Income Tax Incentive for Petroleum Service Contractors Act

Senate TWENTIETH CONGRESS OF THE REPUBLIC OF THE PHILIPPINES First Regular Session 25 AUG -7 P1 21 SENATE RECEIVED MY: S.B. No. _ 1089 Introduced by Senator WIN GATCHALIAN AN ACT PRESCRIBING AND INSTITUTIONALIZING THE PAYMENT BY THE GOVERNMENT OF THE INCOME TAX OF PETROLEUM SERVICE CONTRACTORS, AS INCENTIVE IN PETROLEUM OPERATIONS AND FOR OTHER PURPOSES EXPLANATORY NOTE Petroleum exploration and development is a capital-intensive economic activity which plays a significant role in achieving the Philippines' energy security and self-sufficiency. Under Presidential Decree No. 87 (PD 87), private entities which are legally, financially, and technically qualified are granted the privilege to explore and develop oil and gas resources owned by the State' through a Petroleum Service Contract entered with the government. Given that oil and gas exploration entail significant capital expenditure, there is thus a need for stability in government policies to encourage developers to invest in the sector. A particular policy that needs to be clarified is the payment of income tax liability incurred by a petroleum service contractor. While the law provides that the government share in the annual net revenue derived from a Petroleum Service Contract shall already include the income tax liability of the petroleum service 1 Section 2. Article XII. 1987 Constitution.

contractor, the Commission on Audit (COA) has nonetheless issued a ruling charging the Malampaya Consortium for income tax liability amounting to Php 146.8 Billion.3 The COA Decision has cast uncertainty in the Philippine upstream oil and gas sector has been cited as potentially damaging to the government's efforts in enticing new explorations.4 This proposed legislation thus seeks to remove the cloud caused by the COA Decision by explicitly mandating the government to assume the payment of income tax in line with the provisions of PD 87 and consistent with the long-held practice by the Department of Energy and Department of Finance. This proposed measure would provide stability and certainty in tax policy further stimulating private sector participation in the domestic upstream oil and gas industry, a critical sector of the economy. For these reasons, the immediate passage of this measure is sought. WIN GATCHALIAN 2 Section 18 (2). Presidential Decree No. 87 otherwise known as the Oil Exploration and Development Act of 1972: xxx Provided, finally, That in no case shall the annual net revenue or share of the GOVERNMENT, including all taxes paid by or on behalf of the contractor, be less than sixty percent of the difference between the gross income and the sum of operating expenses and Filipino participation incentive; 3 COA Orders Malampaya consortium to pay P146-B in taxes. CNN Philippines. 17 May 2018. Available at: https://www.cnnphilippines.com/news/2018/5/17/COA-malampaya-P146-billion-taxes.html. Accessed on 9 August 2022. 4 Malampaya tax dispute goes to Supreme Court. Upstream Online. 24 May 2018. Available at: https://www.upstreamonline.com/weekly/malampaya-tax-dispute-goes-to-supreme-court/2-1-340156. Accessed on 9 August 2022.

Bendie Olive of the Sherretary TWENTIETH CONGRESS OF THE REPUBLIC OF THE PHILIPPINES ) First Regular Session 25 AUG -7 P1 21 SENATE RECEIVED SY: S.B. No. 1089 Introduced by SEN. WIN GATCHALIAN AN ACT PRESCRIBING AND INSTITUTIONALIZING THE PAYMENT BY THE GOVERNMENT OF THE INCOME TAX OF PETROLEUM SERVICE CONTRACTORS, AS INCENTIVE IN PETROLEUM OPERATIONS AND FOR OTHER PURPOSES Be it enacted by the Senate and the House of Representatives of the Philippines in Congress assembled:

SECTION 1. Short Title. - This Act shall be known as the "Income Tax Incentive for

Petroleum Service Contractors Act". 4 SECTION 2. Declaration of Policy. - It is hereby declared the policy of the State to 5 encourage the production of indigenous petroleum through a stable incentive regime 6 towards ensuring energy security in the country.

SECTION 3. Income Tax Incentive. - The Government shall pay the income tax of

petroleum service contractors on income derived from petroleum operations in the Philippines under the service contract using the government share in the annual net revenue or net proceeds.

SECTION 4. Implementing Rules and Regulations. - The Department of Energy, in

consultation with the relevant government agencies energy industry stakeholders,

shall issue the implementing rules and regulations of this Act within sixty (60) days 2 upon its effectivity. 4 SECTION 5. Amendatory Clause. - Sections 8.11, 12.1, 12.2, and 19 of Presidential Decree No. 87, otherwise known as the "Oil Exploration and Development Act of 1972" 6 are hereby amended.

SECTION 6. Separability Clause. - Any portion or provision of this Act, which may

be declared unconstitutional or invalid shall not have the effect of nullifying other portions or provisions hereof.

SECTION 7. Repealing Clauses. - All laws, ordinances, rules, regulations and other

issuance or parts thereof, which are inconsistent with this Act, are hereby amended, modified, or repealed accordingly. 16 SECTION 8. Effectivity Clause. - This Act shall take effect fifteen (15) days after its publication in at least two (2) newspaper of general circulation. Approved,