The Supreme Court has ruled that the government’s 60 percent share in the Malampaya Natural Gas Project includes income taxes already being paid by its private contractors.
The ruling effectively reverses the Commission on Audit (COA) position seeking to collect more than P53 billion in back taxes from Malampaya’s contractors.
In a decision promulgated February 25 and made public only yesterday, Wednesday, the Court en banc, through Associate Justice Japar Dimaampao, lifted the tax liability charges against Shell Exploration B.V., PNOC Exploration Corp., and Chevron Malampaya LLC.
The case stemmed from a 1990 service contract between the government and the contractors for the exploration and development of the Malampaya gas field.
Under Service Contract No. 38, the contractors were required to remit 60 percent of net proceeds to the government, with an exemption from all taxes “except” income tax. However, the contract also specified that the government’s share already covered these income taxes under a tax assumption clause.
Despite this, COA, in a post-audit, found that the income taxes — amounting to more than P53 billion for the years 2002 to 2009 — had been charged against the government’s share. COA argued that no law explicitly authorizes such an arrangement and ruled the contractors liable.
The Supreme Court disagreed.
Citing Presidential Decree No. 87, or the Oil Exploration and Development Act, the Court said the law and the terms of the service contract “clearly and unambiguously” state that the government’s share includes the contractors’ income taxes.
“The governing laws and Service Contract No. 38 expressly state that the contractor’s income taxes are included in the government’s share from the Malampaya Project’s net proceeds,” the ruling read.
The Court emphasized that tax assumption is not equivalent to tax exemption. The contractors remain liable for income tax, but the government pays these on their behalf through its share.
It also noted that this interpretation is consistent with the arbitral ruling of the International Chamber of Commerce, which earlier upheld the tax assumption clause. However, the Court said it would have arrived at the same conclusion independently.
“The Court’s independent analysis of the COA’s disposition inevitably leads to the same conclusion that the tax assumption mechanism under Service Contract No. 38 is lawful and consistent with the legislative framework established by Presidential Decrees Nos. 87, 1206, and 1459,” it said.
Senior Associate Justice Marvic Leonen dissented, arguing that PD 87 does not explicitly state that income taxes are part of the government’s share.
