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COMMISSION ON AUDIT
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Reverse Malampaya ruling, COA urged

malaya.com.ph - Business, September 27, 2016
Web source Address: http://www.malaya.com.ph/business-news/business/reverse-malampaya-ruling-coa-urged

The Department of Energy (DOE) is urging the Commission on Audit (COA) to reconsider its decision and honor the sanctity of contracts of the Malampaya gas project to avoid
sending the wrong signal to foreign investors and adversely affecting the upstream exploration industry.

Alfonso Cusi, DOE secretary, in his September 19 letter to COA, said the DOE will still adopt the recommendation of the previous administration, which is to honor the contracts,
citing Presidential Decrees (PD) 87 and 1459.

“In light of these solid legal foundations, we entertain no doubt whatsoever on the legality of our position on this matter,” Cusi said.

“First time it was raised, I said I needed to study the full background of the issue. Then, I discussed it with the economic cluster and the Cabinet. We concurred with the DOE
stand,” Cusi added.

COA had issued a notice of charge to collect P151 billion from the Malampaya consortium composed of Shell Philippines Exploration B.V., Chevron Malampaya LLC and PNOC
Exploration Corp., covering the period 2002 to 2016. COA said the corporate income tax should not form part of the government’s share in the Malampaya project.

“With all due respect and in deference to the Honorable Commission, we maintain that the provision in Service Contract 38 (Malampaya) stating that the income tax of the
contractor shall form part of the government share is in accordance with the express provision of PD 87, as amended by PD 1459,” Cusi said.

At present, there are two arbitration cases on the dispute over the COA ruling.

ArthusTenazas, DOE director for legal department, said COA’s decision “is an undue interference to the powers of the DOE to administer and implement PD 87 and PD 1459 and
totally overstepped and exceeded the legal bounds of COA’s constitutionally mandated functions tantamount to a gross abuse of discretion.”

DOE asserted that the 60 percent share of the government including income tax has legal basis under Section 12 of PD 87, which states that the contractor is exempt from all taxes
except income tax, said Tenazas.

He also cited Section 18 (b) of PD 87 which states “in no case shall the annual net revenue share of the government, including all taxes paid by or on behalf of the contractor, be

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less than 60 percent of the difference between the gross income and the sum of the operating expense and Filipino participation incentive.”

“So it is very clear in the law that the 60 percent share of the government may include all income paid by the contractor. Considering that the contractor is exempt from all taxes
except income tax, the taxes that is referred to under Section 18 of the law, PD 87, refers to income tax,” he explained.

Tenazas said DOE’s legal position is also anchored on PD 1459, Section 1 (a) which “provides that the share of the government including all taxes shall not be less than 60 percent
of the difference between the gross income and the sum of the operating expenses and such allowances such as the secretary of Energy may deem proper to grant.”

Tenezas noted the law provides that the 60 percent share of the government include all taxes out of the net income of the project and that COA’s decision is “misconstrued,
misapplied and ultimately, disregarded Section 18 (b) of PD 87 and Section 1 (a) of PD 1459.”

“The decision was overly biased for the additional collection of tens of billions of pesos but disregarded the legality of the provisions of the service contract as well as the fairness
and the sanctity of the contract between the two parties,” he said.

If not reconsidered, Tenazas said, the problem might harm the country’s long-term interest as it will affect the confidence of foreign petroleum industry investors in the stability
and certainty of the country’s rules and regulations.

The DOE said resolving the dispute is crucial specially as local petroleum exploration at present only stands at 33 percent, lower compared than those of other Southeast Asian
countries.

“In the face of these daunting challenges, of the foremost consideration in the mind of foreign investors in deciding where to invest is the predictability, certainty and consistency
of investment rules and regulatory regime of a country. It is therefore of fundamental importance that we observe the sanctity of contract in our commercial transactions,” Cusi
said.

As seen on the Malaya Business Insight newspaper, Business Section, page A2