Ditching of incentives under TRAIN 2 seen hitting oil exploration investments

Published April 29, 2018, 12:00 AM

by manilabulletin_admin

By Myrna M. Velasco

The proposed scrapping of incentive schemes under the Oil and Gas Law via the second package of the Tax Reform for Acceleration and Inclusion Act (TRAIN) could hamstring the country’s gigantic target of cornering up to US$2.4 billion worth of fresh investments on its newly launched petroleum contracting round.

Under TRAIN-2, at least three provisions of Presidential Decree (PD) 87 or the Oil Exploration and Development Act had been recommended repealed – chiefly Sections 12, 21 and 22, which all delve with the grant of incentives for ventures into the upstream petroleum sector.

Section 12 of the existing law in particular stipulates that service contractors are exempted from paying all taxes, except income tax; plus it sets forth exemption from payment of tariff duties and compensating tax on the importation of machinery and equipment, and spare parts and all materials required for petroleum operations.

General provisions of the propounded TRAIN-2 Law, nevertheless, proffer that “royalties derived from sources within the Philippines shall be subject to a final income rate of 20%.”

The proposed policy did not specify how this tax payment shall be treated – taking into account also the current case of the Malampaya project that the income tax being paid by the service contractor had been charged to the State’s royalty share.

On the duty-free importation of equipment and machinery, the universal application propounded under the proposed tax reform measure will just be an exemption of five years.

The other PD 87 provisions to be junked will be the currently allowable deductions in the calculation of taxable income – primarily the Filipino participation incentive under Section 21; and deduction of intangible exploration costs under Section 22.

The only flickering hope that prospective investors can hang on to for now is the statement of Energy Secretary Alfonso G. Cusi that they will study the impacts of the proposed law on the energy sector, and will “fight it out during Congress deliberations on the law, if warranted.”

The Philippine government, via the Department of Energy (DOE), is scheduling this year the offer of 14 petroleum blocks to interested investors – on top of its year-round reception of “unsolicited tenders” on service areas deemed viable for potential commercial finds of oil and gas. For this undertaking, the department had repackaged its investment enticement strategy for the upstream petroleum sector, hence, the Philippine Conventional Energy Contracting Program (PCECP) coming into being under the Duterte administration.

For the 14 pre-determined blocks that the energy department will be dangling to investors, exploration activities will straddle at least six basins within 73,576.66 square kilometers of specified service areas.

It will be a combination of deep and shallow waters exploration ventures and drilling along offered petroleum blocks in East Palawan, Cagayan, West Luzon, Sulu Sea, Cotabato and Agusan-Davao basins.