FISCAL REGIME OF MINING PROJECTS UNDER THE PHILIPPINE MINING ACT OF 1995

TWO COMMON TYPES OF MINING RIGHTS A 25 year contract renewable for same period Granted exclusively to Filipino corporation (minimum 60% Filipino-owned) & individuals Maximum area of 16,200 hectares for exploration Maximum of 5,000 hectares for commercial production (Basis: Chapter V of the RA 7942) 1. Mineral Production Sharing Agreement 2. Financial or Technical Assistance Agreement An 25 year contract renewable for same period Allows up to 100% ownership by qualified foreign corp. Minimum construction/development cost of US$50 million Minimum authorized capital of US$4 million Maximum of 81,000 hectares for exploration Maximum of 5,000 hectares for commercial production (Basis: Chapter VI of RA 7942)

FISCAL FRAMEWORK FOR AN MPSA AND FTAA MPSA Fiscal Contribution = Basic Gov’t Share + Other Taxes And Fees FTAA Fiscal Contribution = Basic Gov’t Share + Additional Govt Share

BASIC GOVT’S SHARE: OTHER PAYABLE TAXES & FEES: Excise tax on minerals (Basis: Chapter XXI Section 212 of DAO 96-40) National direct + Local direct + Payment to other taxes and fees taxes and fees Filipinos (Basis: Existing taxation laws) MPSA

A. National taxes / fees Income tax Value-added tax Royalties on minerals (in mineral reservations) Capital gains tax Tax on interest payment to foreign loan Tax on foreign stockholders dividends Documentary stamp tax B. Local taxes/fees Business tax Real property tax Registration fees Occupation fees Community tax Other local taxes C. Payment To Other Filipinos Special allowance as defined by the Mining Act Royalties to indigenous cultural communities MPSA - OTHER PAYABLE TAXES & FEES

LEGAL/CONSTITUTIONAL BASIS OF FTAA  The 1987 Constitution provides that: “The Government may enter into agreements with foreign-owned corporations involving FTAA for large scale exploration, development and commercial utilization of mineral.” (Basis: Chapter XII of Constitution)  R.A. No (Mining Act of 1995) A qualified applicant may enter into an FTAA directly with the Government through the DENR (Basis: Chapter IV, Section 33 of RA 7942) An FTAA shall be negotiated by the DENR and executed and approved by the President (Basis: Chapter IV, Section 36 of RA 7942)

RATIONALE FOR AN FTAA  Large scale mining projects: require huge capital and sophisticated technology; involve long gestation period from exploration to production;  Due to these factors, only a limited no. of Filipino investors invest in large scale mining projects;  To promote large scale mining, there is a need for direct foreign investments;  The Philippines has to compete with other countries for direct foreign investment;  The FTAA scheme opens up opportunities for direct foreign investments

SALIENT FEATURES OF AN FTAA  Allows maximum 81,000 hectares for exploration subject to annual area relinquishment;  Final mining area can be up to 5,000 hectares;  Allows maximum 5 year cost recovery period during which govt. waives tax payments;  Requires minimum authorized capital of US$ 4 million or its peso equivalent upon approval;  Obliges minimum ground expenditures set by law.

FTAA MILESTONES 0 25 years Exploration Period (max 4 yrs.) Recovery Period (max 5 yrs.) Pre-Feasibility Study Period (max 2 yrs) Feasibility Study Period ( max 2 yrs) Construction & Development Period (max 3 yrs) Operating Period (Remaining yrs) 25 Pre-operating Expenditures Payment of Govt. share YEARSYEARS

FRAMEWORK FOR FISCAL REGIME OF FTAA Achieve an equitable sharing among the Government, both national and local, the Mining Contractor and the concerned communities of the benefits derived from mineral resources development; and Ensure a fair, equitable, competitive and stable investment regime for the exploration, development and commercial utilization of minerals.

LEGAL BASIS OF THE GOVT’S SHARE FROM AN FTAA “The Government share in an FTAA shall consists, among other things, the Contractor’s corporate income tax, excise tax, special allowance, withholding tax due from the Contractor’s foreign stockholder’s arising from dividends or interest payments to the said foreign stockholder in case of a foreign-owned corporation and all such other taxes, duties and fees as provided for in existing laws.” (Basis: Chapter XXI Section 214 of DAO 96-40)

FISCAL REGIME OF AN FTAA 50% - 50% SHARING OF THE NET MINING REVENUE (AFTER RECOVERY OF PRE- OPERATING EXPENSES)

Net Mining Revenue = Gross Output less Deductible Cash Expenses FISCAL REGIME FOR FTAA...

