Manila: The Supreme Court has ruled that the Philippine government's share in the profits from the Malampaya Natural Gas Project includes the income taxes of its private contractors. In a 19-page decision made public Wednesday, the Supreme Court En Banc lifted the charges against Shell Exploration B.V., PNOC Exploration Corporation, and Chevron Malampaya LLC for unpaid income taxes.
According to Philippines News Agency, the ruling also lifted the "notice of charge" and cleared two Department of Energy (DOE) officials, Compliance Division chief Thelma Cerde±a and Financial Services officer-in-charge Nora Tuazon. The court emphasized that while it aligns with the Commission on Audit (COA) to protect government interests, it must adhere to the Constitution and existing laws. This includes honoring contractual obligations clearly outlined in agreements.
The service contract for the Malampaya Natural Gas Project, executed in 1990, required contractors to remit 60 percent of the project's net proceeds to the government, with an exemption from all taxes except income tax. However, the contract specifies that the government's 60 percent share already accounts for the contractors' income taxes for the period from 2002 to 2009, a provision known as tax assumption.
A post-audit in 2004 by DOE supervising auditor Dolores Barraza revealed that corporate income taxes were deducted from the government's share, leading to an understatement of government revenue. By December 2009, the under collection of the government's 60 percent share amounted to PHP53.14 billion.
In 2020, the Office of the Solicitor General, representing the DOE, argued that existing laws allow for the inclusion of contractors' income taxes in the government's share, treating it as a permissible tax assumption rather than a tax exemption. The Supreme Court clarified that tax assumption is not a tax exemption, meaning contractors remain liable for income tax, but the government pays it as part of its share in the project's income.
While acknowledging COA's role in safeguarding public funds, the Supreme Court stressed the importance of the government fulfilling its contractual obligations when terms are explicitly defined in voluntarily entered agreements. The tribunal stated, "The correct interpretation, therefore...is that the contractor is liable to pay income tax but the contractors' income tax forms part of or is counted in the government's 60 percent share."
