partnerships, cooperatives, associations, or

corporations. In the entire country, offshore, the limit is 50 blocks for individuals

and 500 blocks for firms.

Mineral agreements are typically filed in the region where the mining area is

located, subject to approval by the DENR Secretary. The approved agreement is

submitted to the President of the Philippines.222

3. Financial or Technical Assistance Agreement (FTAA) - a contract involving financial

or technical assistance for large-scale exploration, development and utilization of

221 Rep. Act No. 7942 (1995), Secs. 20 to 25. 222 Id., Secs. 26 to 32.


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mineral resources. FTAA may be entered by the government with “foreign-owned

corporations”, which is defined in the law as those firms duly registered in which

less than 50% of the capital is owned by Filipino citizens.

Every qualified person may obtain a maximum FTAA contract area of 1,000

meridional blocks onshore, 4,000 meridional blocks offshore, or a combination of

the two. A set of terms and conditions is typically attached to the FTAA, which

includes proofs of investment and financial guarantees, technical competence, and

work program commitments. FTAAs are normally negotiated with the DENR and

executed and approved by the President.

Similar to mineral agreements, FTAAs have a term not exceeding 25 years from

execution, renewable for not more than 25 years under such terms and conditions

as may be provided by law.223

For purposes of this study, only the standard contractual stipulations in mineral

agreements and FTAA will be discussed. A mineral agreement essentially contains the

following terms and conditions:

1. Non-acquisition of title over contract/mining area. A stipulation that the contract

shall not, by virtue of the mineral agreement, acquire any title over the

contract/mining area without prejudice to the acquisition by the contractor of the

land/surface rights through any mode of acquisition provided by law;

2. Financial and technical capability and technology. Representations and warranties

that the contractor has, or has access to, all the financing and technical capability

and technology required to promptly and effectively carry out the objectives of the

Agreement with the understanding to timely use the resources under its supervision

pursuant to periodic work programs and related budgets, and when proper,

providing an exploration period (2-6 years).

If exploration beyond the 6-year period is warranted and on the condition that the

contractor has substantially implemented the Exploration and Environmental Work

Programs (EEWP) as verified by MGB, a renewal of the exploration period may be

granted. In this case, a performance surety equivalent to the expenditure

requirement of the EEWP shall be required.

223 Id., Secs. 33-41.


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In opting for a renewal of its exploration period, the contractor must file with the

MGB Regional Office an application, prior to the expiration, which shall be

accompanied by the following documents:

a. Justification of renewal;

b. Comprehensive technical reports on the outcome of the 2-year EEWP,

signed by a licensed mining engineer or geologist and an environmental

officer;

c. Audited financial statements covering the term of the exploration period;

d. 2-year Exploration Work Program (MGB Form No. 5-4), duly prepared,

signed, and sealed by a licensed mining engineer or geologist;

e. Environmental Work Program (MGB Form No. 16-1 or 16-1A);

f. Regional Office certification on the contractor’s compliance with the

terms and conditions of the mineral agreement during the exploration

period; and

g. Other supporting papers required by the MGB.

The conduct of feasibility studies is included during the term of the Exploration

Period. The Declaration of Mining Project Feasibility is also filed within the term of

the exploration period.

3. Qualifications. Representation and warranties that the applicant has all the

qualifications and none of the disqualifications for entering into the agreement.

4. Relinquishment of contract area. A stipulation that the contractor may relinquish

totally or partially the original contract area during the exploration period. After

exploration period and prior to or upon approval of the Declaration of Mining

Feasibility, the contractor shall finally relinquish to the government any portion of

the contract area not needed for mining operations and not covered by the

declaration of mining feasibility.

In evaluating the Mining Project Feasibility Study, the MGB shall consider the

expected life of mine, grade management, mining sequence, conservation measures,

and the capability of the project to pay the government share and absorb the

environmental and social costs.

There should be provisions guaranteeing the payment of the government share

notwithstanding the grant of incentives by other government agencies, number of

operating years without tax holidays that is more than the number of those with tax


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holidays, and minimum exploration expenditures for the remaining area after

relinquishment based on the approved exploration work program.

5. Size of mining area. A stipulation that each mining area after relinquishment shall

not be more than 5,000 hectares for metallic minerals, with a proviso for grant of

possible larger mining area depending on nature of the deposit and verified

technical/financial capability of the contractor.

6. Conduct of mining operations. A stipulation that the contractor shall conduct its

mining operations in accordance with the Mining Act and its IRR.

7. Preference for Filipino goods and services. A stipulation that the contractor shall give

preference for goods and services produced and offered in the Philippines of

comparative quality and cost, particularly in the areas of construction, road

construction and transportation, household equipment, furniture, and food.

8. Preference to Filipinos in employment. A stipulation that the contractor is obliged to

give preference to Filipinos in all types of mining employment for which they are

qualified and that technology shall be transferred to them.

9. Women workers’ rights and gender discrimination. A stipulation that the contractor

shall not discriminate on the basis of gender and that the right of women workers to

participate in policy and decision-making processes affecting their rights and

benefits shall be respected.

10. Anti-pollution measures. A stipulation requiring the contractor to use best available

anti-pollution technology and facilities to protect the environment and to restore or

rehabilitate mined-out areas and other areas affected by mine waste or mill tailings

and other forms of pollution, in compliance with the its ECC and the Pollution

Control law and in coordination with the EMB/Regional Office.

11. Annual reports. A stipulation that it shall furnish the government an annual report

of its mining operations and records of geologic, accounting, and other relevant

data, and the its books of accounts and records shall be open for inspection by the

government.

12. Sale of minerals. A stipulation requiring the contractor to dispose of the minerals

and by-products produced at the highest market price and to negotiate for more

advantageous terms and conditions, with right to enter into long-term sales or

marketing contracts or foreign exchange and commodity hedging contracts.


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A copy of the sales agreement must be given to the MGB, subject to confidentiality

between MGB and the contractor.

13. Consultation and arbitration. A stipulation providing for consultation and arbitration

with respect to the interpretation and implementation of the terms and conditions

of the agreement.

14. Payment of taxes, fees, royalties and other obligations. A stipulation that contractor

shall pay fees, taxes, royalties, and other obligations in accordance with law, rules

and regulations.

