BIR Ruling No. 711-2019

REPUPLIC OF THE PHILIPPINES

DEPART MENT OF FINANCE BUREAU F FNTERNAL REVENUE

Ouezon City

RA No. 7942; DAO 99-56

BIR Ruling No. 010-07 BIR Ruling No. 008-07

NO 011.1815

Unit 3202-B Atlanta Centre, Annapciis S:. Greenhills, San Juan City. GO & CERENO LAW OFFICES

Atteniion: Atty. Lito A. Go, Jr.

Gertiemen:

serviees, withholding tax on dividenis to foreign stockholders, withholding tax on interest contirmation of your opinion that SMn is exempt from the payment of excise tax on mineral producis, income tax, value-added tax (VAT) on purchases of imported equipment, goods and Mines, Inc. (SMi), (formeriy: This refers to your letter dated A pril 3, 2019 requesting on behalf of your client, Sagittarius Tanpakan Mineral Resources Corporation (TMRC)l for

payments on foreign loans, and royalties due the government on minerai reservations from the date of approval of the Mining Project FeasiLility Study up to the end of the Recovery Period. pursuant to the provisions of Section 81 of Repubiis ^ct (RA) No. 7942, otherwise known as the Philippine Mining Act of 1995, Section 3 of DErR. ^cministrative Order (DAO) No. 99-56, implementing Ra No. 7942 and Financiai or Technica! Assistance Agreement (FTAA") between SMI and the Philippine Government.

and is engaged in the mining industry. Sl's Tax Identification No. (TiN) is witn principal place of business at Literty: Cere Farm, Brgy. Liberty, Tampakan, South Cotabato. SMI's soie project is the Tampakan Cer per-Goid Project. It is represented that SMI is a corporation organized and existing under Philippine laws

On March 22, 1 995, Tampakan Miineral Resources Corporation [TMRC, formerly Westerr Mining Corporation (Philippines) Inc.] entered into a Financial & Technical Assistance Agreement (FTAA) with the Republic of the Philippines. On December 18, 2001, TMRC's FTAA was 25 years. On June 8, 2016. the Mines a.1 Geosciences Bureau (MGB) approved the extension of transferred to SMI. The FTAA has a term of 25 years, renewabie for another term of not exceeding

the first tern: of the FTAA for another 12 years. SMI's FTAA covers Tampakan-Gcld Project covering an area of 99,387 hectares.,MI's Deciaration of Mining Project Feasibility (DMPF) was approved by the DENR in an O:der dated May :20, 2016. Based on SMI's Three Year Development and Utilization Work. Program submitted in 2018 and approved by the MGB in January 2019, SM1's production is expecte: to commence on the 4th quarter of 2022.

No 2 3 2e

RA No. 7942: DENR DAO Order No. 99-55 Sagitarius Mines, Ine.

The FTAA ailows the contraetor so adopt a fiscal regime that will be governed by the principle according to which the Governntent expects a reasonable return in economic value for the utilization of non-renewable natura! resources under its natural sovereignty while the contractor expects a reasonable retura o: its expenditure with special account to be taken of the high risks of exploration, the terms and cenditions prevailing elsewhere in the mining industry One of the provisions embodied in the fiscal regime is the payment of Government Share.

In March 1995, the Philippine Minting Act of 1995 was enacted (R.A. No. 7942), and that in December 1999, DENR Administrative Order No.:99-56 ("DAO 99-56") was promulgated establisning the fiscal regime of FTAAs and setting forth the guidelines for the implementation thereof: that among the features of R.^.. No. 7942 is Section 81 which provides that:

"[tIhe Government share in finanicial or technical assistance agreement shall consist of, among other things, the contractor's income tax, excise tax, special allowance, withholding tax due from the contractor's foreign stockholders arising from dividend or interest paymenis to the said foreign stockholder in case of a foreign national and all such other taxes. duties and fees as provided for under existing Iaw's;

In addition. R.A. No. 7942 provices that:

