THE favorable arbitration ruling on the $1.1-billion tax case between the Malampaya consortium and the Commission on Audit (COA) would entice investors to pursue exploration activities in the country.
“The Department of Energy welcomes this latest development in the International Chamber of Commerce [ICC] arbitration case. We have always upheld the position that the tax regime for petroleum service contracts is legal and valid. This victory would go a long way in giving exploration and development activities in the country a much needed and long overdue boost as investors will now have renewed confidence in our upstream gas industry,” Energy Secretary Alfonso G. Cusi said in a text message on Monday.
The DOE has been urging investors to “explore, explore, explore” to help the country build its power supply. He said last year, the country was grossly trailing behind its neighbors in terms of petroleum exploration and development activities.
“It is high time we step up. We need to attain energy security and sustainability to minimize our vulnerability to global oil price shocks,” Cusi said during the launch of a new round of energy-contracting exploration program.
The ICC decided in favor of the Malampaya consortium, with a unanimous vote of 3-0. The ICC is a global organization that provides services to resolve disputes in international business, with headquarters in Paris, France. Service Contract 38, which governs the Malampaya project, provides for dispute resolution under the arbitration rules of the ICC.
The Senate Committee on Energy, the proponent of the Drill Drill Drill program, said there is no longer a legal impediment for investors to undertake oil and natural gas exploration now that the arbitration court in Singapore has finally resolved the tax case between Shell Philippines Exploration BV (SPEX) and the government.
“The multi-billion tax case has been a big specter that discouraged foreign players from conducting petroleum explorations in the Philippines over the past several years and drove away investments in high risk, capital-intensive, and technology-intensive sectors. With the case now behind us, it is high time for the government to aggressively pursue a ‘Drill, Drill, Drill’ program, so that we can tap these oil and gas resources and use them to achieve Philippine energy independence and pave the way for the country to become an energy exporting powerhouse,” Sen. Sherwin Gatchalian said.
The Petroleum Association of the Philippines (PAP) also said the ruling will revive the oil and gas exploration industry.
“I hope the government will react positively. This, of course, will be of great help to the exploration industry,” PAP chairman Rufino Bomasang said.
Shell Philippines Exploration B.V. (SPEX), which leads the Malampaya consortium, and the DOE, will meet soon.
“The Malampaya joint venture can confirm that the ICC arbitration tribunal has issued its decision, which we are currently reviewing with our legal counsels. At this stage, we cannot provide details due to the confidentiality of the proceedings, but the joint venture will be engaging the Department of Energy in due course,” Spex said.
Other members of the consortium are Chevron Malampaya LLC, with a 45-percent stake and state-owned PNOC Exploration Corp. with the remaining 10 percent.
The case stemmed from a COA ruling that overruled the petition of the Malampaya consortium that income tax was already imputed in the government’s 60-percent share in the Malampaya royalties. The tax, it argued, was deductible from the government’s share of the Malampaya earnings.
The COA, in its April 6, 2015 decision, upheld its findings that the income taxes of the service contractors could not be assumed by the national government in its 60 percent share in the Malampaya proceeds and thus ordered the consortium to pay the national government P53,140,304,739.86 in taxes.
It stressed that is no provision in the law stating that the income tax of the contractors forms part of the share of the government.
On a per year basis, COA said the under collection amounted to P2,409,817,191.46 in 2003; P2,335,402,961.38 in 2004; P2,832,586,038.93 in 2005; P7,901,265,361.42 in 2006; P11,272,523,434.55 in 2007; P15,826,563,356.86 in 2008; and P10,562,146,395.26 in 2009.
In September 2015, SPEX filed an arbitration case against the National Government with the Singapore International Arbitration Center. In July 2016, SPEX filed another arbitration case in the International Centre for the Settlement of Investment Disputes Arbitration (ICSID) in Washington against the National Government regarding its tax dispute.