Gov’t mulls legislation to resolve oil exploration taxation woes

By MYRNA M. VELASCO

The Philippine government, in collaboration with the players of the upstream oil and gas sector, has been contemplating on a "legislative approach" as an option to resolve the taxation issue that has been impeding investment flows in the country’s oil and gas exploration and production (E&P) industry.

Edgar Benedict Cutiongco, president of the Philippine Petroleum Association (PAP), qualified though that at this point, industry players are still waiting for a resolution of a pending case at the Supreme Court which may prospectively resolve the legal question on taxation that shall be levied on petroleum service contractors.

The taxation hurdle of upstream petroleum investors stemmed from an interpretation hurled by the Commission on Audit (COA) that the income tax payment of the Malampaya consortium should not have been charged as part of the 60-percent royalty share of the Philippine government.

The consortium of the gas field project, led by Shell Philippines Exploration B.V. (SPEX), already won in 2019 the P146.8 billion arbitration case at the International Chamber of Commerce (ICC) in Singapore, but this will require an affirmation-ruling from the Supreme Court before the final award could be enforced.

“We’re leaving it to the Supreme Court right now. The strategy and the work flow is: we need to get Supreme Court to decide,” noted Cutiongco, who is also board director of Philippine National Oil Company-Exploration Corporation (PNOC-EC), a state-run company that owns minority stake in the Malampaya project.

Nevertheless, if the final verdict of the high court won’t be as favorable to underpin capital flow in the E&P sector, he indicated that the industry is already preparing for a back-up plan because it is really the intent of the current leadership at the DOE to stimulate investments on oil and gas exploration activities.

“We will let Supreme Court decide with finality. But if not, there’s another option which is legislation to resolve the COA issue – so that (taxation policy) will become a law,” he stressed.

And while the tax issue remains unresolved, he emphasized that all service contracts being signed at this point contain a waiver which stipulates that the tax treatment on E&P royalty sharing shall be subject to the final court decision on the COA case.

Essentially, the Malampaya consortium secured legal victory for aggregate P146.8 billion worth of income taxes that had been questioned by COA– that was on account of the State auditor’s differing interpretation on some provisions of Service Contract (SC) 38, which is the legally binding agreement it entered into with the Philippine government for the gas field project.

When the SC 38 consortium elevated the case to the ICC in Singapore, the first notice of charge was at US$1.1 billion (roughly P53 billion) – that was reckoned from the estimated income taxes from the start of the field’s commercial operations in 2001 until 2010.

Then when COA re-affirmed its ruling on interpretation relating to the income tax payment of the contractor, the calculated tax claims climbed by additional P77 billion until year 2015; then additional P16 billion in 2016. These claims comprise the second and third notices of charge lodged by COA against the Malampaya service contractor.

The fourth notice of charge amounting to P9.6 billion had likewise been placed under a review of the arbitral tribunal.

That COA stance was fiercely opposed by the service contractor, hence, the string of legal proceedings that ensued both in the Philippines and overseas.

For its position, the Malampaya consortium secured the backing of the DOE and even Malacanang when it comes to the arbitration proceedings at the ICC.

On DOE’s part, it stated that it has to adhere to the provisions of SC 38 because any act of contractual breach on that major petroleum service contract will have chilling effect on all other investors in the country’s upstream petroleum sector.