Our tax system has long been complex, and starting in 2018, the government introduced several reforms to simplify the structure, tackle inequities and improve efficiency. A recent amendment to the Tax Code was drafted with these same goals in mind. Signed on September 4, Republic Act (RA) No. 12253 or the Enhanced Finance Act for Large Metal Mining, establishes a unified set of tax rules for all large metal mining agreements. According to former Finance Secretary Ralph G. Recto, this reform aims to encourage investment, create quality jobs, promote progressive communities, and deliver better public services.
The law was published in the Official Gazette on September 5 and applies to major mining contractors and/or operators from February 17 (or 150 days from the law’s entry into force). After consultation with industry and government agencies, the Department of Finance (DoF) issued Implementing Rules and Regulations (IRR) on December 18 and provided detailed guidance on the calculation of income tax and capital gains, closing mechanics, filing and payment procedures, and public disclosure obligations.
The key changes introduced by this law are as follows:
A lowercase rule imposing a 2:1 debt-to-equity ratio now limits the deduction of interest on related company debt. This is in addition to the existing rules for the deduction of interest expenses set forth under the Tax Code as implemented by Revenue Regulations (RR) No. 13-2000, as specified in Revenue Memorandum Circular (RMC) No. 19-2024. These laws include the law of tax arbitrage and the prohibition of deducting interest payments between related parties as defined under RR No. 2-40.
In particular, in determining the income from metal mining activities for the purposes of calculating royalty and windfall tax, interest expenses must not only satisfy the above rules for income tax deduction but also meet the arm’s length standard. Therefore, the interest charged on the loan should not exceed what would have been agreed upon between the private parties when the financing was arranged. Guidance on arm’s length interest rates can be taken from Revenue Memorandum Order (RMO) No. 63-99, which listed relevant factors such as the amount and duration of the loan, the collateral involved, the borrower’s credit standing, and the interest rate prevailing in the borrower’s or lender’s area for similar loans. For domestic transactions, the Bank Reference Rate determined by the Bangko Sentral ng Pilipinas (BSP) is generally recommended as the appropriate rate.
Apart from the arm’s length rules, there is one rule that is always important. In Commissioner of Internal Revenue vs. Filinvest Development Corp., the Supreme Court held that notional interest cannot be calculated and taxed, insisting that, under Article 1956 of the Civil Code of the Philippines, no interest is required unless it is expressly stated in writing.
It remains to be seen how the Bureau of Internal Revenue (BIR) will harmonize and implement all of the aforementioned laws, especially in the case of mining-specific tax calculations.
The royals it is now levied on all large iron ore mines, whether located within or outside the mineral reserves. A fixed rate of 5% applies to the total amount of minerals or mineral products extracted or produced by operations within the mineral reservation. For those outside, the royalty rate ranges from 1% to 5%, depending on the level of margin (ie, the ratio of net income from metal mining operations to gross output). If the calculated margin is zero or negative, a minimum profit margin of 0.1% of the total amount generated applies. Royalty is sent to the BIR, with 40% allocated to the concerned Local Government Units (LGUs) and 10% allocated to the Mines and Geosciences Bureau in accordance with the Philippine Mining Act (RA No. 7942) and the Metals Industry Research and Development Center under Section 8 of Executive Order No. 792, series of Executive Order No. 792.
Gross product refers to the actual market value of minerals or mineral products per mine, without deductions for processing or handling costs, excluding sea freight and insurance for CIF (Cost, Insurance, and Freight) sales abroad. For mineral concentrates that are not traded in commodities, they are based on world prices of refined ore less smelting, refining and other processing costs to convert them into refined ore. On the other hand, gross income from mining activities refers to the total amount of deductions that are disallowed directly due to mining activities. For the purposes of calculating profits, the taxes deducted do not include capital gains tax and windfall profits.
Contractors and miners must file quarterly returns and pay within 60 days after each quarter. They are also required to post a bond equal to the royalty rate, subject to final settlement.
A new tax, called windfall profit taxplaced on income from iron ore mines with ventilation rates of at least 30%. Rates range from 1% to 10%, depending on the margin. Specifically, in this tax, the deductions allowed to arrive at the net income from metal mining include business income tax and profits, and only deductions are allowed when calculating the limit. Notably, the windfall tax itself is not a deduction for income tax purposes.
Mining contractors or operators are required to file a windfall profit tax return and pay the appropriate tax on or before the 15th.th in April following the close of the accounting year.
A ring fence requires a proper breakdown of income and expenses on a project-by-project basis in order to determine the appropriate tax rate for profits and tax-free profits. This law prevents mining companies from paying losses or deductions from one project against the profits of another project.
When several contractors operate under the same mineral agreement or Financial or Technical Assistance Agreement, each operator is required to comply separately with its tax obligations for the profits achieved in its mining activities.
I 40% share of LGUs from the total collections that include taxes on mineral products, royalties, other charges including associated charges, interests, fines, and shares from joint production, partnerships or production sharing agreements. it must be issued directly and promptlywithout any additional actions and without being bound or bound by the national government.
I business tax what LGUs can impose on mining contractors cannot exceed 0.5% of the total amount issued.
I BIR and Bureau of Customs they are authorized to inspect all sales and exports of minerals, mineral products, and raw metal for tax purposes. In addition, contractors and/or mine operators must comply with public disclosure and reporting requirements following best practices for transparency, accountability and good management of mineral resources. That’s right You are exempt from the use of privacy clauses under the Tax Code.
Although the IRR has set the operational framework for the new law, further guidance from the BIR is still awaited. Taxpayers continue to seek clarification, particularly on certain tax returns to be included in the newly introduced taxes and the scope and application of the confidentiality exemption clause. Clear and timely instructions will be important to ensure proper compliance and promote transparency.
RA 12253 shows 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 the creation of job opportunities. However, converting government revenue from these tax reforms into quality public services remains a distinct challenge. With recent controversies surrounding corruption and misuse of public funds, taxpayers may feel frustrated and overwhelmed by the burden of compliance. I hope that as the government urges taxpayers to fulfill their responsibility to pay taxes correctly, it will also prioritize ensuring that government services are delivered efficiently and transparently. Most importantly, given the impact of mining on the environment, strong cooperation between mining companies and governments 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 PwC’s global network.
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samantha.joy.h.oreta@pwc.com
