THE SUPREME COURT (SC) ruling confirming that the income taxes of private contractors in the Malampaya natural gas project are included in the government’s share of proceeds is expected to reassure investors, according to the Department of Energy (DoE).

“We’re happy that the issue has been resolved because it gives stability and security to our investors,” Energy Secretary Sharon S. Garin said in an interview last week.

Ms. Garin said that the decision could attract more exploration investment.

In a decision dated July 30, the SC overturned the charges against Shell Philippines Exploration B.V., Chevron Malampaya LLC, and state-run PNOC Exploration Corp. for unpaid taxes.

In 1990, the government awarded a service contract to the Shell Philippines, Chevron, and PNOC for the Malampaya project. Under the contract, the contractors are required to remit 60% of the project’s net proceeds to the government.

While they were exempt from all taxes except income tax, the contract included a tax assumption provision, specifying that their income taxes from 2002 to 2009 would be covered by the government’s share.

Following a post-audit, the Commission on Audit (CoA) found that over P53 billion in income taxes had been deducted from the government’s share. The agency argued that contractors were liable for these taxes due to the absence of an express legal provision that states that their income taxes should be part of the government’s share.

While the case was pending, the International Chamber of Commerce issued an arbitral award affirming the validity of the tax assumption provision in the service contract.

The SC reversed the CoA’s ruling citing Presidential Decree (PD) No. 87, or the Oil Exploration and Development Act, which says that income taxes paid by or on behalf of petroleum contractors form part of the government’s guaranteed 60% share of net proceeds from petroleum operations.

It said that the law seeks to encourage private investment in petroleum exploration by allowing the government to assume contractors’ income tax obligations.

This is stated in PD 1206 and PD 1459, which confirm that the state’s share includes all taxes.

The SC said that the tax assumption clause under the Malampaya contract does not constitute a tax exemption as the government assumes the obligation. — Sheldeen Joy Talavera