Colombia is in the midst of a controversy over mining taxes. In fact, wrangling over taxes is a lot of the reason why I’m here.
Coincidentally, the Philippines is about to overhaul its mining tax regime. According to the Financial Times, the idea is to replace a hodge-podge of taxes (a 2% excise tax, 5% royalties on federal lands, and a share for indigenous people of at least 1% — see page 37 of this review of mining tax regimes and page 12 of this overview of Philippine excise taxes) with a simple flat 10% excise tax on sales, using the average monthly price in London. More importantly, the government will also take a windfall tax when prices rise above a certain level.
What’s not to like? Well, three things.
First, the basic reform does not change very much. I am not seeing where these tenfold increases in revenue are supposed to come from. Below is the current revenue from mining taxes (data here) in millions of pesos:
|Government revenues from mining|
|1997||₱ 33,100||₱ 114.8||₱ 921.5||₱ 70.7|
|1998||₱ 37,700||₱ 34.9||₱ 123.9||₱ 798.6||₱ 116.7|
|1999||₱ 30,900||₱ 37.5||₱ 241.1||₱ 1,016.9||₱ 180.9|
|2000||₱ 31,000||₱ 51.2||₱ 243.3||₱ 1,279.1||₱ 152.1|
|2001||₱ 29,000||₱ 66.3||₱ 129.8||₱ 647.6||₱ 138.4|
|2002||₱ 35,200||₱ 58.5||₱ 303.6||₱ 823.8||₱ 204.8|
|2003||₱ 41,100||₱ 79.8||₱ 155.8||₱ 1,039.2||₱ 226.9|
|2004||₱ 43,400||₱ 120.1||₱ 232.5||₱ 2,769.1||₱ 358.5|
|2005||₱ 50,200||₱ 210.2||₱ 251.4||₱ 4,733.6||₱ 453.5|
|2006||₱ 72,200||₱ 192.1||₱ 489.6||₱ 5,313.2||₱ 395.0|
|2007||₱ 102,200||₱ 774.0||₱ 942.1||₱ 8,371.7||₱ 359.8|
|2008||₱ 87,100||₱ 557.4||₱ 660.3||₱ 5,949.5||₱ 522.2|
|2009||₱ 106,100||₱ 396.2||₱ 718.8||₱ 10,272.5||₱ 992.8|
|2010||₱ 145,300||₱ 800.6||₱ 1,305.9||₱ 10,187.9||₱ 1,070.8|
|2011||₱ 163,200||₱ 1,180.8||₱ 6,985.8||₱ 12,736.2||₱ 1,176.9|
|2012||₱ 100,800||₱ 1,644.1||₱ 5,817.8||₱ 496.6|
Discounting 2011 (the leap in excise revenues seems to be a temporary effect of a decision by the Bureau of Internal Revenue to impose a 7% tax on gold sales) taxes have already been bumping around 10% of total revenues.
Most of the revenues are not from specific mining taxes, but rather general impost and fees. The below chart recasts the above data in terms of the percentage of total gross mining sales paid in taxes:
Which brings us to the second problem with the reform: the trouble isn’t in the Philippine mining tax code, it’s in enforcement. Excise tax collection runs only around half the statutory 2%. In a report by Maita Gomez, on page 20, government officials blamed widespread evasion (which is odd, considering that the Department of Environment and Natural Resources has the production statistics) and the central bank’s willingness to buy gold without tax payments. (Hence the 2011 special tax.) Royalty payments are even less, since they only apply to companies operating in special reservations.
How can we be sure that a higher 10% excise will be enforced better than the current 2% + 5% royalty? Switching to London prices won’t do much, because page 21 of this IMF report on Philippine mining taxes states that London prices are already used. Moreover, excise taxes have an additional problem: when commodity prices drop, they can drive projects into the red. (By definition, a well-crafted income tax cannot do that.)
And so the third thing not to like: what will matter about the new law is precisely what we do not yet know. How will it treat windfalls from high prices? The details will matter a lot, and that is what has not yet been decided.
In short, if that third leg is well-designed, then the Philippines could start pulling in a lot more public revenue when prices are high. But if it is not, then the rest of the reform won’t make much difference.