FISCAL REGIME OF MINING PROJECTS UNDER THE PHILIPPINE MINING ACT OF 1995

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FISCAL REGIME OF MINING PROJECTS UNDER THE
PHILIPPINE MINING ACT OF 1995
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TWO COMMON TYPES OF MINING RIGHTS
1. Mineral Production Sharing Agreement

• 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)

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 US50
  million
• Minimum authorized capital of US4 million
• Maximum of 81,000 hectares for exploration
• Maximum of 5,000 hectares for commercial
  production
• (Basis Chapter VI of RA 7942)

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FISCAL FRAMEWORK FOR AN MPSA AND FTAA

• MPSA Fiscal Contribution
• Basic Govt Share Other Taxes And Fees
• FTAA Fiscal Contribution
• Basic Govt Share Additional Govt Share

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BASIC GOVTS SHARE
MPSA
Excise tax on minerals (Basis Chapter XXI
Section 212 of DAO 96-40)
OTHER PAYABLE TAXES FEES
National direct Local direct Payment to
other taxes and fees taxes and fees
Filipinos (Basis Existing taxation laws)
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MPSA - OTHER PAYABLE TAXES FEES

• 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

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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)

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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

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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.

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FTAA MILESTONES

Exploration Period (max 4 yrs.)
Feasibility Study Period ( max 2 yrs)
Construction Development Period (max 3 yrs)
Pre-Feasibility Study Period (max 2 yrs)
Operating Period (Remaining yrs)
YEARS
Recovery Period (max 5 yrs.)
25
Payment of Govt. share
0
Pre-operating Expenditures
25 years
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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.

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LEGAL BASIS OF THE GOVTS SHARE FROM AN FTAA

• The Government share in an FTAA shall consists,
  among other things, the Contractors corporate
  income tax, excise tax, special allowance,
  withholding tax due from the Contractors foreign
  stockholders 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)
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FISCAL REGIME OF AN FTAA

• 50 - 50 SHARING
• OF THE
• NET MINING REVENUE
• (AFTER RECOVERY OF PRE-OPERATING EXPENSES)

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FISCAL REGIME FOR FTAA. . .

• Net Mining Revenue
• Gross Output
• less
• Deductible Cash Expenses

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GROSS OUTPUT

• 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

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DEDUCTIBLE CASH EXPENSES

• refers to the cash operating expenses incurred by
  the Contractor during a calendar year as follows
• mining, milling, transport and handling expenses
• general/administrative expenses
• environmental expenses
• expenses on development of host/neighboring
  community including development of geoscience and
  mining technology
• royalty payments to claimowners/surface owners
• continuing exploration/mine development expenses
• interest expense on loans

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GOVERNMENT SHARE 50 OF NET MINING REVENUE

• 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

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Sample Calculation of Additional Government Share
under FTAA(1st Year after Recovery Period,
values in US Million)
Based on a US 750 Million - 25 MTPY Project
(1) Gross Output US 1,194
(2) Deductible Expenses US 288
Net Mining Revenue Gross Output (1) Less Deductible Expenses (2) US 906
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
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FTAA FINANCIAL MODEL
25 MTPY 15 MTPY 7.5 MTPY
Payback Period 1 yr 2 yrs 2 yrs
I R R 36 32 29
NPV of Annual CF (Contr) 2,091 1,155 547
NPV of Annual CF (Govt) 2,691 1,579 678
Contractors Share 44 42 45
Governments Share 56 58 55
Ave. Annual CF of Contr 501 293 145
Ave. Annual CF of Govt 507 297 135
Contractors Share 50 50 52
Government Share 50 50 48
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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,

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GOVERNMENTS SHARE IF INDIRECTTAXES ARE
CONSIDERED

• INDIRECT TAXES
• Fuel tax
• Payroll and fringe benefits of Filipinos directly
  employed
• Expenditures for devt of host communities and
  for the devt of geoscience and mine tech.
• Withholding taxes on payroll, royalty payments to
  claimowners and surface owners and royalty
  payments for technology transfer

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PHASES OF MINING PROJECT WHERE FINANCIAL BENEFITS
ARE ENJOYED BY COMMUNITIES AND GOVERNMENT
 
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END OF PRESENTATIONGood Day!