Digging into the mining business

(Second of three parts)

Excise tax on mineral products

In addition to the value-added tax (VAT), excise tax is imposed on mineral products by the Tax Code. Briefly, these are:

1. On coal and coke, a tax of P10 per metric ton;

2. On all nonmetallic minerals and quarry resources, a tax of two percent based on the actual market value of the gross output at the time of removal for locally extracted or produced, or the value used by Bureau of Customs in determining tariff and customs duties, net of excise tax and VAT, in the case of importation;

3. Locally extracted natural gas and liquefied natural gas shall be taxed at two percent;

4. On all metallic minerals: (a) Copper and other metallic minerals is taxed at two percent, while (b) Gold and chromite is also taxed at two percent;

5. On indigenous petroleum, a tax of three percent of the fair international market price on the first taxable sale, barter, exchange or similar transaction to be paid by the buyer or purchaser before removal from place of production.

VAT

Generally, a 12-percent VAT is imposed on the sale of goods or services of a contractor in the ordinary course of trade or business and importation of goods. In certain cases, however, either an exemption or a zero-rating may be applicable.

Under relevant regulations, export sales by a contractor who is a VAT-registered person are subject to zero-percent VAT.

Export sales include the sale and actual shipment of goods from the Philippines to a foreign country paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). It also includes the sale of raw materials to an export-oriented enterprise whose export sales exceed 70 percent of its total annual production. An export-oriented enterprise is an enterprise whose export sale exceeds 70 percent of its total annual production of the preceding taxable year.

In case of purchases or imports of capital goods, the contractor may claim its aggregate acquisition cost (exclusive of VAT), which should exceed P1,000,000 in a calendar month, as credit against output tax in the following manner:

1) If the estimated useful life of a capital good is five years or more — The input tax shall be spread evenly over a period of 60 months and the claim for input tax credit will commence in the calendar month when the capital goods shall be divided by 60 and the quotient will be the amount to be claimed monthly.

2) If the estimated useful life of a capital good is less than five years — The input tax shall be spread evenly on a monthly basis by dividing the input tax by the actual number of months comprising the estimated useful life of a capital good. The claim for input tax credit shall commence in the month that the capital goods were acquired.

Note that where the aggregate acquisition cost (exclusive of VAT) of the capital good purchased or imported in a calendar month does not exceed P1,000,000, the total input taxes will be allowable as credit against output tax in the month of acquisition.

Local taxes

The proper local government unit may impose local taxes such as the local business tax, real property tax, and the community tax against the companies. However, if the contractor is duly certified by the Board Of Investment (BOI) either as pioneer or non-pioneer, it shall remain exempt from local taxation for a period of six and four years, respectively, from the date of registration pursuant to the Local Government Code of 1991.

Fiscal and non-fiscal incentive under OIC

The main fiscal incentive under the OIC is the ITH incentive. Under the 2008 IPP guidelines, mining and/or mineral processing which satisfies the conditions provided under the guidelines are entitled to the ITH incentive.

For six years from commercial operations for pioneer firms and four years for non-pioneer firms, new registered firms shall be fully exempt from income taxes. The income tax exemption may be extended for another year in each of the following cases:

(a) The project meets the prescribed ratio of the total imported and domestic capital equipment to number of workers set by the BOI. For new registered firms, the said ratio must not exceed $10,000 to one worker;

(b) Utilization of indigenous raw materials at rates set by BOI. In case of new registered firms, the said average cost should at least be 50 percent of the total cost of raw materials for the preceding years prior to the extension, unless the BOI prescribes a higher percentage;

(c) The net foreign exchange savings or earnings amount to at least $500,000 annually during the first three years of operation.

However, no registered pioneer firm may avail of the incentive for a period exceeding eight years.

After the lapse of the ITH, the registered enterprise shall be liable for the regular corporate income tax. At present, the rate is 35 perecent based on taxable income for domestic corporations. However, if the regular corporate income tax is less than the MCIT, then registered enterprise shall be liable for the MCIT.

Moreover, under the same OIC, for period of three years from commercial operation, registered expanding firms shall be entitled to an exemption from income taxes proportionate to their expansion under such terms and conditions as the BOI may determine, provided, however, that during the period within which this incentive is availed of by the expanding firm, it shall not be entitled to additional deduction for incremental labor expense. (To be concluded)

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(Alma L. Barcelo is a Director for Tax and Corporate Services of Manabat Sanagustin & Co., CPAs, a member firm of KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. This article is for general information only and is not intended to be, nor is it a substitute for, informed professional advice. While due care was exercised to ensure the quality of the information contained in this article, readers should carefully evaluate its accuracy, completeness and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances. For comments or inquiries, please email [email protected] or [email protected]).