Mining Taxation and Regulations

Bienvenido “Nonoy” Oplas Jr.

Presentation at the Rotary Club of Taguig Fort Bonifacio

Metro Club, Rockwell, Makati City

15 July 2013

Outline

I. Mining Images

II. Some Taxation Theory

III. Mining Tax Policy, PH vs. Chile

IV. Conclusions

I. Mining Images (wanton deforestation, soil erosion…)

Mining Images (Protests, rallies)

Mine tailings, well-enclosed. When fresh, they looked like thick reddish blood of a monster or giant animals. When they dry, they become huge blocks of hardened red soil. @Rio Tuba.

Urban tailings (left, Manila Bay, mouth of Pasig River) Vs. Mine tailings -- none (lower left, Rio Tuba, S. Palawan) The key are several rows of these structures below (encaged charcoal + rocks). * Disclosure: this writer has visited Rio Tuba Nickel Corp.

Mining Image (@Rio Tuba, S. Palawan) Not shown by activists

MAY 2008

Developmental stages of a rehabilitated totally mined-out area at GP-4

SEPT 2008

SEPT 2009

OCT.2011

2008

2011

Another mined out area rehabilitated, @Rio Tuba

2009

II. Some Tax Theory Deadweight loss of higher tax rate

* Deadweight loss arises bec. of monopolistic pricing incl. govt taxation, externalities, price controls. Higher tax, people will produce less even if a product is publicly needed. * Assume that corporate income tax + excise tax + royalty tax + other taxes is equiv. to 6% gross mining revenues. Mining output at this rate is 12 million tons. * Raising the tax to 10% will result in that shaded area, higher revenues for govt but lower mining output to society. Existing players willing to supply only 8 million tons.

Arthur Laffer (and JM Keynes): the higher the tax rate, the lower the tax revenue/collection

At tax rates approaching 100%, private enterprises will either stop working, or they work but understate output and bribe tax assessors/collectors

B. LOCAL TAXES/FEES

• Business tax

• Real property tax

• Registration fees

• Occupation fees

• Community tax

• Other local taxes

C. OTHER PAYMENTS

• Special allowance as defined by

the Mining Act

• Royalties to indigenous cultural

communities

III. Mining Taxation MPSA/FTAA

Other benefits: SDMP & CSR

A. NATIONAL TAXES / FEES * Corporate Income tax * Excise tax * Value-added tax * Royalties (for those in mineral reservations) * Capital Gains tax * Tax on interest payment to foreign loan * Tax on foreign stockholders dividends * Documentary stamp tax * Vehicle registration tax

The difference between the cumulative present value of net

mining revenue and cumulative present value of total govt

share to achieve a 50%-50% sharing

Net Mining Revenue = Gross Output – Deductible Expenses

Gross Output = actual market value of minerals or mineral

products from its mining area as defined by the National

Internal Revenue Code

Deductible Expenses = Allowable expenditures incurred by the

Contractor directly, reasonably and necessarily related to the

mining operations as defined in Section 3 of DAO 99-56

PLUS: Additional Government Share

(Net Mining Revenue-Based)

A. Mining Contribution to PH Economy * Share to GDP, 2011 = P99.2 Billion (1.0% of GDP) * Mineral Exports, 2011 = US$ 2.66 Billion (5.6% of Total Exports) * Direct Employment in Mining & Quarrying, 2012 = 258,000 • Taxes, Fees & Royalties from Mining, 2011 = P17.36 Billion B. Philippine Mining Production, 2011 * Gross Mineral Production = P 163.2 Billion; Of which: (a) Large-scale mines = P88 Billion; (b) Small-scale mines and non-metallic mines = P75.2 Billion.

Table 1. Breakdown of Tax Payment in 2010

source: Dr. Artemio Disini, presentation at the Philippine Economic Society

(PES) Conference, November 27, 2012, PICC, Manila.

The above table shows that: * Actual contribution of large scale metallic mining (LSMM) to taxes not just 9 but 13 percent of gross value production, as small scale gold mining (SSGM) sub-sector does not pay any national tax, only small local taxes and fees. * After deducting production cost, 60 percent for metallic and 50 percent for non-metallic, total taxes, fees and royalties paid to the government of P11.9 billion in 2010 comprised 43 percent of LSMM’s net revenue. * Government share of nearly P12 billion in 2010 alone, constituting nearly one-half of LSMMs’ net revenue is big. It is hard to find other sectors that are taxed this much. * The statement that large scale mining is “not taxed enough” is not valid. The phrase “not taxed enough” applies to small scale mining.

How About Tax Collections from SSM? S. Cotabato and Benguet

Data source: Alternative Forum for Research in Mindanao (AFRIM), 2012. A Background on Small Scale Mining in Benguet and South Cotabato and their Impact on the Economy, the Environment and the Community

• S. Cotabato provincial collection from sand and gravel + small scale

mining only P6.6 M in 2010 and P9.7 M in 2011 are indeed small. They target to collect P30 million in 2012.

