The Philippines' mining industry lagged behind in addressing the challenges being tackled by their foreign counterparts, amid a struggle to set up a fiscal regime that can compete against other mining jurisdictions, according to PricewaterhouseCoopers' Venture Hub colleague partner Pocholo Domondon.
In his presentation at the Mining Philippines 2019 conference in Manila on Sept. 11, Domondon pointed out three facets global miners are tackling to fix the industry's image, namely actions and words on carbon, acceleration and widening of technology adoption, and engagement with consumers.
"In 2018, there was a shift in the questions and in the challenges. It used to be that there were challenges in respect to the adequate fiscal regime as well as the proportion a government must see, but right now the question is on fixing the brand of mining," he said.
Earlier this year, BHP Group pledged to invest US$400 million over five years to develop technologies to cut greenhouse gas emissions from its operations as well as those generated from the use of its resources. Meanwhile, several miners, including BHP, Rio Tinto, and OceanaGold Corp. have integrated autonomous mining technologies in its operations, including autonomous hauling trucks and trains.
In his presentation, Domondon cited Rio Tinto's partnership with Apple for the development of a carbon-free aluminum smelting process as an example of customer engagement.
Despite the three-pronged challenge faced by miners globally, Domondon posed that the local industry is mired in a predicament of "finding and fine-tuning the fiscal regime."
Based on PwC's analysis, the world's top 40 miners have distributed 21% of their value to governments in 2018, up from 19% in the prior year. Direct taxes paid, meanwhile, comprise 18% in 2018, against a five-year average of 14%, citing data from annual reports and S&P Capital IQ.
A vertical analysis of miners listed in the Philippine Stock Exchange showed that net profit amounted to 6% of their revenue, versus 10% for the world's top 40 miners in 2018. This is partly attributed to the Philippines levying an effective income tax rate of 49%, compared to a normal tax rate of 30% globally.
Further, 12% of total revenue is attributed to the national government alone, comprising of royalty, excise, and income taxes, which restricts Philippine miners' profits. "We haven't yet progressed to the local government, real property, and other license fees that the industry is facing," added Domondon.
Against the top destinations for nickel, gold and copper mining – namely Indonesia, Australia, and Chile, respectively – Domondon found that the Philippines has a less enticing environment for investment for the three commodities.
Despite multiple policy challenges in mining, including a plan to expedite restrictions on nickel ore exports from January 2022 to the end of 2019, Indonesia made strides in its investment worthiness in the sector, jumping up to 70th in the Fraser Institute's Annual Survey of Mining Companies for 2018, compared to the Philippines which landed in the 79th spot.
Further, the Southeast Asia neighbor's corporate income tax stood at 25%, with listed entities allowed to avail of a further 5% increment tax deduction. Excise taxes range from nil to 5%, depending on the physical progress of the refining facility. Mining royalty, meanwhile, is comparable to the Philippines at 4% to 5%.
Australia, a mature jurisdiction for diversified mining, imposes a simpler tax regime for miners, with a corporate tax rate of 30%, a 2.5% mining royalty, no additional government share and excise tax, as well as a stable regulatory framework. Cash flows generated by the country's miners total US$585 million, with government revenue at US$371 million, when placed under a scenario of US$30 million in exploration costs, a two-year approval process, and an assumed real gold price of US$1,275 per ounce. The assumed cash flows translate to a 61% share for the mine operator, and a 39% share for the government, taking into account that 100% of capital risk is shouldered by the miner.
For copper, Chile has a corporate income tax ranging from 25% to 27%. Royalty or mineral tax on operational mining income, hinged on the sales volume and operating margin, ranges from nil to 14%. The South American country also has no new legislation due in the near term, as it focuses on sustainability efforts and production efficiency on the backdrop of rising costs and sinking copper grades.
In terms of incentives for miners, the Philippines has been curtailing packages that entice investment and have been rationalizing such perks. Income tax holidays for the industry has been cut since 2012, limited to duty free importations and value added tax zero rating, among others, as afforded to other Board of Investments entities, as well as accelerated depreciation.
In contrast, the other mining jurisdictions Domondon cited are still providing additional incentives to strengthen the industry, with gross domestic product contribution of 15% to Australia, 10% for Chile, and 5% to Indonesia. The Philippine mining industry contributes 1% to the GDP, and there are no incentives to spur growth in the sector.
Contrary to the Philippines' stance, Indonesia has been providing tax allowances subject to certain criteria, Australia is spurring exploration by giving incentives to junior miners, and Chile is focused on enticing foreign investment of at least US$50 million.
