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 on Wednesday, the SC En Banc lifted the charges against Shell Exploration B.V., PNOC Exploration Corporation, and Chevron Malampaya LLC for unpaid income taxes.
The ruling also cleared two Department of Energy (DOE) officials, Compliance Division chief Thelma Cerdeña and Financial Services officer-in-charge Nora Tuazon, of any wrongdoing.
“The Court is on all fours with COA (Commission on Audit) to zealously ensure that the government is never placed at a disadvantage and that it rightfully receives what is due it in all its transactions,” the court stated. However, it emphasized that the government cannot renege on its obligations as outlined in the contract it freely entered into.
In 1990, the government executed a service contract with the contractors for the Malampaya Natural Gas Project to expedite the discovery and production of indigenous petroleum. Under this contract, the contractors are required to remit 60 percent of the project’s net proceeds to the government. While they are exempt from all taxes except income tax, the contract specifies that the government’s 60 percent share already covers the contractors’ income taxes from 2002 to 2009, known as the tax assumption provision.
During a 2004 post-audit, DOE supervising auditor Dolores Barraza noted that the corporate income taxes of the contractors were deducted from the government’s share, leading to an understatement of government revenue. By December 2009, the total undercollection of the 60 percent government share amounted to PHP 53.14 billion.
In 2020, the Office of the Solicitor General, representing the DOE, argued that relevant laws indicate that the contractors’ income taxes are included in the government’s share of net proceeds and constitute a permissible “tax assumption” by the government, rather than a tax exemption.
The SC clarified that tax assumption is not the same as tax exemption. While contractors remain liable for income tax, the government pays it on their behalf as part of its share in the project’s income. The court reiterated that the government must honor its contractual obligations, especially when the terms are clearly stated in agreements it voluntarily entered into. “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,” the tribunal concluded.