• Benguet collection even smaller, only P8,000 in 2009 and P22,000+ in 2010. Of the 69 SSM operators, only 8 are registered and only 5 have payment records.

• With the case of these two mineral-rich provinces’ collection from SSM, a move to limit if not stop LSMM production in certain areas and allow only SSM will be a fiscal disaster for many LGUs themselves, aside from labor dislocation, environmental damage.

Mining Regulation: Mandatory CSR and SDMP

Source: JB Baylon, presentation at DLSU Mining Forum, January 2013

Source: Roberto Mayorga, Chile Ambassador to the Philippines. Presentation at Mining Conference, Manila, September 14, 2011.

Compare the foreign investments and mining taxation policies in Chile. PH taxation way far out, more complicated, more extortionary.

Positive results in Chile look like this – up to $67 B of new investments by 2017. PH projected mining investments of only $12.3 B by 2017. And the single biggest proj, Tampakan mine, is in big uncertainty as an LGU closed it.

High-Potential

Potential High Tax Base: Of the country’s total land area of 30 million hectares…

Of which only 2% currently covered by LSMM contracts/permits

About 30% or 9 million hectares are considered high mining potential

With estimated inventory of: * 8.03 Billion tons of COPPER; * 480.26 Million tons of IRON; * 4.91 Billion tons of GOLD; * 39.66 Million tons of CHROMITE; * 0.81 Billion tons of NICKEL; * 433.88 Million tons of ALUMINUM.

Worth some $1 trillion!

Source: Ronnie Recidoro, COMP

Table 2. Projections for New Mining Projects

2011* 2012 2013 2014 2015 2016 2017 2018

Investments

(Million $) 730 1,369 2,072 3,352 4,045 2,892 812

Revenues

(Million $) 3,768 3,768 4,878 5,167 7,959 10,675 13,114 14,036

Taxes**

(Million $) 400 400 555 596 987 1,367 1,707 1,837

Total investments (2011 to 2018): $15 billion

Total Annual Revenue: $3.8b in 2011, ramps up to $14b in 2018

Taxes Collected: $400m in 2011, increases to $1.8B in 2018

Mining share in GDP: 1.7% in 2011, increases to 5-6% in 2018

*Based on MGB Sep 2012 Figures **Estimated figures is without ITH

source: Dr. Artemio Disini, presentation at the Philippine Economic Society (PES) Conference, November 27, 2012, PICC; basic data from MGB Sept 2012

Anti-mining Claims: (1) “From 2000 to 2009, ave. contribution of mining only 0.91 % of GDP, 2.5 % of

total investments, and only 0.38 % of total employment.” Table 3. Philippine GDP by industrial origin at constant prices, % distribution

Source: computed from NSCB table 1, http://www.nscb.gov.ph/beyondthenumbers/2013/04122013_jrga_agri.asp#tab1

True that share of raw mining production /GDP ratio is small. BUT without those mineral products, (a) NO industrial production , no construction, electricity, cars/tricycles production. And (b) NO or little services production: No malls and buildings, no retail/wholesale/banking; no cell phones & computers, no telecomms, internet; no shipping and trucking, transport of goods and services via horses, cows, carabaos, bicycles, rickshaw.

(2) “Better develop agriculture than mining.” Should be no conflict between the two. But labor productivity and income per worker in LSMM larger than those in agriculture in general. Thus, the sector already provides social and economic services to the poor more than in agriculture in general Table 4. Some comparison between Agriculture and Mining

Source: Alonzo, Emmanuel, Issues Affecting the Mining Industry, Senate STSR Taxbits, July-August 2012.

• Mining is a useful and productive economic activity. People benefit from it even if taxes are zero. From spoon and fork, nails and hammer, cellphones and laptops, cars and airplanes, engines and buildings, they all came from mining.

• “Everything that humanity needs that cannot be grown, must be mined.” – Ed Coronel

• “No to mining whatsoever” is a non-option. “Tax mining as

prohibitively as possible” is next to non-option, will drive the legal, large and responsible mining companies and leave the country’s mineral resources to the guerilla type small-scale mining enterprises that are hardly taxed and regulated.

IV. Concluding Notes

• The statement that large scale mining is “not taxed enough” is not valid. The phrase applies to small scale mining.

• Raising mining tax up to 10% of gross revenues appears to be anti-investment. Should it be considered in a new law, other taxes and fees in mining should be abolished .

• Chile’s simple and low mining taxation policies should be considered by Philippine legislators. Where there are more mining investments, there are more jobs created, more community developments implemented, and more tax revenues collected due to wider tax base.

• Existing mining rights should be respected, allow older contracts to proceed and renew under the terms and conditions under the Mining Act of 1995, unless it is revised.