15. Alien employment. A stipulation that alien employment shall be limited to

technologies requiring highly specialized training and experience, subject to the

required approval under existing laws.

16. Understudies training. A stipulation that in every case where foreign technologies

are utilized and alien executives are employed, a program for training understudies

should be undertaken.

17. Labor, safety, and health standards. A stipulation that the contractor shall conform

with laws, rules and regulations regarding, among others, labor, safety, and health

standards.

18. Mining operations. A stipulation it shall confine its operations to its contract/mining

area and shall not interfere with the rights of other contractors or permit holders.

19. Indigenous people’s rights. A stipulation that the contractor shall recognize and

respect the rights, customs, and traditions of local communities, especially

indigenous cultural communities.

20. Development of host and neighboring communities, local geo-sciences and mining

technology. A stipulation that the contractor shall contribute to the development of

host and neighboring communities of the mining area, local geo-sciences and mining

technology.

21. Environmental programs. A stipulation that the contractor shall comply with its

obligations under its EPEP and AEPEP, including allocation of the prescribed annual

environmental expense, which may approximate a minimum of 3-5% of its direct


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mining and milling costs depending on the environment/geologic condition, nature

and scale of operations, and technology employed.224

22. Mining and processing technologies. A stipulation that the contractor shall use the

best available appropriate and efficient mining and processing technologies.

23. Exploration work program. A stipulation that the contractor shall undertake

exploration work on the area as specified in its agreement based on an approved

work program.

24. Progress reports of exploration. A stipulation that the contractor shall submit

annually starting from the date of approval of the agreement, progress reports of

the exploration activities to the MGB or Regional Office using the prescribed form.

The reports include:

a. Quarterly report containing activities and accomplishments for each quarter;

and

b. Final report detailing list of activities with corresponding expenditures, at the

end of the exploration term, and accompanied by 1:50,000 geologic map of the

contract area acceptable by international standards.

25. Cancellation, revocation or termination of agreement. A stipulation that that the

mineral agreement shall be canceled, revoked or terminated in the event of failure

of the contractor to comply with the terms and conditions thereof or for other

grounds as provided for in Section 230.

26. Withdrawal from the agreement. A stipulation that the withdrawal by the contractor

from the mineral agreement shall not release it from any and all financial,

environmental, legal and fiscal obligations under the Agreement.

27. Designation of assignee. A stipulation that a financing institution that has granted a

loan to the contractor for the mining project shall have the authority to designate its

assignee in case of the contractor’s default from such loan.

28. General Information Sheet. A stipulation that the contractor, if a juridical entity, shall

submit annually a copy of its SEC-received general information sheet.

224 DENR Adm. O. No. 2010-21 (2010), Sec. 171.


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29. LGU endorsement. A stipulation that the contract shall start its development,

construction and use activities after it has secured the required endorsement of the

project by the concerned Sanggunian pursuant to the Local Government Code.

30. Assumption of risks. A stipulation that the contractor shall assume all the risks

inherent and incidental to mining operations such that it will not be entitled for

reimbursement of expenses even if no minerals in commercial quantity are

developed and produced.

31. Inspection and audit of financial records. A stipulation that the financial records of

the contractor related to the mining operations shall be open to government

inspection at reasonable times upon prior written notice, and that the government

shall be part of the group that shall audit such financial records.

32. Beneficial ownership of minerals. A stipulation that the mineral agreement does not

grant beneficial ownership of the minerals to the contractor.

33. Minimum ground expenditure225. A stipulation that the contractor shall execute a

firm commitment, in the form of a sworn statement during the existence of the

agreement, that it shall comply with the minimum ground expenditures during the

exploration and pre- feasibility periods, as follows:

Year Pesos/Hectare

1 and 2 100 3 and 4 400 5 900 6, 7 and onwards 1,150

In case the minimum ground expenditure for a given year is not met for justifiable

reasons as determined by the MGB or concerned regional office, the unexpended

amount may be spent on the following year of the given exploration period of the

agreement. However, if the minimum ground expenditures for the given exploration

period of the Agreement are not met, the unexpended amount shall be paid by the

contractor and shall accrue to the MGB to be used for mining operations in mineral

reservations or for other purposes as it may be determined.

225 These are field and laboratory expenditures incurred for searching and delineating new or extension of ore bodies in an approved FTAA area, including expenditures for social preparation, pre-feasibility studies and reasonable administrative expenses incurred for the FTAA project. Such expenses include those for geological, geophysical, geochemical and air-borne geophysical surveys, borehole drillings, tunneling, test pitting, trenching and shaft sinking. Contributions to the community and environment-related expenses during the exploration period form part of the ground expenditures. (DAO 2010-21, Sec. 5)


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34. Other terms and conditions. Stipulations of other terms and conditions consistent

with the Constitution, the Mining Act and its IRR, as well as those that the DENR

Secretary may deem to be needed for national interest and public welfare.

The stipulations in FTAAs are almost the same as the terms and conditions of mineral agreements. FTAA similarly contains provisions related to, among others, conduct of its operations, preference for Philippine goods and services, women and gender, anti-pollution technology, payment of taxes and fees, alien employment, indigenous people’s rights, development of host and neighboring communities, environmental programs, local government endorsement, and reporting requirements. Notably, FTAA does not have equivalent provisions on labor, safety, and health, assumption of risks, and inspections and audits which mineral agreements have. Among the distinctive terms and conditions of FTAA contracts are as follows:

1. Minimum ground expenditures. A firm commitment in the form of a sworn statement

that it will comply with the minimum ground expenditures during the exploration

and pre- feasibility periods as follows:

Year US$/Hectare

1 and 2 2

3 and 4 8

5 18

6 23

In addition, a minimum investment of USD 50 million or its Philippine equivalent in

the case of Filipino contractor for infrastructure and development in the contract

area.

2. Relinquishment of contract area. A stipulation that the contractor shall relinquish its

contract area pursuant to Section 60 of the IRR, which requires relinquishment of at

least 25% of the original contract area during the first 2 years of exploration and at

least 10% of the remaining contract area annually during the extended exploration

and pre-feasibility study period. Any portion of the contract that is not needed for

mining operations and not covered by any declaration of mining feasibility shall

finally be relinquished to the government during the exploration and pre-feasibility

period. Such mining area after final relinquishment shall not be more than 5,000

hectares, unless the MGB Director, with the DENR Secretary’s approval, allows the

contractor to hold a larger mining area depending on the nature of the deposit and

technical verification by the MGB.


