Malampaya tax dispute goes to Singapore court

THE DEPARTMENT of Energy confirmed that the operators of the Malampaya gas platform had sought international arbitration on the issue involving their alleged unpaid tax obligations to the government.

DOE officer in charge Zenaida Monsada said the Malampaya consortium had “served notice” that it had initiated international arbitration on the issue. An arbitration panel is now being assembled for the proceedings that will take place in Singapore.

Both the Malampaya consortium and the government have named their respective nominees. The two sides will next agree on who the chair of the three-person arbitration panel will be.

The consortium serving as contractor of SC38 (Malampaya) is composed of Shell Philippines Exploration B.V. (SPEX; 45 percent), Chevron Malampaya LLC (45 percent), and PNOC Exploration Corp. (10 percent).

At the DOE budget hearing in Congress last week, Monsada explained to legislators that the department was implementing Service Contract No. 38 (SC38), under which the consortium pays taxes directly to the Bureau of Internal Revenue and the same amount is taken out of the government receivables (60 percent share of proceeds) from the Malampaya gas operations.

Back-channel talks are ongoing, however, to try to resolve the issue between the consortium and the Philippine government “in a collaborative way,” sources said.

DOE officials confirmed that talks are ongoing between the parties to try to resolve the issue out of court.

The Commission on Audit (COA), in decisions dated April 6 and May 11 this year, ordered the DOE to collect income tax of $2.9 billion (about P53 billion) from the Malampaya consortium, saying that this should be paid on top of the government’s 60 percent share in the net proceeds, that is, after allowable expenses are deducted. The DOE appealed COA’s order but was rejected.

In a letter to President Aquino in May, Royal Dutch Shell plc CFO Simon Henry said the COA’s order to collect the $2.9 billion was “erroneous.”

As far as the consortium is concerned, he said, income taxes payable over the period 2002 to 2014 were deemed paid by the DOE out of the 60 percent government share in the net proceeds. This is expressly provided under SC38 and COA’s order saying otherwise had left the consortium with no other choice but to initiate international arbitration, Henry said.

In an exclusive interview, Royal Dutch Shell’s upstream international director Andy Brown, who leads Shell’s upstream (oil exploration, production, and LNG) business, stressed that the “sanctity of contracts,” as well as good regulatory and investment climates, were needed to sustain investor interest in the Philippines.

In 2014 and early 2015, the Philippine government faced arbitration cases initiated by water services providers Maynilad and Manila Water Co. Inc. in response to the Metropolitan Waterworks and Sewerage System’s (MWSS) reinterpretation of their concession contract, disallowing the concessionaires to recover corporate income taxes.

Maynilad won in local arbitration and has moved to the international court in Singapore to claim losses as the MWSS drags its feet in implementing a water rate hike incorporating provisions for income tax payments. Manila Water lost and was disallowed to tuck in corporate income tax provisions in its water rates.