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Make the mining industry more competitive

"This is a step in the right direction. "

 

 

While the impact of the government’s banner tax reform program on inflation has rightly been emphasized, there is relatively less attention given to its other deleterious effects on the broader economy. For instance, while the Tax Reform for Inclusion and Acceleration Law doubled the excise tax on the mining industry, the House of Representatives recently passed on third reading House Bill 8400 which further increases the mining taxes.

To be sure, the income-generating aspect of the proposed measure, ostensibly to further support the Duterte administration’s critical and long-overdue infrastructure agenda is laudable. But from the macro-economic perspective of industry and economic experts, a thorough understanding of the dynamics and complexities of the mining industry such as the strategic repercussions to our competitiveness is needed to avoid costly policy blunders.

This was confirmed during a recent roundtable discussion on this proposed mining fiscal regime organized jointly by independent think tank Stratbase ADR Institute Institute, Philippine Business for Environmental Stewardship the Department of Environment and Natural Resources, and the Mines and Geosciences Bureau.

Stratbase ADRI president, Dindo Manhit said, “There is something counterproductive if a law that seeks to line the country’s coffers with additional tax revenues actually ends up losing billions’ worth of potential income as well as jobs and other benefits.”

“A more balanced policy in close consultation with stakeholders and backed by scientific data must be crafted that carefully considers competitiveness not just in the volatile global market of metallic ores but also in attracting large foreign investments needed in legitimate mining operations” Manhit said.

Ronald Recidoro of the Chamber of Mines of the Philippines compared the domestic mining industry with the “large, prominent” players with “fairly mature, robust mining fiscal regimes,” including Chile, Peru, Canada, South Africa, and the state of Queensland in Australia. To start, these countries, Residoro said, all have a mining tax based on the income rather than revenue as implemented in the Philippines.

The mining tax in Chile, South Africa, Australia, and Canada depends on the operating margin of companies, and while the last two also charge royalties based on revenue, the figure isn’t fixed, which means it will not debilitate the operation during rough periods. “The commodity’s price is made to act as a proxy for income,” he said.

It is only the Philippines that imposes a static excise tax regime on minerals, including the 4-percent excise tax, 1.7 percent business tax, 1 percent royalties to indigenous peoples, and 5 percent royalties if the operation is within a mineral reserve. All these, Recidoro said, renders the Philippine mining sector “not very enticing,” in addition to the notorious policy uncertainties and the moratorium.” The additional royalties imposed by the proposed tax law will make things even worse.

“Why are we thinking of adding more taxes to the mix? If we’re hoping to see more revenues because of these taxes, we think the result will be otherwise,” he said.

For their part, the Department of Finance acknowledged that competitiveness will be an issue for the industry but has a different take on the matter. “We thought otherwise because we own the resources,” said Elsa Agustin, DOF’s Domestic Finance Director. “We know that investors will come in because of the strategic natural resource, so in our presentation of numbers, we do not compare it to other countries.”

Agustin said the pending bill is geared toward simplification and efficiency, and making sure that the government gets its reasonable share of mining profits. “The complicated and varying tax regimes currently in place is one of the rationales behind the reform. A single fiscal regime applicable to all mines is sought as it promotes fairness, regardless of the nature of the agreement or the size of the mining contractor.”

But will simplifying and disregarding the global industry actually work here? But “investors are finite,” said Calixto Chikiamco, President of Foundation for Economic Freedom. It is misguided to assume that the local mining sector can determine its direction without considering the industry worldwide because the industry is not booming, he said.

“We compete with others in terms of attracting investments. Our competitors are weaponizing incentives, while we, on the other hand, are imposing a lot of uncertainty in the sector,” he said.

ADRi Non-Resident Fellow Nonoy Oplas agreed, arguing that the Philippines continues to squander the potential of mining investments to help narrow the trade deficit because of the lack of a sensible tax regime.

“Mining investments have decreased throughout the years and the $5.9-billion Tampakan project is still not operational. Metallic and non-metallic exports were also low when world prices are high. Tax collection from both local and national governments are high, while the approved and registered agreements and permits have declined over the years,” he said.

For UP School of Economics professor Ramon Clarete, high taxes will not amount to anything if the mining tax base remains stagnant. “The state owns the minerals, but if I am the Secretary of Finance, I need to have a good base of that particular tax. the only way I can have a good base is to encourage investors to find it for me. You can’t do that if you have an onerous taxation.

While the original version imposed a royalty of 5 percent across the board and top-up of government share to 50 percent of income whenever government share is below 50 percent, the final version (HB 8400) imposed a range of royalties applied to income from mining operations. They range from one to five percent, depending on operation margins. It also added a Windfall Profits Tax to income from mining operations. The tax ranges from one to ten percent, also depending on the operation margins. It also introduced thin capitalization and ring-fencing.

To sum up. The final version of the bill still imposes higher taxes than other countries. It is higher than the current Mineral Production Sharing Agreement and lower than the Financial or Technical Assistance Agreement.

If the proposed bill becomes law before the end of this Congress, the mining industry and the government will have to live with this “unhappy compromise”.  As a citizen observer, my tendency is to always look at developmental solutions. I agree that policy should be skewed towards boosting competitiveness. This is critical, not just for mining, but for all industries.

It is useless to talk of our huge mineral potential if they remain underground. We need to first, attract exploration investments to know where these mineral riches are, then attract billions of dollars in quality investments that will bring in the best technologies to harness these resources responsibly. If the government just implemented the existing mining law and maintained stable and supportive policies, mining would now be a major pillar of our economy and perhaps we would not need all of these new taxes for Build Build Build.

There are numerous other countries with more sensible fiscal regimes for the mining sector, and it is no coincidence that they are in countries with successful mining industries that had paved the way for the industrialization of their economies, which is ironically also one of the goals of the so-called Dutertenomics. Simplification and raising mining taxes, won’t work. Focusing on policies that will make the mining industry globally competitive is the right direction.

Topics: Orlando Oxales , mining industry , tax reform program , Tax Reform for Inclusion and Acceleration Law
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