Some basic data and economics of PH mining and the high taxes imposed on the sector.

1. Mining Taxation: Between Reason and Extortion
Bienvenido “Nonoy” Oplas Jr.
Presentation at the forum, “enlight EM up”
Sponsored by the UP Mining Engineering Society (UP MINERS)
UPSE Auditorium, UP Diliman, QC, 18 september 2014

2. OUTLINE
I.Basic Stats, PH Mining
II.Some Taxation Theory
III.Mining Tax: Rational vs Irrational
IV.Conclusions

3. Source
2009
2010
2011
2012
2013
2014 Q1
Gross Production Value (P Bill.)
106.1
145.3
163.2
144.6
157.1
21.98
Large-scale metallic mining
MGB
42.8
69.1
88.0
97.8
99.0
21.94
Small scale gold mining
BSP
36.8
42.9
34.1
1.2
0.3
0.04
Non-metallic mining
MGB
26.5
33.3
41.1
45.6
57.8
na
Taxes, Fees, Royalties (P Bill.)
12,696
13.365
22.230
19.942
21.480
1.415
Collections by DENR-MGB
0.396
0.801
1.381
1.647
1.517
1.410
Excise Tax collections by BIR
0.718
1.306
6.986
2.206
2.494
na
Taxes collected by NGAs
10.579
10.188
12.886
14.322
16.237
na
Collections by LGUs
1.002
1.071
1.179
1.767
1.232
0.005
Mining investment fr. Revitalization Prog. Under EO 270 ($ Million)
MGB
719.5
1,053
1,148
812.5
1,311.4
na
Gross Value Added, Mining (P Bill)
NSCB
65.8
88.2
96.9
79.5
77.8
22.4
Mining GVA share to GDP (%)
0.8
1.0
1.0
0.7
0.7
0.8
Exports of Mineral Prods. ($ Mill.)
BSP
1,470
1,929
2,840
2,337
3,417
664
Mineral X / Total X (%)
3.9
3.8
6.0
4.5
6.3
4.6
Exports of Non-Metallic ($ Mill.)
BSP
156
162
177
145
206
77
Non Metallic X / Total X (%)
0.4
0.3
0.4
0.3
0.4
0.5
Employment in Mining & Quarry.
DOLE
169,000
197,000
211,000
250,000
250,000
222,000
Mining Empl. / Total Empl. (%)
0.5
0.5
0.6
0.7
0.7
0.6
Source: Mines and Geosciences Bureau (MGB), DENR, http://www.mgb.gov.ph/Files/Statistics/MineralIndustryStatistics.pdf I. Basic Statistics, Philippine Mining Industry

4. Mining Performance, in $
Indicator
2008
2009
2010
2011
2012
Gross Production Value
$ 1.958 B
$ 2.227 B
$ 3.221 B
$ 3.768 B
$ 3.358 B*
GDP Contribution
$ 1.205 B
$ 1.381 B
$ 1.955 B
$ 2.237 B
$ 1.724 B
0.7 %
0.8 %
1.0 %
1.0 %
0.7 %
Export Share
$ 2.498 B
$ 1.470 B
$ 1.929 B
$ 2.840 B
$ 1.588 B*
5.2 %
3.9 %
3.8 %
6.0 %
4.0 %
Employment
158,000
169,000
197,000
211,000
252,000
0.5 %
0.5 %
0.5 %
0.6 %
0.7 %
Taxes, Fees & Royalties from Mining
$ 172.87 M
$ 259.87 M
$ 296.28 M
$ 509.81 M
$485 M

5. The above numbers show: 1. The contribution of mining in PH economy looks small. Just 1% of GDP, only 0.6% of total employment, mineral exports just 5% of total exports. Yes, because mining’s “multiplier effect” is not counted. Almost all industrial (manufacturing, construction) and services (transportation, telecom, IT, real estate, etc.) activities use mining products . No mineral products means almost no industrial production, very little services sectors. (Ex: Public transpo will be horses and carabaos, not trains, buses or jeepneys) Analogy: GVA of poultry and pork/meat is small, maybe around 2% of GDP. But without chicken and pork, there will be little or no activities in many other sectors -- restaurants, carinderias, litson manok/liempo stalls, chicken cubes/fillet, other manufactured and processed food.