"[t)he collection of Government share in financial or technical assistance agreement shail commence after the finar:cial or technical assistance agreement contractor has fuliy recovered its pre-operaiing expenses, exploration, and development expenditures, inciusive."

in reply, please be informed thai Section 81 of Republic Act (RA) No. 7942, otherwise known as the Philippine Mining Act cf i995, which is a special law provides that:

'SEC. 81. Government Share in Other Mineral Agreements. - The share of the Covernment in co-production and joint-venture agreements shall be negotiated by the Government and the contractor taking into consideration the: (a) capital investment of the project, (b) risks involved, (c) contribution of the project to the economy, and (d) other factors that will provide for a tair and equitable sharing between the Government and the contractor. The Government shall also be entitled to compensations for its other contributions which shall be agreed upon by the parties, and shall consist. ameng other tnings, the contractor's income tax, excise tax, special allowance, withhoiaing tax"due from the contractor's foreign stockholders arising from divide:id or interest payments to the said foreign stockholders, in case of a fore.gn national, and ail such other taxes, duties and fees as provided for under existing laws.

The Government share ir. financial or technical assistance agreement shail consist of, among other things. the contractor's corporate income tax, excise tax. special allowance, withholding iax due from the contractor's foreign stockholders

NOV 2 9 7019 :1-2430

RA No. 79+2: DENR DAO Order No. 99-56 Sagittarius Mines, Inc. 3

arising from dividend or interest payments to the said foreign stockholder in case of a foreign national and all such other taxes, duties and fees as provided for under existing laws.

The collection of Government share in financial or technical assistance

contractor has fully recoveret its pre-operating expenses, exploration, and agreement shall commence afier the financial or technical assistance agreement development expenditures, ineiusive."

Based on the foregoing provisions. i: is ciear that pursuant to the Philippine Mining Act of 1995:

(1) the Giovernment share in an FTA shall consist of, among other things, the contractor's

income tax, excise tax, withnolding.tax due from the contractor's foreign stockholders arising from dividend or interest payments to the said foreign stockholder in case of a foreign national and ail such other taxes, duties and fees as provided for under existing laws; and

(2) the government shall be entitled to its share only when the FTAA Contractor has fully

recovered its pre-operating, exploration and development expenditures.

Moreover, Section 3 (g) () (a) cf DENR Administrative Order (DAO) No. 99-56 provides specifieally what the Government Share consists of, namely:

(a) excise tax on minerals; (b) contractor's income tax; (c) customs duties and fees or imported capital equipment; (d) value added tax on the purchase of imported equipment, goods and services; (e) withholding tax on interest paynents on foreign loans: (f) withholding tax on divide:ds to foreign stockholders: (g) royalties due the government on mineral reservations; (h) documentary stamp taxes;

(1) community tax; (1) capital gains tax; (i) locai business tax; (k) real property tax;

(n) ail other local government taxes, fees and imposts as of the effective date of the FTAA; (m) occupation fees;

(o) special allowance as defi:ed in the Mining Act; (p) royalty payments to any i::digenous peopie(s)/indigenous culturai community(ies).

DAO No. 99-56 further states that the foregoing taxes, fees and other such charges constituting the basic Government Share shall be paid by, the contractor from the effective date (which is the date of signing of the FT.AA). but it also expressly states in a proviso that items (a) to (g); shall not be collected from the contractor upon the date of.approval of the Mining Project

111201 NON 2 9 29

Sagitlarius Mines, Inc. RA No. 7942: DENR DAO Order Nc. 99-55

Feasibility Study up to the end of the Peovery Period. After the Recovery Period, a contractor shall be subject to all the normal taxes, die- and fees imposable on contractors under their FTAA.

Under Section 3(e) of DAO No. 9y-56. Recovery Period refers to the period allowed to the contractor to recover its pre-operating expianses as provided in the Mining Act and the IRR which the mining operations is equal to the aggregate of its pre-operating expenses, reckoned from the Date of Commencement of Commerciai Production, whichever comes first. The basis for shall be for a maximum of five (5) years cr at a date when'the aggregate of the net cash flows from

derermining the Recovery Period shai: be the actual net cash fiows from mining operations and actual pre-operatirg expenses converted intc its US dollar equivalent at the time the expenditure was incurred. Net cash flow means thie gross output less deductible expenses, pre-operating expenses, ongoing capital expenditures and working capital charges.