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At its option, the contractor may submit to the regional office concerned a

declaration of mining project feasibility over any portion of its contract area before

the lapse of exploration or pre-feasibility period.

The contractor shall submit a separate report of relinquishment to the regional

office with a detailed geologic report of the relinquished area accompanied by maps

at a scale of 1:50,000 and results of analyses and corresponding expenditures,

among others. The minimum exploration expenditures for the remaining area after

relinquishment shall be based on the approved Exploration Work Program.

3. Financing of mining operations. Representations and warranties that, except for

payments for dispositions for its equity, foreign investments in local enterprises

which are qualified for repatriation, and local supplier's credits and such other

generally accepted and permissible financial schemes for raising funds for valid

business purposes, the contractor shall not raise any form of financing from

domestic sources of funds, whether in Philippine or foreign currency, for conducting

its mining operations for and in the contract/mining area.

4. Performance of activities within period. A stipulation that the Contractor shall

perform its activities within the periods expressed in the FTAA plans and work

programs, save as may be excused by force majeure.

5. Designation of assignee. A stipulation that the contractor shall conform with laws

and rules to designate its assignee in case of the contractor’s default from such loan.

In both mineral agreements and FTAA, the DENR shall formulate and promulgate such

other rules, regulations and guidelines necessary to ensure compliance with the foregoing

terms and conditions.

B. Oil and Gas Contracts

Subject to the approval of the President, oil and gas contracts are executed by the DOE,

after due public notice, pre-qualification, and public biding concluded through

negotiations.226 As discussed, DOE Circular DC2014-02-005 is the basis for the competitive

bidding of service contracts for the exploration of potential petroleum areas in the country

under the Philippine Energy Contracting Round 5 (PECR-5).

226 Pres. Decree No. 87 (1973), Sec. 5.


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In general, the service contractor furnishes the service and technology, while the

government provides the financing to which all petroleum produced belongs. In return, it

is entitled to a stipulated service fee.227 However, if the government is not able to finance

the exploration operations, the service contract must stipulate that the contractor shall

furnish services, technology and financing, and the proceeds of sale of the petroleum

produced under the contract would be the source of funds for paying the contractor’s

service fee and operation expenses.228

The obligations of the contractor (which may be a consortium) are set forth in the contract.

Overall, it manages the petroleum operations and may be authorized under the contract to

dispose of and market the petroleum produced either domestically in the country or for

export, subject to supplying the domestic needs of the country. The government, on the

other hand, oversees the management of the operations and requires the contractor to:229

Provide all necessary services and technology;

Provide the requisite financing;

Perform exploration work obligations and program;

Operate the field on behalf of the government once petroleum in commercial

quantity is discovered;

Assume all exploration risks such that it is not entitled to reimbursement if no

petroleum in commercial quantity is discovered and produced;

Furnish the DOE promptly with geological and other information, data and

reports which it may require;

Maintain detailed technical records and accounts of its operations;

Conform to regulations regarding, among others, safety, demarcation of

agreement acreage and work areas, non-interference with the rights of other

petroleum, mineral and natural resources operations;

Maintain all meters and measuring equipment in good order and allow access

to these as well as to the exploration and production sites and operations to

inspectors authorized by the DOE;

Allow examiners of the BIR and other DOE authorized representatives full

access to their accounts, books and records for tax and other fiscal purposes; and

Be subject to Philippine income tax;

227 Id., Sec. 6. 228 Id., Sec. 7. 229 Id., Sec. 8.


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The contract also stipulates the obligations of the DOE, on behalf of the government, as

follows:230

Reimburse the contractor for all operating expenses not exceeding 70% of the

gross proceeds from production in any year;

Pay the contractor a service fee the net amount of which shall not exceed 40%

of the balance of the gross income after deducting the Filipino participation

incentive, if any, and all operating expenses recovered;

Reimburse operating expenses and pay service fee in such form and manner as

provided for in the contract.

The law provides that every service contract must also contain the following minimum

terms and conditions:

1. Prosecution of exploration work, delineation, and development. Stipulation that the

contractor is obliged to spend in direct prosecution of exploration work, delineation

and development following the discovery of oil in commercial quantity not less than

the amounts provided for in the contract. The amounts should not be less than the

total obtained according to a schedule of hectares and amounts per hectare. The

contract also stipulates that in case of contractor’s failure to comply with its work

obligations, it shall pay to the government the amount it should have spent but did

not in direct prosecution of its work obligations.

2. Payment in case of abandonment of exploration work. In case the contractor

renounces or abandons wholly or partly the area covered by its contract within 2

years from the effective date, it should in respect of the abandoned area pay the

government the amount it should have spent, but did not, for exploration work

during said 2 years. The performance guarantee posted by the contractor shall be

answerable for this obligation.

3. Compulsory relinquishment of area. Compulsory relinquishment of at least 25% of

the initial area at the end of 5 years from its effective date and should there be an

extension of the contract from 7-10 years, an additional relinquishment of at least

25% percent of the initial area at the end of 7 years from its effective date.

4. Delineation of production area. From the discovery of petroleum in commercial

quantity, delineate the production area within the period agreed upon in the

contract.

230 Id.


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5. Exploration period and rental on retained area. The exploration period is 7 years,

extendible for 3 years if the contractor has not been in default in its exploration

work obligations and other obligations after which the contract shall lapse unless

petroleum has been discovered by the end of the 10th year and the contractor

requests a further extension of 1 year to determine whether it is in commercial

quantity in which event, another extension of 1 year for exploration may be granted.

If petroleum in commercial quantity is discovered, the contractor may retain after

the exploration period and during the effectively of the contract 12-1/2 % of the

initial area in addition to the delineated production area. In this case, the contractor

is expected to pay annual rentals on such retained area (not less than PHP 10 per

hectare or fraction thereof for onshore areas and not less than PHP 20 as

determined by the DOE per hectare or fraction thereof for offshore areas). Such

rentals can be offset against exploration expenditures actually spent on such area.

