Rebuilding Trust in the Mining Industry

The mining industry has been hard at work to skew mining fiscal policy in its favor. It has been grumbling about its financial obligations ostensibly because raising taxes on mining makes the country less competitive. The truth is that as owners of the mineral resources, the Filipino people are only getting 2% of the gross value of our mineral resources. The industry would argue that they are paying more than the 2% excise tax, citing a recent study by the IMF that our average effective tax rate is about 60%.

Yes, it is true they paying other taxes. The industry has to pay a royalty of 5% if they are operating in mineral reservation areas. According to the list of MPSAs (mineral production sharing agreements) from the website of the Mines and Geosciences Bureau, out of the 36 operating metallic mines in the country, only 10 mining operations are in mineral reservation areas. Mining companies are also required to allocate 1.5% of operational expenses to social spending in the localities hosting them. But this also reduces their income tax liability. The industry pays taxes to the national and local governments that other businesses operating in the Philippines normally pay. So as owners of the minerals, we are only getting 2% of their actual value.

A World Bank study shows our total effective tax rate is low compared to other mineral -rich countries. Prof. James Otto examined the tax system of over 20 nations and grouped them in quartiles from lowest -taxing to highest -taxing quartiles. The Philippines is in the second lowest-taxing quartile. Despite that, countries like Peru, Tanzania, Mexico, and Ghana, whose total effective tax rates are higher than ours, rank better in terms of investment attractiveness according to the 2013 Behre Dolbear country ranking for mining investment. The country’s tax policy is just one of the determinants in the decision to invest. Other considerations include the economic and political system, social issues, bureaucratic issues, corruption and currency stability.

Making countries compete by reducing the tax rates they impose on corporations is really a race to the bottom. Other countries can also reduce their tax rates, resulting in revenue losses in all countries involved. Rather than competing to reach bottom, our mining fiscal policy should reflect the real cost of extracting minerals. Other countries are now realizing this. A 2012 industry study by Price Waterhouse Coopers (PWC) International discussed a global trend of increasing tax rates in the mining sector. Argentina, whose taxes are higher than ours, is still considering increasing its mining tax rate. Australia enacted its Mineral Resource Rent Tax last year. Brazil is also considering increasing its tax on its mineral resources. The Ghana government is proposing an increase in its corporate income tax and an additional tax on mining companies. Tanzania also increased its royalty rates on metallic minerals.

Other countries are also maximizing the benefits from mining by creating downstream industries. Indonesia requires mining companies to process and refine mineral ore within the country and now imposes export duty on mineral ore to discourage its export. In the Philippines, most of the mineral ores are exported. We only have one copper smelter and one nickel smelter and our lone copper smelter sources its copper concentrates from abroad! All the copper extracted from our mine sites is exported.

Ultimately, governance of the mining industry must be improved. The public needs to see that government can really regulate the mining industry because our history says otherwise. Many communities have hosted mining activities yet poverty in most of these communities is still very high. Mining for development has been a government paradigm since the time of Marcos. But we have yet to see that positive relationship between hosting the industry and the host communities’ development. Communities have experienced mining accidents which resulted in loss of livelihood, homes and lives; many families who suffered remain uncompensated for their losses. Roel Landingin and Jenny Aguilar in a Newsbreak article showed that, except for Marcopper, the companies responsible for the mining accidents and were associated with violation of environmental regulations remain as top companies in operation. Mining has been linked with human rights abuses and circumvention of the free prior and informed consent (FPIC) process of the indigenous peoples. These are reasons not to trust the industry.

There is now an opportunity to reform governance and rebuild trust in the industry. The Philippines has recently been accepted as a candidate country in the Extractive Industry Transparency Initiative (EITI). Initially conceptualized as an anti-corruption tool, EITI requires companies to disclose the amount of taxes and fees they pay government and for government to disclose how much it actually receives. EITI released a new set of global standards requiring the disclosure of data on production figures, information on ownership of license holders, disclosure of all material payments and revenues and how these are distributed, disclosure of beneficial ownership, social expenditures of companies and sub-national payments and transfers. The new standards encourage the disclosure of contracts entered into by mining companies. I believe mining companies and the Philippine government should disclose these contracts with the communities as these are considered public documents. I certainly hope the government can also disclose monitoring reports of mining operations. Mining disasters happened because of the government’s weak capacity to monitor the industry. Access to these monitoring reports is our only assurance that the government can monitor and regulate mining industry operations.

The first Philippine EITI report should be published by December 2014. The quality and amount of information that will be disclosed will help us make an objective assessment if mining can indeed be an engine for development.

Cielo Magno is the National Coordinator of Bantay Kita, a coalition of civil society organizations working for transparency and accountability of the extractive industry. She is also a member of the Global Steering Committee of Publish What You Pay and a fellow of Action for Economic Reforms.

Cielo Magno

Cielo Magno is the executive director of Bantay Kita, an organization that advocates transparency and accountability in the extractive industries. She is concurrent fellow of Action for Economic Reforms (