6. The above numbers show:
2. Taxes, fees, royalties by mining looks small, only P20+ billion out of around P1.5 trillion tax collections or just 1 percent of total tax collections.
Again, because mining’s “multiplier effect” is not counted.
Mining output enables more agri, industrial and services sectors to produce more, and government collects more.
Almost all of the taxes and fees mentioned are from large-scale mining, very little from small scale mining.

7. Nickel Performance, Global Ranking
NICKEL PRODUCTION (000 MT)
COUNTRY
Rank
2012
Rank
2011
RESERVES
Philippines
1
330,000
2
270,000
1,100,000
Indonesia
2
320,000
1
290,000
3,900,000
Russia
3
270,000
3
267,000
6,100,000
Australia
4
230,000
5
215,000
20,000,000
Canada
5
220,000
4
220,000
3,300,000
Brazil
6
140,000
7
109,000
7,500,000
China
7
91,000
8
89,800
3,000,000
Colombia
8
80,000
9
76,000
1,100,000
Cuba
9
72,000
10
71,000
5,500,000
South Africa
10
42,000
3,700,000
New Caledonia
6
131,000
12,000,000
Other Countries
332,000
200,600
7,667,100
TOTAL
2,127,000
1,939,400
74,867,100
Source: Mines and Geosciences Bureau (MGB)

8. II. Some Taxation Theory
•Deadweight loss arises bec. of monopolistic pricing incl. govt taxation, externalities, price controls.
•At higher tax, people will either produce less even if a product is publicly needed, or they will underdeclare actual output and pay lower taxes.
•Example: if taxes (corporate income, excise, royalty, LGUs’, …) are equiv. to 6% of gross mining revenues, mining output is 12 million tons.
•Raising the tax to 10% will result in that shaded area, Potential higher revenues for govt but lower output to society. Players willing to supply only 8 M tons. And govt will collect less.

9. Arthur Laffer (and JM Keynes): the higher the tax rate, the lower the tax revenue/collection At tax rates approach 100%, private enterprises will either stop working, or they work but understate output; tax assessors/collectors allow it in exch. for personal and financial gains.

10. “But Mining causes lots of deforestation, soil erosion, river pollution… It deserves to be taxed super high” – Anti mining lobby

11. B. LOCAL TAXES/FEES
•Business tax
•Real property tax
•Registration fees
•Occupation fees
•Community tax
•Other local taxes C. OTHER PAYMENTS
•Special allowance as defined by the Mining Act
•Royalties to indigenous cultural communities
•Various documents/permits required by MGB, LGUs
III. Mining Taxation: Rational vs Irrational Other costs: SDMP & CSR A. NATIONAL TAXES / FEES * Corporate Income tax * Excise tax * Value-added tax * Royalties (in mineral reservations) * Capital Gains tax * Tax on interest payment to foreign loan * Tax on foreign stockholders dividends * Documentary stamp tax * Vehicle registration tax MPSA/FTAA

12. The difference between the cumulative present value of net mining revenue and cumulative present value of total govt share to achieve a 50%-50% sharing
Net Mining Revenue = Gross Output – Deductible Expenses
Gross Output = actual market value of minerals or mineral products from its mining area as defined by the National Internal Revenue Code
Deductible Expenses = Allowable expenditures incurred by the Contractor directly, reasonably and necessarily related to the mining operations as defined in Section 3 of DAO 99-56
PLUS: Additional Government Share (Net Mining Revenue-Based)

13. Illustration: Breakdown of Tax Payment in 2010 source: Dr. Artemio Disini, presentation at the Philippine Economic Society (PES) Conference, November 27, 2012, PICC, Manila.