6. Production period. Where petroleum of commercial quantity is discovered during

the exploration period in any area covered by the contract, the contract with respect

to said area shall remain in force for production purposes during the balance of the

10-year exploration period and for an additional period of 25 years, thereafter

renewable for a period not exceeding 15 years under such terms and conditions as

may be agreed upon by the parties at the time of renewal.

7. Properties of contractor. All materials, equipment, plants and other installations

erected or placed on the exploration and/or production area of a movable nature by

the contractor are considered properties of the contractor and shall remain so

unless the same is not removed from location within 1 year after the end of the

contract.

8. Labor, health, safety, and ecology. The contractor shall be subject to the provisions

of laws of general application relating to these matters insofar as they are not in

conflict with the provisions in the decree.

9. Discovery, production, sale, and disposal of natural gas and casinghead petroleum

spirit should be included stipulating that it must be in line with the rules prescribed

for crude oil, with the exception that the market price is the basis for tax and all

other purposes, and that priority shall be given to supplying prospective demand in

the country after meeting the requirements in secondary recovery operations.

In addition, notwithstanding contrary provisions of any law, a service contract may provide

certain privileges of the contractor.231 (Discussed under Incentives section) From the

231 Id., Sec. 12.


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language of the provision, it is understood that the contractor’s privileges are not

absolutely granted by virtue of the decree alone, but must be expressly stated as such in

every service contract.

Finally, service contracts may stipulate that disputes arising from the contract may be

settled through arbitration.232

C. Coal Contracts

Like oil and gas contracts, a coal operating contract is executed by the DOE, subject to the

approval of the President. As service, technology, and financing are furnished by the

operator, it is typically entitled to the stipulated fee and reimbursement of operating

expenses. Technical competence and financial capability to undertake coal operation is

thus required in the contract.233

As discussed, DOE Circular DC2014-02-005 is the basis for the competitive bidding of

service contracts for the exploration of potential coal areas in the country under the

Philippine Energy Contracting Round 5 (PECR-5). The PECR-5 process determines the legal,

technical, and financial qualification of applicants, the evaluation of their applications, and

the award of corresponding service and operating contracts for coal resources.

Coal operating contracts specify the obligations of the operator in undertaking, managing,

and executing coal operations in the country, which includes examining and investigating

lands supposed to contain coal, undertaking steps to reach the coal deposits so the same

can be mined; and extracting and utilizing coal deposits. In overseeing the management of

the coal development operations, the government typically requires the operator to:234

Provide all the necessary service and technology;

Provide the requisite financing;

Perform the work obligations and program prescribed in the contract;

Operate the area on behalf of the government in accordance with good coal mining

practices;

Furnish the DOE promptly with all information, data and reports which it may

require;

Maintain detailed technical records and account of its expenditures;

232 Id., Sec. 15. 233 Pres. Decree No. 972 (1976) Sec. 8. 234 Id., Sec. 9.


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Maintain detailed technical records and account of safety demarcation of agreement

acreage and work areas, non-interference with the rights of the other petroleum,

mineral and natural resources operators;

Maintain all necessary equipment in good order and allow access to these as well as

to the exploration, development and production sites and operations to inspectors

authorized by the DOE; and

Allow DOE authorized representative/s full access to their accounts, books and

records for tax and other fiscal purposes.

On the other hand, the DOE, on behalf of the government, performs the following:235

Reimburse the operator for all operating expenses not exceeding 90% of the gross

proceeds from production in any year, with a proviso that if in any year, the

operating expenses exceed 90% of the gross proceeds from production, the

unrecovered expenses may be recovered from the operation of succeeding years.

Operating expenses means the total expenditures for coal operation incurred by the

operator as provided in a coal operating contract;236 and

Pay the operator a fee, the amount of which shall not exceed 40% of the balance of

the gross income after deducting all operating expenses.237

In addition to the above operator’s fee, and subject to the conditions that it may impose, the

DOE may grant valid holders of coal revocable permits, coal leases and other existing rights

who have organized their area into a coal unit a special allowance of a maximum of 40% of

the balance of the gross income after deducting all operating expenses.238

Coal operating contracts with Filipino citizens or corporations not covered in the preceding

paragraph shall be granted a special allowance, the amount of which shall not exceed 30%

of the balance of the gross income after deducting all operating expenses. Coal operating

contracts in which Filipino individuals or corporations have a minimum participating

interest of 40% in the contract area may, subject to reasonable conditions imposed by the

DOE, be granted a special allowance not exceeding 20%of the balance of the gross income

after deducting all operating expenses.239

Among the minimum terms and conditions of every coal operating contract are the following:240

235 Id. 236 Id. As amended by Pres. Decree No. 1174 (1977). 237 Id. 238 Id.Sec. 10, as amended. 239 Id. 240Id, Sec.11, as amended.


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1. Spend amounts in direct prosecution of exploration work. This should not be less than

the amounts provided for in the coal operating contract and not less than the total

obtained by multiplying the number of coal blocks covered by the contract by PHP 1

million per block annually, with a proviso that the same may be reduced to PHP

200,000 per block annually if the area is suitable for opening pit mining;

2. Exploration, development and production. The exploration period is for 2 years only,

but may be extended to another 2 years if the operator has complied with its

exploration work obligations. Unless coal of commercial quantity is measured during

exploration or at the end of said period, the contract shall lapse. Otherwise, if coal of

commercial quantity is measured, the contract shall remain in force for development

and production during the balance of the exploration period and/or for an additional

period ranging from 10 – 20 years, thereafter renewable for a series of 3 year period

but not exceeding 12 years.

3. Movable properties. All materials, equipment, plants and other installations erected or

placed on the exploration and/or production area of a movable nature by the operator

shall become properties of DOE if the same is not removed within 1 year after the

termination of the coal operating contract.

4. Labor, health, safety, and ecology. The operator shall be subject to the provisions of

laws of general application relating to labor, health, safety and ecology insofar as they

are not in conflict with the provisions otherwise contained in this Decree.

