FISCAL REGIME OF MINING PROJECTS

UNDER THE PHILIPPINE MINING

ACT OF 1995

TWO COMMON TYPES OF MINING RIGHTS

• A 25 year contract renewable for same period• Granted exclusively to Filipino corporation (minimum 60%

Filipino-owned) & individuals• Maximum area of 16,200 hectares for exploration• Maximum of 5,000 hectares for commercial production

(Basis: Chapter V of the RA 7942)

1. Mineral Production Sharing Agreement

2. Financial or Technical Assistance Agreement• An 25 year contract renewable for same period

• Allows up to 100% ownership by qualified foreign corp.

• Minimum construction/development cost of US$50 million

• Minimum authorized capital of US$4 million • Maximum of 81,000 hectares for exploration• Maximum of 5,000 hectares for commercial

production (Basis: Chapter VI of RA 7942)

FISCAL FRAMEWORK FOR AN MPSA AND FTAA

MPSA Fiscal Contribution =

Basic Gov’t Share + Other Taxes And Fees

FTAA Fiscal Contribution =

Basic Gov’t Share + Additional Govt Share

BASIC GOVT’S SHARE:

OTHER PAYABLE TAXES & FEES:

Excise tax on minerals

(Basis: Chapter XXI Section 212 of DAO 96-40)

National direct + Local direct + Payment to other

taxes and fees taxes and fees Filipinos (Basis: Existing taxation laws)

MPSA

A. National taxes / fees

• Income tax

• Value-added tax

• Royalties on minerals (in mineral reservations)

• Capital gains tax

• Tax on interest payment to foreign loan

• Tax on foreign stockholders dividends

• Documentary stamp tax

B. Local taxes/fees• Business tax• Real property tax• Registration fees• Occupation fees• Community tax• Other local taxes

C. Payment To Other Filipinos

• Special allowance as defined by the Mining Act

• Royalties to indigenous cultural communities

MPSA - OTHER PAYABLE TAXES & FEES

LEGAL/CONSTITUTIONAL BASIS OF FTAA

The 1987 Constitution provides that:“The Government may enter into agreements with

foreign-owned corporations involving FTAA for large scale exploration, development and commercial utilization of mineral.”

(Basis: Chapter XII of Constitution) R.A. No. 7942 (Mining Act of 1995)

• A qualified applicant may enter into an FTAA directly with the Government through the DENR

(Basis: Chapter IV, Section 33 of RA 7942)• An FTAA shall be negotiated by the DENR and

executed and approved by the President (Basis: Chapter IV, Section 36 of RA 7942)

RATIONALE FOR AN FTAA

Large scale mining projects:• require huge capital and sophisticated technology;• involve long gestation period from exploration to

production; Due to these factors, only a limited no. of Filipino

investors invest in large scale mining projects; To promote large scale mining, there is a need for

direct foreign investments; The Philippines has to compete with other

countries for direct foreign investment; The FTAA scheme opens up opportunities for direct

foreign investments

SALIENT FEATURES OF AN FTAA

Allows maximum 81,000 hectares for exploration subject to annual area relinquishment;

Final mining area can be up to 5,000 hectares;

Allows maximum 5 year cost recovery period during which govt. waives tax payments;

Requires minimum authorized capital of US$ 4 million or its peso equivalent upon approval;

Obliges minimum ground expenditures set by law.

FTAA MILESTONES

025 years

Exploration Period (max 4 yrs.)

Recovery Period (max 5 yrs.)

Pre-Feasibility Study Period (max 2 yrs)

Feasibility Study Period ( max 2 yrs)

Construction & Development

Period (max 3 yrs)

Operating Period (Remaining yrs)

25Pre-operating ExpendituresPayment of Govt. share

YEARS

FRAMEWORK FOR FISCAL REGIME OF FTAA

• Achieve an equitable sharing among the Government, both national and local, the Mining Contractor and the concerned communities of the benefits derived from mineral resources development; and

• Ensure a fair, equitable, competitive and stable investment regime for the exploration, development and commercial utilization of minerals.

LEGAL BASIS OF THE GOVT’S SHARE FROM AN FTAA

“The Government share in an FTAA shall consists, among other things, the Contractor’s corporate income tax, excise tax, special allowance, withholding tax due from the Contractor’s foreign stockholder’s arising from dividends or interest payments to the said foreign stockholder in case of a foreign-owned corporation and all such other taxes, duties and fees as provided for in existing laws.”

