Mining tax reform: What you need to know

Our tax system has long been complex, and since 2018, the government has introduced several reforms to simplify the framework, address inequities and improve efficiency. The latest amendment to the Tax Code was drafted with these same objectives. Signed on Sept. 4, Republic Act (RA) No. 12253 or the Enhanced Fiscal Regime for Large-Scale Metallic Mining Act, establishes a unified set of tax rules for all large-scale metallic mining agreements. According to former Finance Secretary Ralph G. Recto, this reform aims to encourage investment, create quality jobs, foster more progressive communities, and deliver better public services.

The law was published in the Official Gazette on Sept. 5 and applies to large-scale mining contractors and/or operators starting Feb. 17 (or 150 days from the effectivity of the law). Following consultations with industry and government agencies, the Department of Finance (DoF) issued Implementing Rules and Regulations (IRR) on Dec. 18 and provided detailed guidance on the computation of royalties and windfall profits tax, ring-fencing mechanics, filing and payment procedures, and public disclosure obligations.

The key changes introduced by this law are as follows:

A thin capitalization rule imposing a 2:1 debt-to-equity ratio now limits the deductibility of interest on related-party debt. This is in addition to the existing rules on interest expense deductions prescribed under the Tax Code as implemented by Revenue Regulations (RR) No. 13-2000, as clarified by Revenue Memorandum Circular (RMC) No. 19-2024. These rules include the tax arbitrage rule and the prohibition on deducting interest payments between related parties as defined under RR No. 2-40.

Specifically, in determining income from metallic mining operations for purposes of computing royalty and windfall profits tax, interest expenses must satisfy not only the foregoing income tax deductibility rules but also meet an arm’s length standard. Thus, interest charged on loans should not exceed what would have been agreed upon between independent parties at the time the financing was arranged. Guidance on arm’s length interest rates may be drawn from Revenue Memorandum Order (RMO) No. 63-99, which enumerated relevant factors such as the amount and duration of the loan, the security involved, the credit standing of the borrower, and the interest rate prevailing at the situs of the lender or creditor for comparable loans. For domestic transactions, the Bank Reference rate prescribed by the Bangko Sentral ng Pilipinas (BSP) is generally recommended as the appropriate benchmark.

Despite the arm’s length rules, there is jurisprudence which remains relevant. In Commissioner of Internal Revenue vs. Filinvest Development Corp., the Supreme Court held that theoretical interest cannot be imputed and taxed, emphasizing that, under Article 1956 of the Civil Code of the Philippines, no interest is due unless it has been expressly stipulated in writing.

It remains to be seen how the Bureau of Internal Revenue (BIR) will harmonize and implement all of the above-mentioned rules, particularly in the context of mining-specific tax computations.

Royalty is now levied on all large-scale metallic mining operations, whether located within mineral reservations or outside these areas. A fixed rate of 5% applies to the gross output of minerals or mineral products extracted or produced for operations within mineral reservations. For those outside, the royalty rate ranges from 1% to 5%, depending on the level of margin (i.e., ratio of net income from metallic mining operations to gross output). If the computed margin is zero or negative, a minimum royalty of 0.1% of gross output applies. Royalty is remitted to the BIR, with 40% allocated to the Local Government Units (LGUs) concerned and 10% earmarked for the Mines and Geosciences Bureau pursuant to the Philippine Mining Act (RA No. 7942) and for the Metals Industry Research and Development Center under Section 8 of Executive Order No. 79, series of 2012.

Gross output refers to the actual market value of minerals or mineral products from each mine, without deductions for processing or handling costs, except for ocean freight and insurance on C.I.F. (Cost, Insurance, and Freight) sales abroad. For mineral concentrates not traded in commodity exchanges, it is based on world prices of refined metal less smelting, refining and other processing charges for conversion into refined metal. On the other hand, net income from mining operations means gross output less allowable deductions directly attributable to mining operations. For royalty computation purposes, deductible taxes do not include royalty and windfall profits tax.

Mining contractors and operators must file quarterly royalty returns and pay within 60 days after each quarter. They are also required to post a bond equal to the estimated royalty, subject to final adjustment.

A new tax, called windfall profits tax, is imposed on the net income from metallic mining operations with windfall margins of at least 30%. The rates range from 1% to 10%, depending on the margin. Specifically, for this tax, the allowable deductions to arrive at net income from metallic mining operations include corporate income tax and royalty, and only itemized deductions are allowed when computing the margin. Notably, the windfall profits tax itself is not a deductible item for income tax purposes.

Mining contractors or operators are required to file a windfall profits tax return and pay the tax due on or before the 15^th day of April following the close of the accounting year.

Ring fencing requires proper attribution of income and expenses on a per project basis to determine the correct royalty and windfall profits tax. This rule prevents mining companies from offsetting losses or deductions from one project against the profits of another project.

Where multiple contractors operate under the same mineral agreement or Financial or Technical Assistance Agreement, each operator is required to comply separately with its royalty and windfall profits tax obligations for its respective mining activities.

The 40% share of LGUs from gross collections covering excise taxes on mineral products, royalties, other charges including related surcharges, interests, fines, and shares from co-production, joint venture or production sharing agreements must be released directly and immediately, without any additional actions and without being subjected to any lien or holdback by the national government.

The business tax that LGUs may impose on mining contractors cannot exceed 0.5% of the total gross output.

The BIR and the Bureau of Customs are authorized to audit all sales and exports of minerals, mineral products, and raw ores for tax purposes. Moreover, mining contractors and/or operators must comply with public disclosure and reporting requirements pursuant to best practices in the open, accountable and good governance of mineral resources. They are exempt from the application of confidentiality clauses under the Tax Code.

Although the IRR has set the operational framework for the new law, further guidance from the BIR is still expected. Taxpayers continue to seek clarification, particularly on the specific tax returns to be filed for the newly introduced taxes and the scope and application of the confidentiality exemption clause. Clear and timely instructions will be essential to ensure proper compliance and promote transparency.

RA 12253 reflects a strong intention to transform the country’s natural resources into economic growth while giving back to communities, especially those affected by mining operations, through job creation. However, converting government revenue from this tax reform into quality public services remains a separate challenge. With recent controversies surrounding corruption and misappropriation of public funds, taxpayers may feel discouraged and frustrated about the compliance burden. I am hopeful that as the government urges taxpayers to fulfill their obligation to pay taxes properly, it will also prioritize ensuring that public services are delivered effectively and transparently. Most importantly, given the environmental impact of mining, a strong collaboration between mining companies and the government is essential to restore ecological balance.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.

Samantha Joy H. Oreta is a director in the Tax Services group of Isla Lipana & Co., the Philippine member firm of the PwC global network.

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samantha.joy.h.oreta@pwc.com