Finally, as a stipulation in coal operating contracts, incentives may be provided to the

operator. (Discussed under Incentives section)

X. Social Development and Environmental Management Provisions

A. Mining Law

(1) Social Development and Management Expenditures

Chapter X of RA 7942 provides the standards for the development of mining communities,

promotion of the general welfare of inhabitants, and the development of science and

mining technology.241

DAO 2010-21 expounded this by requiring mining contractors in operation to allot

annually a minimum of 1.50% of the operating costs needed to implement their respective

241 Rep. Act No. 7942 (1995) Sec. 57.


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Social Development and Management Program (SDMP).242 Of this amount, 1.125% (75% of

1.50%) shall be allocated for the development of host and neighboring communities;

0.150% (10% of 1.50%) for the development of mining technology and geosciences; and

0.225% (15% of 1.50%) for the implementation of information, education, and

communication (IEC) programs.243

For purposes of the rules, “operating cost” means the “specific costs of producing a saleable

product on a commercial scale incurred in the calculation of the net income before tax, as

confirmed by the Bureau/Regional Office. This shall include costs and expenditures related

to mining/extraction and treatment/processing (inclusive of depreciation, depletion, and

amortization), exploration activities during operation stage, power, maintenance,

administration, excise tax, royalties, transport and marketing, and annual

progressive/environmental management.”244 For new mining operations, the initial SDMP

shall be based on the operating cost estimates found in the approved mining project

feasibility study.245

Specifically, the implementing rules provide a comprehensive list of “creditable activities or

expenditures” for specific areas of SDMP concern:

Specific SDMP Concern (% of SDMP)

Suggested Activities

For the development of the host and neighboring communities (75%)

Human resource development and institutional building activities that aim to strengthen existing local institutions, create new community organizations, and provide opportunity for marginalized/disadvantaged groups to participate in developing their communities, such as capacity building on project management, organizational development, entrepreneurship, and skills training.

Enterprise development and networking activities that help develop and promote economically viable community enterprises by providing community members with access to capital to stimulate existing livelihood industries and other income generating activities, such as animal husbandry, provision of farm implements, small/micro-businesses, preferential procurement of local goods, cooperative development, and market linkaging.

Assistance to infrastructure and support services that facilitate other forms of economic activity, such as development, construction,

242 SDMP is defined in the implementing rules as “a comprehensive 5-year plan towards the sustained improvement in the living standards of the host and neighboring communities by creating responsible, self-reliant and resource-based communities capable of developing, implementing and managing community development programs, projects and activities in a manner consistent with the principle of people empowerment. 243 DENR Adm. O. No. 2010-21 (2010), Sec. 134. 244 Id., Sec. 135. 245 Id., Sec. 134.


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improvement, maintenance of farm-to-market roads, water systems, post-harvest facilities, bridges, and electric power.

Access to education and educational support programs that aim to provide educational opportunities to members of the community, including scholarships, technical/vocational education, apprenticeship programs, construction/repair/improvement of school buildings and related facilities, provision of school furniture and fixtures, and subsidy to teachers, among others;

Access to health services, health facilities and health professionals that seek to improve overall living conditions and health of the host and neighboring communities. This could be provision of health facilities, access to health services, medicines and professionals, health education and preventive measures, training of health paraprofessionals, maternal-child health care and family planning, health insurance, nutrition and immunization programs, access to clean and potable water, and waste and sewage disposal facilities.

Protection and respect of socio-cultural values of the host and neighboring communities to promote social cohesion and cultural awareness and to instill community pride.

Use of facilities or services within the mine camp or plant site, such as hospitals and schools, among others, by members of the host and neighboring communities.

For the development of mining technology and geosciences (10%)

Basic and applied research on mining technology, geosciences, and related subjects like socioeconomics related to mining operations, environmental protection, and mineral economics.

Advanced studies and publications related to mining which are conducted by qualified researchers who are not employees of the mine.

Expenditures for scholars, fellows and trainees, including grants for dissertations, on mining technology and geosciences and related subjects.

Expenditures on equipment and capital outlay to assist research and educational institutions that serves as venue for developing mining technology and geosciences.

For the promotion of public awareness and education on mining technology and geosciences (15%)

Establishment or enhancement of information and publicity centers where stakeholders can access information on the performance of a mining project.

Publication of IEC materials on social, environmental and other issues/concerns relative to mineral resources development and responsible mining operations.

Expenditures for continuing public awareness and education campaigns (radio/web-based broadcasts, publications, other forms of mass communication on mining-related information and issues).


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It is noted that the expenditures for implementing the foregoing activities shall not be

credited to the royalty payment for IP/ICCs (discussed in Payment section).246

Finally, for holders of an exploration permit, or mineral agreement or FTAA in the

exploration stage, the permit holder or contractor shall instead develop and implement a

Community Development Program (CDP), which is supported by funds equivalent to a

minimum of 10% of the budget of the approved Exploration Work Program. The CDP is

also developed in consultation and in partnership with the host communities within the

area subject of active exploration and may include the foregoing activities.247

(2) Environment Standards and Related Expenditures

Among the environmental protection standards provided under the Mining Act are as

follows: (Chapter XI)

1. Environmental protection. Mining contractors are required to undertake an

environmental protection and enhancement program (EPEP) covering the

period of the mineral agreement or permit. The EPEP is part of the contractor’s

environmental work program (EWP) that is submitted as an accompanying

document to the application for a mineral agreement or permit.

The EWP includes plans relative to (a) mining operations; (b) rehabilitation,

regeneration, re-vegetation, and reforestation of mineralized areas; (c) slope

stabilization of mined-out and tailings covered areas; (d) aquaculture; (e)

watershed development and water conservation; and (f) socio-economic

development.

2. Environmental impact assessment. Most mining projects, particularly large-scale

mining, are considered under PD 1586 as environmentally-critical projects that

need to go through an EIA and secure an ECC prior to mining operation.

Under the 1995 Mining Act, except during the exploration period, an ECC is

required based on EIA procedures for mining projects. It requires that a

completed ecological profile of the proposed mining area is undertaken as part

of the EIA.

246 Id. 247 Id., Sec. 136-A.


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3. Rehabilitation. The law requires mining contractors to technically and

biologically rehabilitate excavated, mined-out, tailings covered, and disturbed

areas to the condition of environmental safety.

