What does it take to own and operate a mining company in the Philippines? Mining is one of the industries that heavily revolves around a number of laws and regulations.
On Day 2 of the Philippine Mining Virtual Summit (17 March 2022), Atty Dennis A. Quintero of the Quisumbing Torres Law Office was one of the presenters. Atty Quintero gave a comprehensive report titled "Philippine Mining Legal Framework / Updates on Regulations".
Known as one of the top lawyers in the Philippines, Atty Quintero is also a Chairman and Trustee of the Philippines-Australia Business Council (PABC). He is a member and active advocate of the Philippine Mineral Reporting Code Committee.
In his presentation, he stressed the importance of the adoption of international best practices and world-class standards in mining. He stated that the Philippines has taken steps to achieve the same by having the following:
- World-class mining law
- requirement for free and prior informed consent for indigenous peoples/indigenous cultural communities
- local community approvals prior to commercial operations
- adoption of Philippine Mineral Reporting Code (PMRC) and Towards Sustainable Mining (TSM)
- Extractive Industry Transparency Initiative (EITI)
- new regulations on environmental safety and biodiversity
He mentioned that PMRC, TSM, and EITI are being promoted and supported by the Chamber of Mines of the Philippines.
To open and operate a mine site requires different types of tenurial permits/agreements, namely: Exploration Permit, Mineral Production and Sharing Agreement (MPSA) or Financial or Technical Assistance Agreement (FTAA) (for extraction), and the Mineral Processing Permit (for processing activities).
The current legal framework in the Philippine mining industry can be described as:
- the state having ownership of natural resources which is the foundation of the Philippine mining legal framework;
- the state can undertake the exploration, development, and utilisation of these natural resources or it can enter into agreement with private parties or contractors under revenue-sharing or production-sharing arrangements;
- this is found in Article XII, Section 2 of the 1987 Constitution;
- private contractors can enter into an MPSA for the exploration, development, and utilisation of natural resources. In an MPSA, Filipino citizens or corporations must own at least 60% of the company that entered into an MPSA; and
- the foreign equity limitation is removed for large-scale exploration, development, and utilisation of minerals and petroleum, and other mineral oils.
The exception is implemented through (i) the Financial or Technical Assistance Agreement (FTAA) in the minerals sector (similar to the Service Contract in the oil and gas sector). Furthermore, an Exploration Permit (EP) and Mineral Processing Permit (MPP) in the minerals sector can be held by a corporation that is up to 100% foreign-owned.
What are the major requirements to operate a mine? Some programs are required, such as: a work development and utilisation program, an environment protection and enhancement program, safety and health program, social development and management program (SDMP), final mine rehabilitation and commissioning plan, environmental compliance certificate, and declaration of mining project feasibility.
Additionally, a Mechanical / Electrical permit is also required. Other permits needed are the Wastewater Discharge Permit, Ore Transport Permit, and Mineral Ore Export Permit.
Notable Regulatory Update
There are currently some notable regulatory updates that directly affect the mining industry.
First is the Amendment of Section 4 of Executive Order No. 79. E.O. No. 79, series of 2012 prohibited the grant of mineral agreements until a new legislation rationalising existing revenue sharing schemes and mechanisms shall have taken effect. Executive Order No. 130 which was issued on 14 April 2021 lifted the moratorium on mineral agreements. The government may enter into new mineral agreements.
Second is the Lifting of the Ban on the Open Pit Mining, DENR Administrative Order no. 2021-40. The order lifted the ban on open pit method of mining for the extraction of copper, gold, silver and complex ores.
While open pit mining is a topic of debate for some environmental groups, it is subjected to the following conditions and strict requirements:
a) use of surface mining method shall not pose possible hazard to public health and safety resulting from ground failure or physical deterioration.
b) it shall not release hazardous chemicals into the environment, or the proponent has presented proven and acceptable techniques to control the same
c) proponent has adequate information to conduct a comprehensive stakeholders' involvement process to ensure that all interests and concerns are considered, and has social acceptability of its project since the commencement of exploration activities.
Moreover, as a means to further protect the environment, there are orders concerning the Biodiversity Conservation and Protection in Mining Operations.
DENR Administrative Order No. 2022-04 provides guiding principles to be promoted in the enhancement of biodiversity in mining operations. This order entails a precautionary principle and a sustainable use of natural resources. The operation should not lead to the decline of biological diversity.
Tax Reform for Acceleration and Inclusion Act
Republic Act No. 10963 (signed in 2017) doubled the rate of excise tax on minerals, mineral production, and quarry resources from 2% to 4%. Under the new law, there shall be a tax of 4% on all nonmetallic minerals and quarry resources, based on the actual market value of the gross output thereof at the time of removal in the case of those locally extracted or produced.
Corporate Recovery and Tax Incentives for Enterprise Act (CREATE Act)
Under the CREATE Act (R.A. No. 11534).it may be possible for mining operations, in particular those with downstream processing activities, to qualify for incentives under the CREATE Act, subject to details in the new Board of Investments Strategic Investment Priorities Plan (SIPP).
Under CREATE, the Fiscal Incentives Review Board or the investment promotion agencies (e.g. PEZA and BOI) may grant the following incentives to registered business enterprises (RBEs):
- Income Tax Holiday of 4-7 years, depending on tier, location and industry priorities
- Followed by a Special Corporate Income Tax (SCIT) rate of 5% based on gross income earned or Enhanced Deductions for 10 years
- Enhanced Deductions are in addition to the allowable deductions under the Tax Code
- Duty exemption and VAT exemption on importations and VAT zero rating on local purchases
Recommendations for Investors in the Mining Sector
At the end of Atty Quintero’s presentation, he enumerated some recommendations for investors in the mining sector.
- Conduct appropriate due diligence on exploration / mining projects
- Consider pending bills in Congress (e.g. downstream ore processing)
- Consider the foreign equity limitations applicable to certain mining projects (i.e. if under an MPSA)
- Strengthen stakeholder acceptance and involvement. Build a strong CSR in-house team. Local community acceptance is of paramount importance.
- Consider possible investment incentives under the CREATE Act and 2022 SIPP.
For our next article, we shall discuss the briefing of the Board of Investment's initiatives on copper, iron and steel industries, their economic contributions, industry roadmaps and more. This was a Philippines Australia Business Council webinar last year that was organized by Atty. Quintero with the Board of Investments.