(Basis: Chapter XXI Section 214 of DAO 96-40)

FISCAL REGIME OF AN FTAA

50% - 50% SHARING

OF THE

NET MINING REVENUE

(AFTER RECOVERY OF PRE-OPERATING EXPENSES)

Net Mining Revenue =

Gross Output

less

Deductible Cash Expenses

FISCAL REGIME FOR FTAA. . .

Gross Output = means the actual market

value of the minerals or mineral products

from its mining area as defined in the National

Internal Revenue Code

Section 3(v) of the Mining Act

GROSS OUTPUT

refers to the cash operating expenses incurred by the Contractor during a calendar year as follows:

1. mining, milling, transport and handling expenses

2. general/administrative expenses

3. environmental expenses

4. expenses on development of host/neighboring community including development of geoscience and mining technology

5. royalty payments to claimowners/surface owners

6. continuing exploration/mine development expenses

7. interest expense on loans

DEDUCTIBLE CASH EXPENSES

Basic Government Share – all taxes, duties, royalties and fees – National Taxes, i.e., Excise Tax, Income Tax, Customs

Duties and Fees, etc.– Local Taxes, i.e., Business Tax, Real Property Tax,

etc.,– Payment to Filipinos, i.e., Special Allowance, Royalty

to IPs Additional Government Share – amount

collected to achieve the 50% of the Net Mining Revenue

GOVERNMENT SHARE : 50% OF NET MINING REVENUE

Sample Calculation of Additional Government Share under FTAA

(1st Year after Recovery Period, values in US$ Million)

(1) Gross Output US$ 1,194

(2) Deductible Expenses US$ 288

(3) Net Mining Revenue = Gross Output (1) Less Deductible Expenses (2)

US$ 906

(4) Total Government Share = 50% of Net Mining Revenue (3)

US$ 453

(5) Basic Government Share US$ 293

(6) Additional Government Share = Total Government Share (4) Less Basic Government Share (5)

US$ 160

Based on a US$ 750 Million - 25 MTPY Project

FTAA FINANCIAL MODEL25 MTPY 15 MTPY 7.5 MTPY

Payback Period 1 yr 2 yrs 2 yrs

I R R 36% 32 % 29 %

NPV of Annual CF (Cont’r) $ 2,091 $ 1,155 $ 547

NPV of Annual CF (Gov’t) $ 2,691 $ 1,579 $ 678

% Contractor’s Share 44 % 42 % 45 %

% Government’s Share 56 % 58 % 55 %

Ave. Annual CF of Cont’r $ 501 $ 293 $ 145

Ave. Annual CF of Gov’t $ 507 $ 297 $ 135

% Contractor’s Share 50 % 50 % 52 %

% Government Share 50 % 50 % 48 %

OTHER ENTITLEMENTS OF FTAAs Recovery of Pre-Operating Expenses (for

FTAA Contractors)– Set at a maximum of five (5) years– May be extended for projects incurring very

large investments with high production rate and extensive mine life

Availment of the incentives under the Mining Act and Executive Order No. 226– Sufficient Ore Reserves to sustain a projected

total mine life of three (3) times the projected number of operating years with incentives,

GOVERNMENT’S SHARE IF INDIRECTTAXES ARE CONSIDERED

Government60%

Contractor40%

INDIRECT TAXES:

• Fuel tax

• Payroll and fringe benefits of Filipinos directly employed

• Expenditures for dev’t of host communities and for the dev’’t of geoscience and mine tech.

• Withholding taxes on payroll, royalty payments to claimowners and surface owners and royalty payments for technology transfer

PHASES OF MINING PROJECT WHERE FINANCIAL BENEFITS ARE ENJOYED BY

COMMUNITIES AND GOVERNMENT 

Exploration , Development and Construction Phase Operating Phase

Cost Recovery Period Post - Cost Recovery PeriodBenefits enjoyed:Exploration expendituresDevt & const’n expendituresForeign exchange receiptsSocial infrastructuresDev’t of geoscience/mine techEmploymentLocal taxes and feesIndirect taxes and fees

Benefits foregone:National taxes and fee

Benefits enjoyed:Foreign exchange receiptsSocial infrastructuresDevt of geoscience/mine techEmploymentLocal taxes and feesIndirect taxes and fees

Benefits foregone:National taxes and feesAdditional government share

Benefits enjoyed:Foreign exchange receiptsSocial infrastructuresDevt of geoscience/mine techEmploymentNational taxes and feesAdditional government shareLocal taxes and feesIndirect taxes and fees

END OF PRESENTATION

Good Day!