For this purpose, contractors must create a rehabilitation fund to be used for (a)

physical and social rehabilitation of areas and communities affected by mining

activities; and (b) for research on the social, technical and preventive aspects of

rehabilitation. The fund is based on the contractor’s approved work program

which is deposited as a trust fund in a government depository bank.

4. Tree cutting standard. Mining contractors are given the right to cut trees or

timber within the mining area that may be necessary for the mining operations

and subject to forestry laws, rules, and regulations. They are also required to

perform reforestation work within the mining area in accordance with forestry

laws, rules, and regulations.

5. Water use standard. Mining contractors likewise have water rights for mining

operations upon approval of application with the appropriate government

agency and in accordance with existing water laws, rules, and regulations.

6. Payment of just compensation for easement rights, compensation for damage to

property. The law states that when mining areas are so situated that for

purposes of more convenient mining operations it is necessary to build,

construct, or install on the mining areas or lands owned, occupied or leased by

other persons, such infrastructure like roads, railroads, mills, waste dump sites,

tailings ponds, warehouses, staging or storage areas, and port facilities,

tramways, runways, airports, electric transmission, telephone or telegraph lines,

dams and their normal flood and catchment areas, sites for water wells, ditches,

canals, new river beds, pipelines, flumes, cuts, shafts, tunnels, or mills, the

contractor is entitled to enter and occupy said mining areas or lands upon

payment of just compensation.248 Any damage caused to the property of the

surface owner, occupant, or concessionaire because of the mining operations or

as a result of the construction or installation of the said infrastructure is also

required to be properly and justly compensated.249 In all cases, the contractor

shall post a cash or surety bond in an amount to be agreed upon by the parties,

or in case of disagreement, to be determined by the MGB based on the type of

land and the value of the trees, plants, and other existing improvements.250

248 Id., Sec. 104. 249 Id., Sec. 107. 250 Id., Sec. 108.


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The implementing rules further flesh out the environmental protection provisions of the

Mining Law, which may be understood as expounding on the environmental standards for

mining in the country:

1. Certificate of Environmental Management and Community Relations Record

(CEMRR). Prior to the approval of mineral agreements and FTAA, the applicant

must secure a CEMRR to prove its satisfactory environmental management and

community relations in past mineral resource use ventures.

2. Environmental Work Program (EWP) during exploration. This is required for

exploration permits as well as mineral agreements and FTAAs that will go

through exploration activities. The EWP details the environmental impact

control and rehabilitation activities proposed during exploratory period,

including the costs needed to enable sufficient financial resources to be allocated

to meet the environmental and rehabilitation commitments. It should include, in

essence:251

a. A description of the expected and considered acceptable impacts;

b. The environmental protection and enhancement strategies based on best

practice in environmental management in mineral exploration;

c. A statement on post-exploration land use potential for various types of

disturbed land and extension of completion of the commitments in the

rehabilitation of the disturbed land in a technically, socially and

environmentally competent manner; and

d. Implementation schedules, system of environmental compliance

guarantees, monitoring, reporting and cost provisions.

3. Environmental Protection and Enhancement Program (EPEP) is regarded as the

operational link between the EPEP commitments under the rules and those

stated in the ECC under the Philippine EIS system, and the contractor’s mining

operation plan. The EPEP complements the requirement for an ECC. It is

required for mineral agreement and FTAA contractors following the issuance of

the ECC and is implemented during the life of the mine. The EPEP, which still

needs to be approved by the MGB, contains the following items:252

a. Proposed environmental impact control and rehabilitation activities

during the life of the mine, including costs needed to meet the life-of-the-

mine commitments;

251 DENR Adm .O. No. 2010-2 (2010), Sec. 168; MGB Form No. 16-1 or 16-1A. 252 DENR Adm .O. No. 2010-2 (2010), Sec. 169; MGB Form No. 16-2.


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b. A description of the expected and considered acceptable impacts as well

as the life-of-mine environmental protection and enhancement strategies

based on best practice in environmental management in mining;

c. A statement on post-mining land use potential for various types of

disturbed land (pits, waste dumps, tailings-impounding structures and

infrastructure sites) and which must extend to the completion of the

commitments in the rehabilitation of the disturbed land in a technically,

socially and environmentally competent manner.

d. Implementation schedules, system of environmental compliance

guarantees, monitoring, reporting and cost provisions.

For its initial environment-related capital expenditures, the contractor shall

allocate an approximate amount of 10% of the total capital/project cost or such

other amount depending on the environmental or geological condition, nature

and scale of operations, and technology employed.253

Initial environment-related capital expenditures may include environmental

studies and design cost, waste area preparation, tailings/slime

containment/disposal system, mine waste disposal system, wastewater/acid

mine drainage treatment plants, dust control equipment, air pollution control

facilities, drainage system and other environment-related mitigating measures

and capital expenditures.

4. Annual Environmental Protection and Enhancement Program (AEPEP). This is

also required to be submitted by the contractor before the start of every year of

operation in order to effectively implement the approved EPEP. This should be

implemented during the year for which it is submitted.

The allocation for a contractor’s annual environment-related expense is a

percentage based on the AEPEP which may approximate a minimum of three to

five percent (3-5%) of its direct mining and milling costs depending on the

environment/geologic condition, nature and scale of operations and technology

employed.254

5. Mine Environmental Protection and Enhancement Office (MEPEO). Required to be

organized by every contractor, the MEPEO is expected to set the level of

priorities and marshal the resources needed to implement environmental 253 DENR Adm .O. No. 2010-21 (2010), Sec. 169. 254 Id., Sec. 171.


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management programs. It is also expected to address the environmental

concerns of the contractor.255

6. Environmental monitoring and audit. A multi-partite monitoring team (MMT) is

required to be formed to regularly ensure that the contractor complies with its

approved EPEP/AEPEP. An independent environmental audit shall also be

undertaken annually in order to identify environmental risks affecting mining

operations and to serve as basis for the development of an effective

environmental management system.256

7. Environmental Compliance Certificate (ECC). As discussed, the contractor/permit

holder needs to secure an ECC before it can start operating its project. The EPEP

is considered under the rules as a mandatory ECC condition. The ECC will also

be used as basis in the preparation of the EPEP.

