Are we getting a fair deal in coal mining?

The Philippine coal mining industry has displayed a considerable expansion in recent years. Semirara Mining Corparation dominates the industry, accounting for 94 percent of the country’s total coal extraction in 2011. For several decades, the company has enjoyed the exclusive right to operate in Semirara Island in Caluya, Antique, where roughly one-third of the country’s total mineable coal reserves are located.

This year, the multi-stakeholders group of the Philippine Extractive Industry Transparency Initiative (PH-EITI) has agreed to include Semirara Mining Company in its first report to be released in December 2014. However, the company has yet to sign the waiver that will allow the Bureau of Internal Revenue to disclose its tax payment to the government.

Disclosure of its tax payments concerns the public because the company enjoys billions-worth of financial incentives granted by laws and policies governing the coal mining operations.

For example, under the sharing scheme of the coal revenues, the company can deduct as much as 90 percent of the gross proceeds of coal as expense. While such deductions are commonly allowed among government contracts with extractive industries, the proportion of recoverable cost for coal operators is among the highest; oil and natural gas operators, for example, are only allowed to deduct up to 70 percent of total proceeds of their extractions as expenses.

From the remaining 10 percent of gross proceeds, the company receives a share equal to 7 percent. This is tantamount to the sum of the company’s “basic fees” and “special allowances.” Thus, the state—the inherent owner of these extracted resources—is left with a measly share of three percent of the gross proceeds from coal.

As part of its incentives, Semirara Mining Corporation is also exempted from payment of all national taxes, except income tax. However, the company’s income tax expense may be included to the total amount of expenditure to be deducted from the total sale of coal, as explicitly stated in the “Guidelines for Coal Operations in the Philippines.”

On top of these, the company has also availed itself of other incentives granted by investment-promoting agencies of the government, particularly the Board of Investment (BOI). Last September 2008, the BOI granted the company a six-year income tax holiday (ITH). In the past years, the effectivity of the ITH, along with other adjustments (including the statutory corporate income tax rate adjustments in 2005 and 2009) has significantly reduced the income tax rate levied on the company.

Based on its annual consolidated financial accounts, effective income tax rate paid by the company from 2009 to 2012 averaged at less than one (0.67) percent. In the same period, the amount of foregone income taxes from the company’s ITH alone has accumulated to PhP5.7 billion (calculated by taking the company’s annual rate of income tax exemption and corresponding taxable income from 2009 to 2012).

Ideally, these incentives are granted to encourage investments in industries which the private sector would otherwise find unattractive. In the case of the coal mining industry, however, the presence of coal resources in commercial quantity should be a sufficient incentive for private players to make the investment. The financial incentives, therefore, are redundant and serve as unnecessary subsidy to a well-performing private company. They are tantamount to billions of foregone government revenues that could have been used to finance various basic social services.

Unfortunately, the details of the incentives which the company enjoy are currently beyond the public access for further scrutiny. Lack of transparency hinders, for example, the dissection of the total amount of expenses deducted by the company from the gross sale of coal. Thus, determining if whether or not all items in the total amount of deducted expenses are legitimate (as defined by law) is currently difficult and costly, if not impossible, to undertake.

Disclosure of Semirara Mining Corporation’s documents is a good opportunity to look at the company’s tax payments, social payments and the incentives awarded by the government. This will also allow the public to identify areas for reforms including fixing the lopsided distribution of coal revenues, earmarking of proceeds from mining to basic social services and internalizing the negative impact of coal mining through effective regulation and taxation.

Ragos is a researcher of and a member of the Sin Tax team of Action for Economic Reforms

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