Mining hobbled by gov’t ‘fixation’ on taxes

The Aquino administration’s proposal to hike taxes on the Philippine mining industry to an effective rate of as high as 81 percent of a company’s net income may result in the government drawing in less revenue from the sector—the exact opposite effect of what it hopes to achieve.

More importantly, Ronald Mendoza of the Asian Institute of Management Policy Center believes that the government’s “narrow focus on revenues” risks neglecting other important aspects of mining policy unaddressed, “resulting in failure to generate cohesive support from all sectors.”

Activity in the local mining industry has remained relatively lackluster compared to those of other mineral-rich nations in recent years due to the lack of clear direction from policy makers on several issues, chief of which is the contentious tax rate.

Philippine metallic mineral production was up by only 0.26 percent in 2013. The estimated production value stood at P99.33 billion in 2013 compared to P99.04 billion in 2012, a gain of only P298 million.

The lack of clarity on policy also resulted in the failure of the Philippine mining sector to capitalize on the surge in mineral prices in the last few years due to surging demand from China.

According to Mendoza, “very little evidence” has been shared by the government on the possible impact of the new tax regime on existing and future mining investments which, in turn, would have an impact on future revenues as well.

A study by professor Ramon Clarete and Karlo Adriano of the UP School of Economics finds evidence that the proposed new mining tax regime will dramatically increase the country’s average effective tax rate on copper, gold, and nickel (all taken together and weighted) from 16 percent to 81 percent.

“This translates to a projected decrease in mining investments in the Philippines, both domestic and foreign, of anywhere from 13 percent to 67 percent,” Mendoza said in his position paper. “If investments go down, so too will revenue, eventually.”

The Aquino administration is proposing a revenue sharing scheme for large-scale metallic mines which imposes either a 10-percent tax on gross revenue or a 55-percent tax on the adjusted net mining revenue. This will replace all existing income and sales taxes and royalties paid by mining firms.

Philippine miners contend that, including all other government levies, the effective tax rate would rise to as high as 81 percent.

Mendoza said the government should clearly communicate to all stakeholders its basis for proposing the higher tax rate to avoid creating more uncertainty.

The AIM Policy Center official also stressed that international best practice explicitly states how mining wealth will be managed and invested—something that is not immediately evident in the local setting.

“For the Philippines, the creation of an ‘inclusive growth trust fund’ could be critically important, ensuring that mining wealth is invested transparently and consistently over time, and in areas that boost inclusive and sustained growth and development,” he suggested. High-yielding investments here may include those that focus on the education and health of the youth—the country’s human capital—as well as the necessary infrastructure to boost the country’s physical capital, with a bias towards investing in neglected and marginalized regions of the economy.

Mendoza’s position paper also called on the government to help consolidate public support for mining policies by promoting stronger transparency and accountability across all stakeholders; improve public sector governance, and increase coherence across central and local government policies on mining; improve public sector governance, and increase coherence across central and local government policies, and integrate mining more effectively in the country’s industrialization and job-creation strategy.

“All of these reforms require greater ambition—not simply to fixate on short-term tax revenues, but more importantly to connect mining policy to the over-all industrialization blueprint, linking mining with stronger investments, job creation, and sustainable growth,” Mendoza said.

“It’s not too late to take steps in order to arrive at a more balanced mining policy that will help us harness and transform our mineral wealth into a truly inclusive development.”