8. Contingent Liability and Rehabilitation Fund (CLRF). This is the collective name

for the environmental guarantee fund (EGF) mechanism that needs to be set up

to ensure just and timely compensation for damages, progressive and

sustainable rehabilitation for any adverse effect a mining operation or activity

may cause.

The CLRF, which is administered by a CLRF Committee, takes the following

forms:257

a. Mine Rehabilitation Fund (MRF). This is in the form of a Monitoring Trust

Fund (MTF) that is used exclusively to implement a monitoring program

approved by the MRF Committee; and Rehabilitation Cash Fund (RCF)

which is used to ensure compliance with the approved rehabilitation

activities.258

The MTF shall be in cash and in an amount determined by the MRF

Committee, which shall not be less than the amount of PHP 150,000. This

should cover maintenance and other operating budget for the

transportation and travel expenses, cost of laboratory analysis, cost of

supplies and materials, cost of communication services, cost of this

amount may be increased by the DENR Secretary when national interest

and public welfare require. The MTF is deposited in a mutually acceptable

government depositary bank exclusively used for the stated purpose.

255 Id., Sec. 173. 256 Id., Sec. 185. 257 Id., Chapter XVIII. 258 Id., Sec. 181.


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The RCF, on the other hand, is set up by the contractor which shall be

designated to ensure its compliance with the approved rehabilitation

activities and schedules, including research programs, as defined in the

EPEP/AEPEP. The RCF is equivalent to 10% of the total amount needed

to implement the EPEP or PHP 5 million, whichever is lower, and is

deposited as a trust fund in a mutually agreed government depositary

bank.

b. Mine Waste and Tailings Fee (MWTF). As discussed under the Payments

section, this fee is collected semi-annually based on the amount of mine

waste and mill tailings that an operating contractor generated for the

period. The fees accrue to a MWTF Reserve Fund and deposited in a

government depository bank to be used for payment of compensation for

damages caused by any mining operations.

The MGB currently pegs the basic fee at PHP0.05/MT of mine waste

produced and PHP0.10/MT of mill tailings generated from mining

operations, with certain exceptions on the matter of utilizing the mine

waste and mill tailings. (See discussion on Payments)259

c. Final Mine Rehabilitation and Decommissioning Fund (FMRDF). This fund

is established to ensure that the full cost of the approved Final Mine

Rehabilitation and Decommissioning Plan (FMRDP) or mine closure plan

is accrued before the end of the operating life of the mine. This is

estimated based on the costs of having such rehabilitation and

decommissioning work done by third party contractors, on an annual

basis, and deposited as a trust fund in a government depository bank to

be used solely for the implementation of the approved FMRDP.260

The contractor shall make annual cash provisions to the fund based on a

formula.261

B. Petroleum and Coal Resources Laws

The laws pertaining to petroleum and coal resources do not have similar extensive

provisions on social and environmental aspects of the industry. However, the following

provisions are relevant:

259 Rep. Act No. 7942 (1995) Sec. 85; DENR Adm. O. No. 2010-2 (2010) Sec. 190. 260 DENR Adm. O. No. 2010-2 (2010) Secs. 187, 187-B. 261 Annual Provision = Cost of Implementing the Approved FMRDP x Percentage (based on a table).


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First, once petroleum in commercial quantity is discovered, it is the contractor’s obligation

under the contract to operate the field on behalf of the government according to accepted

good oil field practices using modern and scientific methods to enable maximum economic

production of petroleum. This must be undertaken in a manner that avoids hazards to life,

health and property, avoids pollution of air, land and waters, and in pursuit of an efficient

and economic program of operation.262

A similar provision is found in the Coal Development Act, where coal operating contractors

are obliged to operate the area in accordance with good coal mining practices using

modern methods appropriate for the geological conditions of the area to enable maximum

economic production of coal, avoiding hazards to life, health and property, avoiding

pollution of air, land and waters, and pursuant to an efficient and economic program of

operation.263

Second, both laws subject the contractors to the provisions of laws of general application

that relate to labor, health, safety, and ecology insofar as they are not in conflict with the

provisions of either decrees.264

Moreover, a Memorandum of Agreement between DENR and DOE has been signed in

August 1999, streamlining the EIS process for energy projects.

With respect to social development and management, the DOE is tasked to devise ways and

means of giving direct benefits to the province, city or municipality, especially community

and people affected, and equitable and preferential benefit to the region that hosts the

energy resource and/or energy-generating facility. DOE must nonetheless ensure that

other provinces, cities, municipalities or regions shall not be deprived of their energy

requirements.265

Third, for coal projects, operators are obliged to observe the rules governing entry and use

of private lands, timber rights, and water rights.266 Surface owners and occupants of lands

affected by coal operations are generally entitled to the payment of compensation based on

the type of land and the value of trees, plants, crops, and other existing improvements.267

Further, while cutting of trees within the contract area is permissible, coal operators are

required to comply with forestry regulations, which include performing reforestation

262 Pres. Decree No. 87 (1973), Sec. 8 (d). 263 Pres. Decree No. 972 (1976), Sec. 9 (d). 264 Pres. Decree No. 87 (1973), Sec. 9; Pres. Decree No. 972 (1976), Sec. 11(d). 265 Republic Act No. 7638 (1992), Sec. 5. 266 Pres. Decree No. 1174 (1977) 267 Id. Section 16-A.


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works.268 Finally, the operator’s enjoyment of water rights is subject to government

regulations and should always be within the principles of reasonable and equitable

distribution of water supply.269

XI. Inputs to EITI Legislation

EITI is often described as a voluntary initiative. However, once a state subscribes to EITI,

its implementation is primarily undertaken or driven by the government.

A survey of different countries taking action on EITI reveals different forms of

implementation. In Nigeria, Liberia, and Mongolia, EITI is enacted or decreed as

legislation.270 In Norway, Ghana, and Sierra Leone, EITI finds its way as a clause in their

respective mining or petroleum laws.271 In Trinidad and Tobago, a Memorandum of

Agreement (MOA) signed by the government, companies, and civil society organizations

suffices to commence EITI implementation.272 The United Kingdom has launched in 2013

new transparency rules for extractive industry payments.273 At about the same time, the

United States has established an advisory committee under the Federal Advisory

Committee Act to oversee the country’s implementation of the USEITI,274 while the

Government of Canada has announced it would establish new mandatory reporting

standards for Canadian extractive industries.275

In the Philippines, EITI is declared as a broad commitment by the government under a

Presidential executive order, signed up by all three sectors during its launch in 2013, and is

now being considered by the MSG for legislation.

