SPEX wins US$1.1-B Malampaya tax case in arbitration

By Myrna M. Velasco

With a unanimous vote of 3-0, the operator of the multi-billion Malampaya gas field project led by Shell Philippines Exploration B.V. (SPEX) won its landmark US$1.1 billion (approximately P53 billion) tax case before the International Chamber of Commerce (ICC) in Singapore.

The Malampaya gas field uses an innovative and sustainable deepwater technology for recovering natural gas from the deepwater reservoir in northwest Palawan. (Image from shell.com.ph | Manila Bulletin) The Malampaya gas field uses an innovative and sustainable deepwater technology for recovering natural gas from the deepwater reservoir in northwest Palawan. (Image from shell.com.ph | Manila Bulletin)

Voting in favor of the Malampaya consortium had been designated arbitration Chairperson Yves Fortier, SPEX-led consortium arbitrator David Williams and Philippine arbitrator Reynato S. Puno, a former Chief Justice of the Supreme Court.

According to highly placed sources, the Philippine government has already been informed of the decision, along with the other relevant parties. The Malampaya consortium was represented by the Romulo Mabanta Buenaventura Sayoc and de los Angeles law firm; while the Philippine government leaned on the Office of the Solicitor General (OSG) on its legal defense.

The US$1.1 billion tax case stemmed from the demand of the Commission on Audit (COA) for the Malampaya consortium to settle what it claimed as “back taxes” under its Service Contract 38 for the gas field venture – as the State auditor deemed that income tax should have been to the service contractor’s account instead of it being integrated into the royalty share of the Philippine government.

Nevertheless, SPEX along with its co-consortium members American firm Chevron Malampaya LLC and Philippine National Oil Company-Exploration Corporation (PNOC-EC) argued that the Malampaya gas development contract prescribes that the contractor’s income tax payment shall become part of the State’s royalty share- hence, it is not liable on such scale of back taxes being demanded by COA. Petroleum service contracts (PSCs) in the Philippines take guide from the prescriptions of Presidential Decree No. 87 or the Philippine Oil and Gas Law.

Aside from the ICC case in Singapore, the Philippine government is also confronted with dispute resolution proceedings at the International Centre for Settlement and Investment Disputes (ICSID) at the World Bank Group in Washington DC – still relating to the Malampaya tax case.

SPEX similarly filed a petition for declaratory relief before the Philippine Supreme Court relating to the continuing tax payment demand of the State Auditor – with the amount already rising exponentially to P146.8 billion as of cut-off date of 2016.

It is worth noting, however, that the Philippine government has split stance on the case – with Malacanang, the Departments of Finance and Energy siding with the Malampaya consortium; while COA is pursuing its own argument on the tax raps.

For the DOE, a favorable decision to the Malampaya contractor would also be beneficial to the government chiefly at this time that it has just opened its new round of contracting for petroleum blocks being offered to investors.

Since the Malampaya gas field’s commercial operations in 2001, it already yielded over US$10 billion in revenues shared by the contractor and the Philippine government. Malampaya is currently the only commercially producing gas field in the country.

Many of the interested takers of the oil and gas block offers of the country has raised concern over the Malampaya tax case – and this has in fact, dampened the appetite of investors in recent years.

The DOE primarily stated that “the hesitancy and reluctance of investors and petroleum companies to do exploration activities could also be due to the decisions made by the COA in relation to Service Contract 38, in which COA had affirmed its findings and ordered the Malampaya consortium to settle P146.8 billion in taxes that were charged against the government’s share.”

As stipulated in petroleum service contracts, the investor (contractor) is entitled to a full recovery of capital and operating costs and a service fee of 40% of the net proceeds.

In the new model contract released by the DOE to guide prospective investors in the Philippine Conventional Energy Contracting Program (PCECP) of the Duterte administration, it upheld that the income tax of the contractor shall be integrated in the government share.

The DOE has always acknowledged that petroleum exploration ventures are extremely risky – with a 20-percent rate of discovery already considered highly favorable. This is also the main reason why recovery of operating costs had been warranted under PD 87, albeit it had been capped at 70-percent of gross proceeds.