Sanctity of contracts
HIDDEN AGENDA (The Philippine Star) - October 12, 2016 - 12:00am

In its first 100 days accomplishment report, the Department of Energy under Secretary Al Cusi said that pursuant to the DOE’s commitment to maintain and strengthen the predictability, certainty, and consistency of investment rules of the country, it has affirmed its position that the income tax of the private contractor for the Malampaya gas project in Northwest Palawan, shall form part of the 60 percent government share.

In its motion for reconsideration filed with the Commission on Audit (COA), the DOE has urged COA to honor government’s commitment in its contract with the Malampaya consortium, which includes Shell Philippines Exploration B.V. (SPEX), Chevron Malampaya LLC and PNOC Exploration Corp.

COA has issued a notice of charge to collect from the Malampaya consortium about P151 billion in income tax payments covering the period 2002 to 2016, following the commission’s position that corporate income tax should not form part of the government’s share in the Malampaya project.

According to Cusi, the legal basis of the DOE’s position is Presidential Decree no. 87 or the Oil Exploration and Development Act of 972, and PD 1459, which authorizes the energy chief to enter into petroleum service contracts.

Even the previous DOE administration was pushing for COA to honor the contracts of the Malampaya gas project to avert the negative impact on the upstream exploration industry and discourage foreign investors.

Cusi has earlier emphasized that petroleum exploration in the country remains at 33 percent, which is relatively lower than its Southeast Asian peers, adding that in the face of these daunting challenges, of the foremost consideration in the mind of foreign investors in deciding where to invest is the predictability, certainty and consistency of investment rules and regulatory regime of a country.

Cusi raised the matter to the Economic Cluster after SPEX filed a second arbitration case arising from the COA ruling.

DOE director for legal Arthus Tenazas earlier noted that COA’s decision interferes with the powers of the DOE to implement PD 87 and PD 1459, pointing out that Sec. 12 of PD 87 states the contractor is exempted from all taxes, except income tax. Meanwhile, Sec. 18 provides that in no case shall the annual net revenue share of the government, including all taxes paid by or on behalf of the contractor, be less than 60 percent of the difference between the gross income and the sum of the operating expense and Filipino participation incentive.

Tenazas has said it is very clear in the law that the 60 percent share of the government may include all income paid by the contractor, and considering that the contractor is exempt from all taxes except income tax, the taxes that is referred to under Section 18 of the law, PD 87, refers to income tax.

He also emphasized that Sec. 1 of PD 1459 provides that the share of the government including all taxes shall not be less than 60 percent of the difference between the gross income and the sum of the operating expenses and such allowances such as the Secretary of Energy may deem proper to grant. So the law practically provides that the 60 percent share of the government include all taxes out of the net income of the project, he added.

The COA should apply what the law states, however unfair it may seem for the auditors. They say that there is no provision in the law that says the income taxes of the Malampaya contractors will form part of the government’s 60 percent share of Malampaya natural gas project’s earnings.

COA uses as its basis also PD 87 and PD 1459 which it said state that the government’s minimum share was 60 percent of Malampaya’s net earnings and that the contractor’s service fee shall not exceed 40 percent of the balance of the gross income.

Both COA on one hand, and the DOE and Malampaya’s contractors on the other hand, use the same legal provisions as basis for their respective positions. But shouldn’t the parties to the contract, namely DOE and the Malampaya contractors, be in a better position to know what is the correct interpretation? Shouldn’t these two government agencies speak with one voice?

Not so hidden agenda

ALA INDUCTION: The 10-country ASEAN Law Association (ALA) held its two-day legal forum last Oct. 7-8, capped by the formal induction as Philippine minister-representatives to the ALA Governing Council of several members of President Duterte’s Cabinet, most of whom had served as ALA officials for many years. Shown in photo are inductees Executive Secretary Salvador Medialdea (fourth from left), Justice Secretary Vitaliano Aguirre II (sixth from left), Information and Communications Technology Secretary Rodolfo Salalima (seventh from left), Transportation Secretary Arthur Tugade (fourth from right), Pagcor president & COO Alfredo C. Lim (third from right), and Solicitor General Jose Calida (second from right). Others in photo are ALA President Avelino Cruz (fifth from left), ALA Philippine National Committee chair retired Supreme Court Chief Justice Artemio Panganiban (third from left), ALA PNC Secretary General Atty. Regina Geraldez (second from left), Atty. Leni Papa (leftmost) and ALA public relations committee head Atty. Mike Toledo (rightmost).


WINE EVENT: PAL president and COO Jaime Bautista has expressed the company’s support for the 16th Grand Wine Experience on Nov. 4 at the Marriott Grand Ballroom, Resorts World. PAL is a co-presentor sponsor of the event, the largest in Southeast Asia, which will showcase and make available for tasting more than 500 wines from France, Chile, US, Australia, Japan, Argentina and other countries. Shown in photo is Bautista (second from left) shaking hands with Robert Lim Joseph (third from left), chairman of Philippine Wine Merchant. With them is PAL’s Eya Prospero and Dawn Ignacio, off-trade head of Philippine Wine Merchant. Other sponsors are Rustan’s Supermarket, Starbucks, Store Specialist Inc., Diageo Philippines, Future Trade International, Moet Hennessy Philippines, Ralph’s Wine and Spirits, Emperador Distillers, Resorts World Manila and Department of Tourism. For comments, e-mail at

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