Increasing royalties like ‘walking to a trap’

Sen. Ralph G. Recto today warned government against approaching the issue of mining as a revenue-enhancing tool by increasing government’s royalty share from mining operators, over proposal to increase mining tax.

“Royalties are back-ended or paid only after income comes out from extraction of minerals while excise taxes are frontloaded or paid the minute extraction is done,” Recto, chair of the Senate ways and means panel, said.

He said his pet measure seeking to increase mining excise tax to 7 percent from the current 2 percent could generate at least P3.3 billion in fresh revenues.

Recto said pegging the government mining revenues to royalties would be “tantamount to walking to a trap” since mining firms may not be totally honest in declaring true income and even resort to padding their capital expenditures or operating expense to downsize earnings.

The senator said whatever additional revenues can be derived from increasing the royalties would be off-set by the padding in the expenditures of mining firms.

He stressed under the excise tax regime, every extraction is readily subject to tax and would give government an honest valuation of the amount of taxes that can be collected.

Recto said he hoped government could also include his mining measure aside from the fiscal rationalization bill as part of the soon-to-be signed executive order.

The government is seeking a bigger royalty from mining players, possibly as high as 50 percent.

It has come up with a draft executive order requiring mining firms to pay the government 5-percent royalties on top of the excise tax.

Most of the mining firms in the country hold mineral production sharing agreements (MPSA) as contracts backing their operations.

Under such contracts, they pay the national government a 2-percent excise tax on their revenues. Such contracts are given to mining firms that are owned by a majority of Filipinos.

Under the Mining Act, however, mining firms that are owned by a majority of foreigners may operate in the country using financial or technical assistance agreements (FTAAs) as contracts. The deals, however, require them to remit 50 percent of their revenues to the national government.

Very few mining firms operate under the FTAAs.

The Department of Finance earlier estimated that the government was getting P2 billion annually from mining companies, largely through royalties under MPSAs.

In filing his pet measure, Recto noted that excise tax on mining have been unchanged since 1994 when Republic Act 7729 was enacted and effectively reduced the excise tax rates on metallic and non-metallic minerals such as quarry resources including granite, limestone and clay.

Under the National Internal Revenue Code (NLRC), as amended, the rates were uniformly pegged at two percent (2%) for both metallic minerals and quarry resources.

An excise tax is one levied on specific goods or commodities produced or sold within a country, or on licenses granted for specific activities like mining or quarrying.

Recto earlier said his bill would help bring in fresh revenues to a high of P3.3 billion annually from the current yearly average of only P702.7 million.

Recto also said the national government and the host local government units (LGUs) should equally partake of the additional revenues from the increased excise tax.

He said LGUs will have direct utilization of the 3.5 percent of the proposed 7 percent excise tax rate on metallic minerals and quarry resources and channel it to support the Special Education Fund (SEF) to address “the perennial shortages of classrooms, tables and chairs, books, teaching aids and other educational materials.”