In whatever form, there is notably a strong direction for government agencies and

extractives companies to comply with EITI.

268 Id. Section 16-B. 269 Id. Section 16-C. 270 NEITI Act, 2007 (Nigeria); LEITI Act of 2009 (Liberia); Government of Mongolia Resolution No. 222 (2012) specifies role of State central and local administrative bodies in EITI implementation. A full draft EITI law is being discussed. 271 See https://eiti.org country pages. October 20, 2014. 272 See http://www.tteiti.org.tt/about-tteiti/final-executed-memorandum-of-understanding-on-the-implementation-of-eiti-in-trinidad-and-tobago/ Accessed: October 20, 2014. 273 UK Government website. https://www.gov.uk/government/news/new-transparency-rules-launched-for-extractive-industry-payments Accessed: October 20, 2014. 274 U.S. Department of Interior Website. http://www.doi.gov/eiti/FACA/index.cfm Accessed: October 20, 2014. 275 Website of the Prime Minister of Canada. http://pm.gc.ca/eng/news/2013/06/12/canada-commits-enhancing-transparency-extractive-sector. Accessed: October 21, 2014.

https://eiti.org/

http://www.tteiti.org.tt/about-tteiti/final-executed-memorandum-of-understanding-on-the-implementation-of-eiti-in-trinidad-and-tobago/

http://www.tteiti.org.tt/about-tteiti/final-executed-memorandum-of-understanding-on-the-implementation-of-eiti-in-trinidad-and-tobago/

https://www.gov.uk/government/news/new-transparency-rules-launched-for-extractive-industry-payments

https://www.gov.uk/government/news/new-transparency-rules-launched-for-extractive-industry-payments

http://www.doi.gov/eiti/FACA/index.cfm

http://pm.gc.ca/eng/news/2013/06/12/canada-commits-enhancing-transparency-extractive-sector

http://pm.gc.ca/eng/news/2013/06/12/canada-commits-enhancing-transparency-extractive-sector


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There are several issues that need to be considered in enacting an EITI law. Among these

are:

1. What is nature of the desired PH-EITI entity? Will it be an autonomous agency that

reports directly to the President? Or, will it continue to be attached to a specific

government agency, such as the Department of Finance? In its preference to

embody the interests of the various players, will it continue to be governed or

advised by a multi-stakeholder body? If so, what will be the role of this body and of

each member of the multi-stakeholder entity? Will it also be a corporate body that

can sue and be sued, and can legitimately acquire properties or raise its own

revenue?

2. What is the mandate of the PH-EITI? It is evident that PH EITI would be a monitoring

and reporting body that would ensure that the country promptly submits its

country reports as required to achieve the status of an EITI compliant country. It is

also apparent that PH EITI would have the mandate to facilitate the multiple

stakeholder interests involved in pushing the initiative forward. However, it will be

important to consider whether under the law, PH-EITI will be further given the

mandate to investigate companies’ and agencies’ compliance with its reporting

responsibilities. Consequently, will the PH EITI evolve into a regulatory body that

can also enforce the objectives of the law?

3. What is the scope of PH EITI reports? The broad objective of EITI globally is to

increase transparency in the companies’ payment of taxes, fees, and charges to the

government, and in the revenue that the government generates from these

companies. Will the PH EITI reports, under an EITI law, be limited to financial

disclosures? Or, will it be expanded to also include socio-economic monitoring?

4. What are the objectives of PH-EITI? By ensuring transparency in extractives

payments and revenues, will PH EITI also monitor and ensure accountability of

companies and agencies? Will it aim to eliminate corruption in payment, and thus

incorporate in the law provisions on liabilities and penalties? Will it seek to evaluate

government and industry practices in acquiring contracts, and thus intervene, when

needed, to ensure that EITI provisions are built in such contracts? Will it go further

as to ensure that the benefits due to the government are paid, duly accounted for,

and prudently used? Or, to ensure that significant outcomes are felt in extractives

communities in terms of social and economic development?

5. What are the activities that PH EITI will undertake? In connection with the foregoing

discussion, what are the activities of PH EITI apart from reporting, reconciling,


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audit, and publishing payments and revenues? Will it also launch information and

education activities, and conduct capacity-building initiatives? Will it be a platform

for dialogue alone? Or will it also be a platform for making policies and/or

enforcement? In encouraging companies and agencies to comply, will it have the

power to give due recognition, such as rewards, and provide incentives? Will it

suffice that the PH EITI engages in a “shame and blame” approach to promote

compliance and discourage errant behavior? Or, will it have the power prosecute

those that commit willful violations of the EITI law?

6. What are the financial considerations in implementing an EITI law? Several

remarkable laws passed by Congress are not fully implemented because of lack of

fund support. In crafting an EITI law, financial provisions to sustain the initiative

must be incorporated. Will its implementation solely depend on government

appropriations? Will it have the power to raise funds from private sources?

It is worthy to note that the Philippine government is also considering a broader Freedom

of Information Bill – a legislative proposal that aims to mandate the disclosure of public

documents.276 The administrative bill, an attempt to balance the government’s need for

secrecy and the public’s right to know in all aspects of governance, forms part of its Good

Governance and Anti-Corruption Plan of 2012-2016, which sets out the reforms towards

greater transparency, accountability, and citizen participation in governance.277 This

version, however, only covers information pertaining to official acts, transactions, or

decisions, and government research data used as a basis for policy development. Once

legislated, it will complement EITI in terms of the data that would emanate from the

government. But it will not involve information coming from the private extractives sector

– which EITI seeks to extract for further reconciliation with government data and

consequent validation.

276 House Bill No. 3237 and Senate Bill No. 1733; Proposed 2013 Freedom of Information Bill. Available at the Government of the Philippines Website at http://www.gov.ph/foi/ Accessed: October 12, 2014. 277 Id.

http://www.gov.ph/foi/