Digging into the mining business

(First of three parts)

In my former work, I paid very little attention to the tax concerns of those in the mining business. After all, I thought that taking care of the International Tax Affairs Division absolved me from concerning myself about their tax issues unless it relates to the implementation of a tax treaty. However, after several interactions with clients engaged in mining, I was prompted to take a closer look into their tax exposures and the interplay of incentives accorded them that may modify such exposure. For those who dare mine, explore with me!

Contractor must be a qualified person

Let us start digging into the Philippine Mining Act of 1995. Initially, this law would tell us that to be a contractor or a party to a mineral agreement or to a financial or technical assistance agreement (FTAA), one must be a qualified person. And a qualified person is defined as a Filipino citizen with the capacity to contract or a corporation, partnership, association, or cooperative organized or authorized for the purpose of engaging in mining, with technical and financial capability to undertake mineral resources development and duly registered in accordance with law at least 60 percent of the capital is owned by citizens of the Philippines. But then a legally organized foreign-owned corporation shall be deemed a qualified person for purposes of granting an exploration permit, financial or technical assistance agreement or mineral processing permit.

From this perspective, attention is readily drawn to matters on taxes and incentives a contractor must deal with in this business. 

Income tax vis-à-vis 2008 Investment Priority Plan (IPP)

The Philippine Mining Act of 1995 provides that after the lapse of the income tax holiday (ITH) under the Omnibus Investments Code (OIC), a contractor shall be liable to pay the income tax as provided in the National Internal Revenue of 1997 (Tax Code). For corporate taxpayers, the Tax Code provides that the corporate income tax is 35 percent of the taxable income of the Philippine corporation, or minimum corporate income tax (MCIT) of two percent of the gross income may be imposed on the Philippine corporation when the MCIT is greater than the regular corporate income tax due for the taxable year beginning on the fourth taxable year following commencement of its business operations. Under tax regulations, commencement of business operations means the year when the corporation registered with the Bureau of Internal Revenue (BIR). For Individual taxpayers, he is subject to the rates from five percent to 34 percent (now five percent to 32 percent under Republic Act 9504).

For a contractor to determine entitlement to ITH, it must consult the Investment Priorities Plan (IPP) issued pursuant to the Omnibus Investment Code. The Philippine Mining Act of 1995 is included in the Mandatory Inclusions of the 2008 IPP which covers exploration and development of mineral resources, mining, quarrying and processing of metallic and non-metallic minerals. Its footnote, however, states that such activities in general are not entitled to ITH except those projects that comply with the minimum investment requirement or degree of value adding as provided in the Specific Guidelines. Moreover, projects on exploration, mining, quarrying and processing of minerals may be entitled to ITH if located in Less Developed Area (LDAs) or in the thirty (30) poorest provinces.

Specific guidelines on the exploration, development and utilization of mineral resources

Tunneling towards the Specific Guidelines of the 2008 IPP provide for more details and clearer understanding of which activities would enjoy ITH incentive:

1. Exploration of mineral resources including those covered by mineral agreements may qualify for pioneer status (but not entitled to ITH);

2. Mining , quarrying and/or processing of metallic and non-metallic minerals (except those involving riverbed operations, cave mining and beach mining) may have ITH entitlement under any of the following parameters:

a. Mining, quarrying and/or mineral processing

• The mining and/or mineral processing projects require a process or technology other than the normal or usual processes or technology to mine and/or process the minerals, without which, the resources will not be developed or the mining activity will not be possibly undertaken;

• For copper and gold project, a hurdle on the magnitude of investments equivalent to $50 million for gold and $300 million for copper;

• For nickel, chromite and iron projects, an additional processing step that will add further value to the mineral end product is required (e.g., ferronickel, mixed sulfites, nickel pig iron, ferrochrome, refractory bricks);

• For all projects, there should be a mine life of at least 10 years.

b. Non-metallic mineral activity must support a downstream industry, e.g., clay for ceramic manufacturing, silica for glass manufacturing.

c. Mining and processing of aggregates is not entitled to ITH. Mining and quarrying of marble and other dimension stories are not entitled to ITH.

d. Marble and/or other dimension stones processing projects, whether or not integrated with mining and quarrying, must export at least fifty percent (50 percent) of production, if Filipino-owned or at least seventy percent (70 percent), if foreign-owned.

e. Mineral processing projects must locate outside the National Capital Region.

All projects must have the necessary permits/licenses from competent authorities.

It can be surmised after all that while a contractor may be subject to regular corporate income tax or MCIT as applicable, if qualified and after being granted BOI registration, may enjoy ITH incentive, six years for pioneer projects and four years for non-pioneer projects. It is after the lapse of the ITH period and without an approved extension of the ITH incentive, that the contractor is liable for corporate income tax. (To be continued)

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(Alma L. Barcelo is a director for Tax and Corporate Services of Manabat Sanagustin & Co., CPAs, a member firm of KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. This article is for general information only and is not intended to be, nor is it a substitute for, informed professional advice. While due care was exercised to ensure the quality of the information contained in this article, readers should carefully evaluate its accuracy, completeness and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances. For comments or inquiries, please email [email protected] or [email protected]).