SC clears Malampaya contractors, rules gov’t share includes taxes

Supreme Court. File photo.

MANILA, Philippines — The Supreme Court (SC) has dropped the charges against the private contractors of the Malampaya Natural Gas Project, ruling that the Philippine government’s share in the project’s profits includes the contractors’ income taxes.

In a decision released on Wednesday, the Supreme Court En Banc lifted the charges for unpaid income taxes against Shell Exploration B.V., PNOC Exploration Corporation, and Chevron Malampaya LLC.

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The SC said the government and the contractors signed a service contract for the Malampaya Project in 1990, which states that “contractors must remit 60 percent of the project’s net proceeds to the government” and are exempt from all taxes except income tax.

However, the SC pointed out that under the tax assumption provision in the contract, “the government’s 60 percent share already covers the contractors’ income taxes from 2002 to 2009.”

According to the SC, the charges against the contractors stemmed from the Commission on Audit’s (COA) findings that P53 billion in income taxes had been deducted from the government’s share.

The court said COA then ruled that the contractors were liable for these taxes, arguing that “no law explicitly states that their income taxes should be part of the government’s share.”

The SC said the private contractors challenged the findings before the court, while the International Chamber of Commerce (ICC) issued an arbitral award upholding the validity of the tax assumption provision in the service contract.

With this, the SC reversed the COA’s ruling but explained that “tax assumption is not tax exemption and contractors are still liable for income tax, but the government pays it on their behalf as part of its share in the project’s income.”

“It respects the ICC’s arbitral ruling, in line with the State’s policy favoring arbitration, but emphasized that even without the ICC ruling, it would have reached the same conclusion based on its own review,” the SC said.

“While acknowledging COA’s role in protecting public funds, the government must honor its contractual obligations, especially when the terms are clearly stated in agreements it voluntarily entered into,” it added./mcm