Publications


Business and Economic Update
Issue 04

Mining Taxation in the ASEAN

Despite the huge potentials in mineral deposits of the Philippines, mining output is not that big. The average share of mining gross value added (GVA) is only around 0.9 percent of the country’s gross domestic product (GDP). Employment in mining and quarrying constitutes only 0.6 percent of total employment.

The share of taxes, royalties and fees from mining look small too, only P20+ billion out of around P1.5 trillion tax collections or just 1 percent of total tax collections. The “smallest” of mining’s contribution is “multiplier effect” due to the fact that its not counted.

The final products of mining output, from gadgets and electronic devices to appliances, cars and buses, boats and airplanes, malls and buildings, are valued higher compared to the value of raw materials, those stones, rocks and soil that contain the mineral ores.

Almost all industrial (manufacturing, construction) and services (transportation, telecom, IT, etc.) activities use mining products. No mineral products means almost no industrial production, very little services sectors. Public transportation will be horses and carabaos, not cars, buses, jeepneys or trains.

Table 1. Basic Statistics, Philippine Mining Industry

Source: Mines and Geosciences Bureau (MGB), DENR,
http://www.mgb.gov.ph/Files/Statistics/MineralIndustryStatistics.pdf

Legend: NGAs – national government agencies; LGUs – local government units; X – exports; nya - not yet available.

Almost all of the taxes and fees mentioned in the table above are from large-scale mining, very little from small scale mining.

Comparative ASEAN taxes
The Philippines has the highest rate in value added tax (VAT) and gross sales tax (GST) in the region, and second highest in corporate income tax (CIT) and personal income tax. Vietnam and Malaysia are cutting their CIT, signifying a growing tax competition among the association’s member-countries.

Table 2. Tax rates in the ASEAN, in percent

Source: http://www.alasoplascpas.com/publication-taxupdate-specialissue2.php

In the 2010 Report on “Paying Taxes”, the Philippines ranked second to the last among the ASEAN countries, indicating that our tax system is among the most complicated and lessfriendly to investors and businessmen. By 2015 Report, the country’s ranking has improved, 4th from the last among ASEAN countries.

The improvement in ranking after five years was due to (a) reduced number of payments per year, and (b) lower average tax rate paid by private businesses to the government.

Table 3. Paying Taxes in ASEAN Countries, Indicators

Source: World Bank, Doing Business, 2010 and 2015 Reports

In terms of total tax rates, the amount paid to the government as a share of private enterprises’ net and taxable income, the Philippines used to have the highest rate among the ASEAN economies in the 2009 and 2012 Reports.

In the most recent, 2015 Report though, tax rate in the Philippines have declined from almost 51 percent in 2009 to only 42.5 percent. This is still big compared to its many ASEAN neighbors, but at least the trend is there, declining tax rate.

Table 4. Paying Taxes in the ASEAN, in percent: 2009, 2012, 2015 Reports

Source: Price Waterhouse Coopers (PWC), Paying Taxes, annual reports: 2009, 2012, 2015

Mining taxation

As shown in the table below, the Philippines seems to have an “anti-export” policy because it is the only country among the six countries covered, to impose a VAT on exports, including mineral exports. And if one must get a VAT refund, it would take that person more than one year to get the money, an unsightly situation comparable to Indonesia.

In withholding tax (WHT) rates, the Philippines also has the second highest rate in the region.

Table 5. Mining taxation Asia, in percent

Source: PWC, Corporate income taxes, mining royalties and other mining taxes: A summary of rates and rules in selected countries, June 2012, http://www.pwc.com/en_GX/gx/energy-utilities-mining/publications/pdf/pwc-gx- miining-taxes-and-royalties.pdf

Among the distortions created by high tax rates is the appearance of “deadweight loss” in the economy. A deadweight loss arises because of monopolistic pricing including government taxation, externalities and price controls.

At higher tax, people will either produce less even if a product is publicly needed because the bulk of extra income derive from more work only goes to the government, or they will continue working but underdeclare actual output and pay lower taxes.

Two famous economists, Arthur Laffer and John Maynard Keynes illustrated that the higher the tax rate after a certain point, the lower the tax revenue/collection can be. As tax rates approach 100%, private enterprises and individuals will either stop working, or they continue work but understate output. The tax assessors/collectors may allow it in exchange for personal and financial gains.

Chart 1. The Laffer Curve

The number of taxes, royalties, fees, contributions and mandatory programs impose on mining companies can be dizzying. The cost of compliance alone, filling up and submitting various permits and paper work would already be high, plus the actual cost of those taxes and fees.

Here is a list, not comprehensive nor complete, yet but would give an idea of the high cost of compliance with the various mining and community regulations.

Table 6. Mining-related taxes, royalties, fees, contributions in the Philippines

Average effective tax rate (AETR)

The AETR is developed to estimate how much taxes, fees and related charges are being paid by the mining and extractive companies to the government, local and national. AETR is computed as the ratio of the Net Present Value (NPV) of total tax collections over the projected life of the mine to the NPV of the total project pre-tax net cash flows (discount rate of 10%).

Here are the numbers. The 79 percent refers to the new taxes as proposed by the Mining Industry Coordinating Council (MICC), contained in House Bill No. 5367 at the House of Representatives.

Chart 2. Computed Average effective tax rates (AETR), selected countries

Source: Halcon, Nelia, COMP’s EVP. “The MICC Proposed Fiscal Regime for Mining: An Assessment”, July 2014

Here is one news report, Mining tax rate could top ASEAN, BusinessWorld, August 18, 2015. The proposed new mining revenue-sharing scheme can raise the government’s take from the industry to as much as 71 percent, potentially would be the highest among ASEAN countries.

Under HB 5367, the government as “owner of the minerals” will get each year 10% of a miner’s gross revenues or 55% of “adjusted net mining revenues” (ANMR: gross revenue less production and other deductible costs but not to exceed 10% of direct mining, milling and processing costs), whichever is higher; and 60% of any windfall profit (in case the “ANMR margin” -- ANMR divided by gross revenue -- exceeds 50%, the government gets 55% of that threshold of 50% of gross revenue plus 60% of the excess).

Government’s share will be in lieu of CIT, royalty to indigenous communities, duties on imported specialized capital mining equipment, mayor’s business permits, other fees and charges imposed by host LGUs.

But mining companies will still have to pay other levies: VAT, capital gains tax, stock transaction tax, documentary stamp tax, withholding tax on passive income, donor’s tax, environmental fee, real property tax, SEC fee,…

Concluding Notes

  1. The Philippines has higher tax rates and more types of taxes, fees and mandatory programs compared to its neighbors in East Asia.
  2. More taxes, fees and permits mean lower output, lower job creation and higher commodity prices. More deadweight loss is created in the economy, ultimately leading to lower revenues as illustrated in the Laffer curve.
  3. AETR of 71-79 percent as proposed in current congressional bills can worsen the tax and fiscal environment. It may drive away the legal, responsible companies that want to remain honest, or force them to become less honest just to stay in business.
  4. Mining taxation, fees and permits overall should decline.

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