Secretary upon recommendation of the Director of the Mine's and Geosciences Bureau (MGB) and The recoverable pre-operating expenses, however, shall be approved by the DENR

shall consist of actual expenses and capitai expenditures enumerated under items 1 to 13 of Section 3(f) of DAO No. 99-56. Moreover, such recoverable pre-operating expenses shall be subject to Verification of its actual expenditure by che independent audit recognized by the Government.

In the case of La Bugal-B'Laan Tr:bul Association, Inc. v. Ramos, 445 SCRA I, G.R. No.

contractor of national taxes, is waived. Only Iocal government taxes and fees would be paid during Prilippine Mining Act of 1995, ruled chzi during the recovery period, the payment by the 127882 dared December 1, 2004, the Supreme Court, in interpreting the provisions of the

the period.

The Supreme Court explaired:

"Specifically, under the fiscal :egiine, the government's expectation is, inter alia the receipt of its share from the taxes and fees normally paid by a mining enterprise On the other hand. the FTAA contractor is granted by the government certain fiscal and non-fiscal incentives to help support the former's cash flow during the most critical phase (cost recovery) ana to make the Philippines competitive with other mineral producing countries. After the contractor has recovered its' initiat

the government, plus an additicnal share for the government based on the options investment, it will pay all the normai taxes and fees comprising the basic share of ana formulae set forth in DAO 99-56."

Also, in the iatest case of FCF Mineruls Corporation vs. Commissioner of Customs, CTA

recognized and applied the rule that Goveinment Shares are collected only after Recovery Period. EB No. 1620, promulgated on Augus: 14, 2018, the Court of Tax Appeals (CTA), En Banc, has

WHEREFORE, in view of the foreoing, it is the opinion of this Office, and thus, holds that excise tax on minerais, income tax, vaiue added tax (VAT) on purchases of imported equipment, goods and services, withhoiding sax on dividends to foreign stockholders, withhoiding tax on interest payments on foreigr: ioans, and royalties due the government on mineral

NOV 2 3 2018

RA No. 7942; DENR DAO Order No. 95-5 Sagiitarius Mines, Inc. 5

reservations shall rot be collected fran Mi from the daie cf approval of the Mining Project

Feasibility Study in June 8, 2016 up to thc'end of the Recovery Period. The Recovery Period, as

defined under Section 3(e) of DAO No. 99-56, shall be for a maximum of five (5) years or at a

date where the aggregate of the Net Cash Flows from the mining operations is equal to the

aggregate of its Pre-Operating Expenses, reckoned from the Date of Commencement of

Cominercial Operations (as represented, SMI's production is expected to commence on the 4th

quiarter of 2022), whichever comes fii t. as provided under Section 81 of the Philippine Mining

Act, its implementing rules and regulations particulariy DAO No. 99-56; and the FTAA between

SMlI and the Philippine Government. it is understood that the recoverabie pre-operating expenses

shail be approved by the DENR Secretary upon recommendation of the MGB Director and shalt

consist of actual expenses and capital expenditures enumerated under items l to 13 of Section 3(f)

of DAO 99-56, and that such recoverabie pre-operating expenses shall be subject to verification

of its actuai expenditure by an independert zudit recognized by the Government. Finally, it is

understood that after the expiration of the said Recovery Period, SMI shall become subject to ali

applieable taxes, fees, royalties, and ciher riated payments required by the Government.

This ruling is being issued on th.- basis of the foregoing facts as represented. However, if

upon investigation. it shali be disclosed trat the facts are different, then this ruling shall be

considered null and void.

Very truly yours. CcM CAESAR R. DULAY Commissioner of Internal Revenue G 030E13

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