14. The above table shows that:
* Actual contribution of large scale metallic mining (LSMM) to taxes not just 9% but 13% of gross value production, as small scale gold mining (SSGM) sub-sector does not pay any national tax, only small local taxes and fees.
* After deducting production cost, 60% for metallic and 50% for non- metallic, total taxes, fees and royalties paid to the government of P11.9 billion in 2010 comprised 43% of LSMM’s net revenue.
* Government share of nearly P12 billion in 2010 alone, constituting nearly one-half of LSMMs’ net revenue is big. It is hard to find other sectors that are taxed this much.
* The statement that large scale mining is “not taxed enough” is not valid. The phrase “not taxed enough” applies to small scale mining.

15. 2010
2011
LSMM
NMM
Total
LSMM
NMM
Total
Gross Revenue
69.1
33.3
102.4
88.0
41.1
129.1
Less Operating Cost
(60% LSMM, 50% NMM)
41.5
16.6
58.1
52.8
20.5
73.3
Net Revenue
27.6
16.7
44.3
35.2
20.6
55.8
Taxes and Fees Paid *
11.9
1.5
13.4
22.0
Taxes/Net Revenue, Percent
43.1
9.0
30.2
39.4
Taxes and Fees Paid by LSMM and NMM, 2010 and 2011, P Bill. * 2010 tax breakdown source: Disini. Presentation at PES Conf., 2012 No breakdown of tax payment among LSMM, NMM and SSM at the MGB data. At 39.4% combined payment by LSMM and NMM in 2011, and seeing their proportional payment in 2010, it is safe to assume that LSMM paid about 50 of their net revenues to the government.

16. * On top of taxes and fees paid, LSMM also required by RA 7942, Chapter X, and DENR Administrative Order (DAO) 2010-21 (IRR of RA 7942) LSMM to have Social Development and Management Program (SDMP) for the communities where they are operating. In 2010 alone, this was more than half billion pesos from members of the Chamber of Mines of the Philippines (COMP).
* Since SDMP (school, hospital, livelihood trainings, tractors, etc.) is not counted as part of operating expenses, then it can be considered as additional tax and fee that goes direct to the people in the communities, not to the BIR, Congress and LGUs.

17. Monsod computation
Realistic nos.
Potential metallic mineral value
P36.0 trillion
P36.0 trilion
Gross taxable profit
P14.4 trillion
P14.4 trillion
Government share
(a) Excise tax: 2%
(b) Malampaya: 60%
(c) Average taxes + fees payment: 46 %
Projected tax collection
(a) P288 billion
(she wrote P720 B) (b) P8.64 trillion
(c) P6.62 trillion
“Underpayment” to government
(b) – (a) = P8.35 trillion
(she wrote P7.92 trillion)
(b) – (c) = P2.02 trillion
―Using the Malampaya formula, the share of the government/Filipino people would come out to P8.64 trillion. Using the 2-percent formula of the Philippine Mining Act, our share is P720 billion—or eight hundredths of one percent (0.08 percent) of what we would have gotten using Malampaya. In effect, if all those mineral resources had been extracted, under RA 7942, the loss to the Filipino people would be P7.92 trillion.‖ – Winnie Monsod (PDI, August 9, 2013) Wrong. (1) Based on taxes and fees paid by LSMM in 2010 (43%) and 2011 (about 50%), the tax multiplier to be used should be around 46%, not 2%

18. (2) Assuming an amendment to RA 7942 in mining taxation, a move from excise tax of 2% ++ existing taxes and fees to a Malampaya revenue sharing (government 60%, private 40%), potential difference in revenue collection will only be around P2.02 trillion and not P8.35 or P7.92 trillion. And if SDMP spending is included, difference will narrow down to perhaps only P1.8 trillion. (3), “adverse environmental effects of mining” applies mainly to practices by SSM (Mt. Diwalwal for instance) and not by LSMM. Prof. Monsod was silent about SSM in her article.

19. Source: Roberto Mayorga, Chile Ambassador to the Philippines. Presentation at Mining Conference, Manila, September 14, 2011. Chile, Mining Taxation and Regulations

20. Foreign investments and mining taxation policies, Chile vs PH, the latter is far out more complicated, more extortionary. Source: Roberto Mayorga,, 2011.

