Digging into the mining business _________________ By Alma L. Barcelo 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. Excise tax on mineral products In addition to the value-added tax (VAT), excise tax is imposed on mineral products by the Tax Code. Briefly, these are: 1. On coal and coke, a tax of P10 per metric ton; 2 . On all nonmetallic minerals and quarry resources, a tax of two percent based on the actual market value of the gross output at the time of removal for locally extracted or produced, or the value used by Bureau of Customs in determining tariff and customs duties, net of excise tax and VAT, in the case of importation; 3. Locally extracted natural gas and liquefied natural gas shall be taxed at two percent; 4 . On all metallic minerals: (a) Copper and other metallic minerals is taxed at two percent, while (b) Gold and chromite is also taxed at two percent; 5 . On indigenous petroleum, a tax of three percent of the fair international market price on the first taxable sale, barter, exchange or similar transaction to be paid by the buyer or purchaser before removal from place of production. VAT Generally, a 12-percent VAT is imposed on the sale of goods or services of a contractor in the ordinary course of trade or business and importation of goods. In certain cases, however, either an exemption or a zero-rating may be applicable. Under relevant regulations, export sales by a contractor who is a VAT-registered person are subject to zero-percent VAT. Export sales include the sale and actual shipment of goods from the Philippines to a foreign country paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). It also includes the sale of raw materials to an export-oriented enterprise whose export sales exceed 70 percent of its total annual production. An export-oriented enterprise is an enterprise whose export sale exceeds 70 percent of its total annual production of the preceding taxable year. In case of purchases or imports of capital goods, the contractor may claim its aggregate acquisition cost (exclusive of VAT), which should exceed P1,000,000 in a calendar month, as credit against output tax in the following manner: 1) If the estimated useful life of a capital good is five years or more — The input tax shall be spread evenly over a period of 60 months and the claim for input tax credit will commence in the calendar month when the capital goods shall be divided by 60 and the quotient will be the amount to be claimed monthly. 2) If the estimated useful life of a capital good is less than five years — The input tax shall be spread evenly on a monthly basis by dividing the input tax by the actual number of months comprising the estimated useful life of a capital good. The claim for input tax credit shall commence in the month that the capital goods were acquired. Note that where the aggregate acquisition cost (exclusive of VAT) of the capital good purchased or imported in a calendar month does not exceed P1,000,000, the total input taxes will be allowable as credit against output tax in the month of acquisition. Local taxes The proper local government unit may impose local taxes such as the local business tax, real property tax, and the community tax against the companies. However, if the contractor is duly certified by the Board Of Investment (BOI) either as pioneer or non-pioneer, it shall remain exempt from local taxation for a period of six and four years, respectively, from the date of registration pursuant to the Local Government Code of 1991. Fiscal and non-fiscal incentive under OIC The main fiscal incentive under the OIC is the ITH incentive. Under the 2008 IPP guidelines, mining and/or mineral processing which satisfies the conditions provided under the guidelines are entitled to the ITH incentive. For six years from commercial operations for pioneer firms and four years for non-pioneer firms, new registered firms shall be fully exempt from income taxes. The income tax exemption may be extended for another year in each of the following cases: (a) The project meets the prescribed ratio of the total imported and domestic capital equipment to number of workers set by the BOI. For new registered firms, the said ratio must not exceed $10,000 to one worker; (b) Utilization of indigenous raw materials at rates set by BOI. In case of new registered firms, the said average cost should at least be 50 percent of the total cost of raw materials for the preceding years prior to the extension, unless the BOI prescribes a higher percentage; (c) The net foreign exchange savings or earnings amount to at least $500,000 annually during the first three years of operation. However, no registered pioneer firm may avail of the incentive for a period exceeding eight years. After the lapse of the ITH, the registered enterprise shall be liable for the regular corporate income tax. At present, the rate is 35 perecent based on taxable income for domestic corporations. However, if the regular corporate income tax is less than the MCIT, then registered enterprise shall be liable for the MCIT. Moreover, under the same OIC, for period of three years from commercial operation, registered expanding firms shall be entitled to an exemption from income taxes proportionate to their expansion under such terms and conditions as the BOI may determine, provided, however, that during the period within which this incentive is availed of by the expanding firm, it shall not be entitled to additional