COA upholds ruling Malampaya consortium must pay tax liabilities

The Commission on Audit (COA) has rebuffed the appeal of the Department of Energy (DOE) and the Office of the Solicitor General (OSG) to let the Malampaya gas consortium keep P146.8 billion in underpayments that were not collected by the government.

The consortium — Shell Philippines Exploration B.V., Chevron Malampaya LLC and state-owned Philippine National Oil Company Exploration Corp.—

operates the Malampaya gas project that supplies fuel to gas-fired plants in Luzon.

In a decision dated Jan. 24 and made public this week, the COA sustained its April 6, 2015, ruling that the government should not have shouldered the consortium’s tax liabilities in computing its share of net revenue from the natural gas field off Palawan province.

“If this commission will not put an end to this illegal ‘tax assumption’ scheme, the government will continue to bleed billions and billions of funds that can and should be used for the very purpose intended by law,” said the decision signed by Commissioners Jose Fabia and Isabel Agito.

COA Chair Michael Aguinaldo inhibited himself from the case.

While the Duterte administration claimed this decision would discourage investment and harm the country’s interest, the COA said that ensuring greater government revenue would allow the country to develop its energy resources, including renewable energy.

Under the law, royalties that the government gets from the gas wells are exclusively for the financing of energy resource development.

Ordered to pay the uncollected amounts from 2002 to 2016 were the three members of the consortium.

60:40 sharing

Under Presidential Decree Nos. 87 and 1459, the government is entitled to a minimum of 60 percent of the net revenue, or the difference between gross income and operational expenses. The maximum service fee of contractors is capped at 40 percent of the net revenue.

But the DOE has considered the consortium’s income tax liabilities part of its minimum 60-percent share under a so-called tax assumption scheme provided by Service Contract No. 38. This allowed the contractors to keep the full 40-percent portion for themselves.

State share reduced

By refusing to pass the tax liabilities on to the contractors, the government effectively eroded its 60-percent share to only 34.03 percent, according to the findings of Assistant Commissioner Rizalina Mutia.

The DOE accused the COA of overstepping its authority in issuing the April 2015 ruling, unduly amending the provisions of PD 87 and PD 1459, and encroaching upon the discretionary powers of the DOE and the President.

The DOE argued that the COA disregarded the provisions stating that “the share of the government, including all taxes, shall not be less than 60 percent” of the net revenues.

The COA, however, said that “tax assumption” reduced the government’s share and put it below the 60-percent threshold.

The decision cited Section 8 of PD 87, which mandated that “the contractors shall be liable each taxable year for Philippine income tax” and not the government.

SolGen’s arguments

The tax assumption scheme even made the Malampaya consortium “immune” to income tax changes since the government would shoulder the burden anyway.

While the 2015 decision led to outcry among the DOE and industry stakeholders, the OSG under the Duterte administration formally joined the case in September 2017 to defend the existing arrangement.

The OSG argued that the administration’s policy was to “honor the government’s contractual obligations” under SC 38.

The COA said it was not a party to SC 38 and was not barred from questioning the contract in the exercise of its role to safeguard public funds.

The COA even said following the OSG’s line of thinking would “destroy the principles of accountability, and checks and balances.”