The oil and gas project in the Malampaya waters of the northwestern coast of Palawan is arguably the most felicitous piece of FDI (foreign direct investment) in this country. Initiated by subsidiaries of two of the world’s oil industry giants—Shell Exploration B.V. and Chevron Malampaya LLC, both with a 45 percent share—in the 1980s, the Malampaya project is the largest single piece of FDI the Philippines has received and, more important, it has placed this country among the ranks, however low, of the world’s oil and gas producers.
Unfortunately, this felicitous Malampaya picture is being marred by a dispute between the Philippine government and the consortium that owns the project. The dispute is about the taxes on the income earned by the consortium. The originator of the dispute was not the Bureau of Internal Revenue; it was CoA (Commission on Audit).
In two decisions that it handed down this year—on April 6 and May 11—CoA, after a recomputation, ordered DoE (Department of Energy) to collect additional taxes totaling P2.9 billion on the income earned by the consortium. Under the terms of the consortium agreement Philippine government, represented by PNOC Exploration Corp., receives 60 percent of the net proceeds from sales of Malampaya oil and gas.
DoE appealed the CoA decisions, but the appeals were denied. That left the consortium with no recourse other than to bring the matter to the attention of the president of the Philippines.
In his letter to President Aquino, Royal Dutch Shell Co. Ltd. chief financial officer Simon Henry stated that CoA’s claim for additional income taxes covering the years 2002-2014 was erroneous and violative of the terms of Service Contract No. 38. The claimed taxes were deemed, under the said service contract, to have been paid by DoE out of the government share of the consortium’s net income, Henry said. “This is expressly provided for under Service Contract No. 38,” the Royal Dutch Shell CFO said.
Then came the bombshell.
Henry told President Aquino: “I want to let you know that in order to preserve our rights under Service Contract No. 38, Shell Philippines Exploration B.V. (SPEX) together with the other foreign investor in the consortium, intends to initiate international arbitration shortly.”
The last thing that Shell wanted was any kind of conflict with the Philippine government, Henry said. But, he said, “The scale and nature of (the present) challenge are such that I believe we have no choice.”
This year Royal Dutch Shell celebrating its 100th year of operations in the Philippines.
The entire dispute appears to hinge upon the validity of the consortium’s claim that Service Contract No. 38 provides that the Philippine taxes on the consortium’s income are payable out of the Philippine government’s 60 percent share of that income. If the provision is clearly worded, nothing more need be said on the matter. If it is not, a determination by a third party will be needed.
Every effort needs to be exerted to bring about a fair and mutually acceptable resolution of the impasse between the Philippine government and the consortium. No one should be scared of arbitration proceedings, but word that the consortium has felt itself obliged to resort to arbitration is not going to do any good for the Philippines’ reputation as an FDI destination. The Shell folk are already talking about the sanctity of contracts; that kind of talk, suggestive as it is of the Philippines’ unreliability as a contracting party, can be very damaging.
CoA may win this battle with the Malampaya consortium. But did winning the battle and losing the war ever make sense?
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