The Supreme Court (SC) has reversed the ruling of the Commission on Audit (COA) as it declared that the 60 percent share of the government in the profits from the Malampaya Natural Gas Project includes the income taxes of its private contractors.

With its decision, the SC said that the COA committed grave abuse of discretion when it declared that the contractors of the Malampaya project should be held liable for their failure to remit P53.14 billion in income taxes to the government from 2002 to 2009.

Reversed in the full court decision written by Associate Justice Japar B. Dimaampao were the April 6, 2015 decision and the Jan. 24, 2018 resolution of COA which declared that the income taxes of contractors should not have been part of the 60 percent government share.

Absolved of liability were Malampaya contractors Shell Exploration B.V., PNOC Exploration Corporation, and Chevron Malampaya LLC.

The SC said: “The Court is on all fours with COA to zealously ensure that the Government is never placed at a disadvantage and that it rightfully receives what is due it in all its transactions.”

But it pointed out: “Nevertheless, remaining bound by the Constitution and the laws of the land, the Government cannot be allowed to renege on its obligation, especially when such has been distinctly outlined in the contract it freely entered into and agreed to.”

A summary of the decision issued by the SC’s Office of the Spokesperson stated that in 1990, the government signed a Service Contract with the three companies for the Malampaya Project.

Under the contract, the contractors must remit 60 percent of the project’s net proceeds to the government. The contract also stated that the government’s 60 percent share already covers the contractors’ income taxes from 2002 to 2009.

After a post-audit, the COA found that P53.14 billion in income taxes had been deducted from the government’s share.

COA ruled that the contractors were liable for the deducted taxes since there is no law which explicitly states that their income taxes should be part of the government’s share.

The contractors challenged the COA ruling before the SC.

While the case was pending, the International Chamber of Commerce (ICC) issued an arbitral award upholding the validity of the tax assumption provision in the Service Contract.

Resolving the petitions elevated by the contractors, the SC reversed the COA ruling.

The SC cited Presidential Decree No. (PD) 87, the Oil Exploration and Development Act, which states that income taxes paid by or on behalf of the contractors are included in the government’s guaranteed 60 percent share of net proceeds from petroleum operations.

It also said that the law provides that the government assumes and pays the contractors’ income taxes to encourage private investment in petroleum exploration.

The provision in PD 87, it pointed out, was reiterated in PD 1206 and PD 1459 which confirm that the government’s share includes all taxes.

The SC clarified that tax assumption is not tax exemption. While the contractors are still liable for income tax, the government pays it on their behalf as part of its share in the project’s income.

It noted that it respects the ICC’s arbitral ruling. However, it said that even without the ICC ruling, it would have reached the same conclusion based on its own review.

The dispositive portion of the SC decision:

“Accordingly, the consolidated Petitions for Certiorari are granted. The April 6, 2015 Decision No. 2015-115 and the Jan. 24, 2018 Resolution No. 2018-075 of the Commission on Audit are reversed and set aside. The Oct. 5, 2010 Notice of Charge No. 2010-01-151(09) is lifted. So ordered.”