21. •Compared with: PH’s $2-3 B a year mineral exports, only around 5% of total X
•And PH’s 1% share of GDP, 1% share of tax revenues,.

22. • Positive results in Chile, up to $67 B of new mining investments by 2017.
• PH only $12.3 B by 2017. The single biggest proj. in the PH, Tampakan
mine by Sagitarrius Mining Inc. (SMI) still uncertain due to LGU
opposition and disapproval of the project.
Projected mining investments, Chile vs. PH.

23. High-Potential
Potential High Tax Base: Of the country’s total land area of 30 million hectares…
Of which only 2% currently covered by LSMM contracts/permits About 30% or 9 million hectares are considered high mining potential With estimated inventory of: * 8.03 B tons COPPER; * 480.26 M tons IRON; * 4.91 Bi tons GOLD; * 39.66 Mi tons CHROMITE; * 0.81 Bi tons NICKEL; * 433.88 Mi tons ALUMINUM. Worth some $1 trillion Source: Recidoro, COMP

24. Projections for New Mining Projects, as of 2012
2011*
2012
2013
2014
2015
2016
2017
2018
Investments
(Million $)
730
1,369
2,072
3,352
4,045
2,892
812
Revenues
(Million $)
3,768
3,768
4,878
5,167
7,959
10,675
13,114
14,036
Taxes**
(Million $)
400
400
555
596
987
1,367
1,707
1,837 Total investments (2011 to 2018): $15 billion Total Annual Revenue: $3.8b in 2011, ramps up to $14b in 2018 Taxes Collected: $400m in 2011, increases to $1.8B in 2018 Mining share in GDP: 1.7% in 2011, increases to 5-6% in 2018 *Based on MGB Sep 2012 Figures **Estimated figures is without ITH source: Dr. Artemio Disini, presentation at the Philippine Economic Society (PES) Conference, November 27, 2012, PICC; basic data from MGB Sept 2012

25. Anti-mining Claims:
(1)“From 2000 to 2009, ave. contribution of mining only 0.91 % of GDP, 2.5 % of total investments, and only 0.38 % of total employment.” Philippine GDP by industrial origin at constant prices, % distribution Source: computed from NSCB table 1, http://www.nscb.gov.ph/beyondthenumbers/2013/04122013_jrga_agri.asp#tab1 True that share of raw mining production/GDP ratio is small. BUT check that if the multiplier effect of mining is included, its contribution to agri, industrial and services sectors is huge.

26. (2) “Better develop agriculture than mining.” Should be no conflict between the two. But labor productivity and income per worker in LSMM larger than those in agriculture in general. Thus, the sector already provides social and economic services to the poor more than in agriculture in general Table 4. Some comparison between Agriculture and Mining Source: Alonzo, Emmanuel, Issues Affecting the Mining Industry, Senate STSR Taxbits, July-August 2012.

27. 34.5% 40.8% 52.6% 54.7% 58.3% 58.8% 79.3%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
Papua New Guinea
Chile
South Africa
Peru
Canada
Australia
MICC Tax Structure
Source: Halcon, Nelia, COMP’s EVP. “The MICC Proposed Fiscal Regime for Mining: An Assessment”, July 2014 Computed Average Effective Tax Rate (AETR *), Selected Countries * AETR is the ratio of the Net Present Value (NPV) of total tax collections over the projected life of the mine to the NPV of the total project pre-tax net cash flows (discount rate of 10%).

28. •People benefit from mining even if taxes are zero. From spoon and fork to nails and hammer, cellphones and laptops, cars and airplanes, they all came from mining.
•“No to mining whatsoever” is a non-option. “Tax mining as prohibitively as possible” is next to non-option. It will drive away the legal, large, responsible mining companies. Small-scale mining that are hardly taxed and regulated will flourish.
•Chile’s simple investments and low mining tax policies should be considered by the PH government.
•A high AETR of 79% as proposed by the MICC will worsen the tax environment to an outright extortionary system.
•Any tax hike proposal should compensate it with streamlining and abolition of other taxes and charges.
IV. Concluding Notes