deduction for incremental labor expense. The summary of the incentives are as follows: (1) Fiscal incentives under EOs 226 and 528 • ITH for a period of six years for pioneer projects and four years for non-pioneer projects; • Tax and duty exemption on imported machinery, equipment and accompanying spare parts; • Exemption from wharfage dues and export tax, duty, impost and fees of non-traditional export products; • Tax credit for taxes and duties on raw materials of export products; and • Additional deductions from the taxable income for labor expenses and necessary and major infrastructure expenses. (2) Non-fiscal incentives under EO 226 • Employment of foreign nationals; • Simplification of customs procedures for the importation of equipment, spare parts, raw materials and supplies, and exports of processed products; • Unrestricted use of consigned machinery, equipment, and spare parts which are reasonably needed in the registered operations and are for the exclusive use of the registered enterprise; and • Access to the utilization of bonded manufacturing/trading warehousing system subject to such guidelines as may be issued by the BOI Board in consultation with the Bureau of Customs. The commencement date of the ITH is the start of the business operations of the company as declared in the general terms and conditions governing its registration with the BOI. Other incentives under the Philippine mining act (1) Incentives for pollution control devices Pollution control devices acquired, constructed or installed by contractors shall not be considered as improvements on the land or building where they are placed, and shall not be subject to real property and other taxes or assessments. However, the payment of mine wastes and tailings fees are not exempted. (2) Income tax-carry forward of losses The net operating loss without the benefit of incentives incurred in any of the first 10 years of operations may be carried over as a deduction from taxable income for the next five years immediately following the year of such loss. The entire amount of the loss shall be carried over to the first of the five taxable years following the loss, and any portion of such loss which exceeds the taxable income of such first year shall be deducted in like manner from the taxable income of the next remaining four years. However, the Implementing Rules and Regulations (IRR) of the Philippine Mining Act of 1995 provides that if the contractor opts to avail of the ITH incentive under its BOI registration, then the incentive on the income tax carry forward of losses should not be granted to it and vice versa. It should then be a choice between the ITH or the income tax-carry forward of losses, with the choice of the first availment governing the succeeding availments. There shall be no switching of these two incentives within the entire prescribed period within which the contractor is entitled to such incentives. (3) Income-tax accelerated depreciation Fixed assets may be depreciated as follows: (a) To the extent of not more than twice as fast as the normal rate of depreciation or depreciated at normal rate of depreciation if the expected life is 10 years or less; or (b) Depreciated over any number of years between five years and the expected life if the latter is more than 10 years. However, the contractor should notify the BIR at the beginning of the depreciation period which depreciation rate will be used. The same IRR provides that the incentives on income tax-accelerated depreciation may be availed of simultaneously with the ITH incentive provided under the BOI registration. (4) Deductibility of exploration and development expenditures In computing for taxable income, unless otherwise provided in the said law, the contractor may, at his option, deduct exploration and development expenditures accumulated at cost as of the date of the prospecting or exploration and development expenditures paid or incurred during the taxable year. However, the total amount deductible for exploration and development expenditures shall not exceed 25 percent per annum of the net income from mining operations. The actual exploration and development expenditures minus the 25-percent net income from mining shall be carried forward to the succeeding years until fully deducted. Net income from mining operation is defined as gross income from operations less allowable deductions which are necessary or related to mining operations. Allowable deductions shall include mining, milling and marketing expenses, depreciation of properties directly used in the mining operations. Discovering the riches of the earth through mining begins with exploration. But once the mineral resource is discovered, business concerns set in and so from this corner, we attempt to provide an insight from a tax perspective to those who have ventured into mining. Finally, what makes mining interesting is that it adheres to the so called biblical method of “Search and you shall find”. It is like the journey of life where we seek to find that which is precious. It will take us farther than the bend, and yet after all that searching, we realized that we need not go so far because what we have attempted to look for has always been with us. Such irony rings true in the poem of T.S. Elliot, The Waste Land where he wrote, “We shall not cease from exploration and the end of all our exploring will be to arrive where we started... and know the place for the first time”. |