Gross Output = means the actual market value of the minerals or mineral products from its mining area as defined in the National Internal Revenue Code Section 3(v) of the Mining Act GROSS OUTPUT

refers to the cash operating expenses incurred by the Contractor during a calendar year as follows: 1.mining, milling, transport and handling expenses 2.general/administrative expenses 3.environmental expenses 4.expenses on development of host/neighboring community including development of geoscience and mining technology 5.royalty payments to claimowners/surface owners 6.continuing exploration/mine development expenses 7.interest expense on loans DEDUCTIBLE CASH EXPENSES

Basic Government Share – all taxes, duties, royalties and fees –National Taxes, i.e., Excise Tax, Income Tax, Customs Duties and Fees, etc. –Local Taxes, i.e., Business Tax, Real Property Tax, etc., –Payment to Filipinos, i.e., Special Allowance, Royalty to IPs Additional Government Share – amount collected to achieve the 50% of the Net Mining Revenue GOVERNMENT SHARE : 50% OF NET MINING REVENUE

Sample Calculation of Additional Government Share under FTAA (1 st Year after Recovery Period, values in US$ Million) (1) Gross OutputUS$1,194 (2)Deductible ExpensesUS$288 (3)Net Mining Revenue = Gross Output (1) Less Deductible Expenses (2) US$906 (4) Total Government Share = 50% of Net Mining Revenue (3) US$453 (5)Basic Government ShareUS$293 (6)Additional Government Share = Total Government Share (4) Less Basic Government Share (5) US$160 Based on a US$ 750 Million - 25 MTPY Project

FTAA FINANCIAL MODEL 25 MTPY15 MTPY7.5 MTPY Payback Period1 yr2 yrs I R R36%32 %29 % NPV of Annual CF (Cont’r)$ 2,091$ 1,155$ 547 NPV of Annual CF (Gov’t)$ 2,691$ 1,579$ 678 % Contractor’s Share44 %42 %45 % % Government’s Share56 %58 %55 % Ave. Annual CF of Cont’r$ 501$ 293$ 145 Ave. Annual CF of Gov’t$ 507$ 297$ 135 % Contractor’s Share50 % 52 % % Government Share50 % 48 %

OTHER ENTITLEMENTS OF FTAAs u Recovery of Pre-Operating Expenses (for FTAA Contractors) –Set at a maximum of five (5) years –May be extended for projects incurring very large investments with high production rate and extensive mine life u Availment of the incentives under the Mining Act and Executive Order No. 226 –Sufficient Ore Reserves to sustain a projected total mine life of three (3) times the projected number of operating years with incentives,

GOVERNMENT’S SHARE IF INDIRECT TAXES ARE CONSIDERED INDIRECT TAXES: Fuel tax Payroll and fringe benefits of Filipinos directly employed Expenditures for dev’t of host communities and for the dev’’t of geoscience and mine tech. Withholding taxes on payroll, royalty payments to claimowners and surface owners and royalty payments for technology transfer

PHASES OF MINING PROJECT WHERE FINANCIAL BENEFITS ARE ENJOYED BY COMMUNITIES AND GOVERNMENT Exploration, Development and Construction Phase Operating Phase Cost Recovery PeriodPost - Cost Recovery Period Benefits enjoyed:  Exploration expenditures  Devt & const’n expenditures  Foreign exchange receipts  Social infrastructures  Dev’t of geoscience/mine tech  Employment  Local taxes and fees  Indirect taxes and fees Benefits foregone:  National taxes and fee Benefits enjoyed:  Foreign exchange receipts  Social infrastructures  Devt of geoscience/mine tech  Employment  Local taxes and fees  Indirect taxes and fees Benefits foregone:  National taxes and fees  Additional government share Benefits enjoyed:  Foreign exchange receipts  Social infrastructures  Devt of geoscience/mine tech  Employment  National taxes and fees  Additional government share  Local taxes and fees  Indirect taxes and fees

END OF PRESENTATION Good Day!