DISSENTING OPINION

CARPIO, J.:

I dissent and vote to deny respondents’ motions for reconsideration. I find that Section 3(aq), Section 39, Section 80, the second paragraph of Section 81, the proviso in Section 84, and the first proviso in Section 112 of Republic Act No. 7942[1] (“RA 7942”) violate Section 2, Article XII of the 1987 Constitution and are therefore unconstitutional.

In essence, these provisions of RA 7942 waive the State’s ownership rights under the Constitution over mineral resources.  These provisions also abdicate the State’s constitutional duty to control and supervise fully the exploitation of mineral resources.

A.    The Threshold Issue for Resolution

Petitioners claim that respondent Department of Environment and Natural Resources Secretary Victor O. Ramos, in issuing the rules to implement RA 7942, gravely abused his discretion amounting to lack or excess of jurisdiction.  Petitioners assert that RA 7942 is unconstitutional for the following reasons:

1.  RA 7942 “allows fully foreign owned corporations to explore, develop, utilize and exploit mineral resources in a manner contrary to Section 2, paragraph 4, Article XII of the Constitution”;

2.  RA 7942 “allows  enjoyment by foreign citizens as well as fully foreign owned corporations of the nation’s marine wealth contrary to Section 2, paragraph 2 of Article XII of the Constitution”;

3.  RA 7942 “violates Section 1, Article III of the Constitution”;

4.  RA 7942 “allows priority to foreign and fully foreign owned corporations in the exploration, development and utilization of mineral resources contrary to Article XII of the Constitution”;

5.  RA 7942 “allows the inequitable sharing of wealth contrary to Section 1, paragraph 1, and Section 2, paragraph 4, Article XII of the Constitution.”[2] (Emphasis supplied)

Petitioners also assail the validity of the Financial and Technical Assistance Agreement between the Philippine Government and WMCP (Philippines), Inc. dated 2 March 1995[3] (“WMCP FTAA”) for violation of Section 2, Article XII of the 1987 Constitution.

The issues that petitioners raise boil down to whether RA 7942 and the WMCP FTAA violate Section 2, Article XII of the 1987 Constitution. 

B.        The Constitutional Declaration and Mandate

Section 2, Article XII of the 1987 Constitution[4] provides as follows:

All x x x minerals, x x x petroleum, and other mineral oils, x x x and other natural resources are owned by the State.  x x x The exploration, development, and utilization of natural resources shall be under the full control and supervision of the State. x x x. (Emphasis supplied)

Two basic principles flow from this constitutional provision. First, the Constitution vests in the State ownership of all mineral resources. Second, the Constitution mandates the State to exercise full control and supervision over the exploitation of mineral resources.

The first principle reiterates the Regalian doctrine, which established State ownership of natural resources since the arrival of the Spaniards in the Philippines in the 16^th century.  The 1935, 1973 and 1987 Constitutions incorporate the Regalian doctrine.[5] The State, as owner of the nation’s natural resources, exercises the attributes of ownership over its natural resources.[6] An important attribute of ownership is the right to receive the income from any commercial exploitation of the natural resources.[7]

The second principle insures that the benefits of State ownership of natural resources accrue to the Filipino people.  The framers of the 1987 Constitution introduced the second principle to avoid the adverse effects of the “license, concession or lease”[8] system of exploitation under the 1935 and 1973 Constitutions.[9] The “license, concession or lease” system enriched the private concessionaires who controlled the exploitation of natural resources.  However, the “license, concession or lease” system left the Filipino people impoverished, starkly exemplified by the nation’s denuded forests whose exploitation did not benefit the Filipino people.

The framers of the 1987 Constitution clearly intended to abandon the “license, concession or lease” system prevailing under the 1935 and 1973 Constitutions.  This exchange in the deliberations of the Constitutional Commission reveals this clear intent: 

MR. DAVIDE:            Thank you, Mr. Vice-President. I would like to seek some clarifications.

MR. VILLEGAS:        Yes.

MR. DAVIDE:            Under the proposal, I notice that except for the lands of the public domain, all the other natural resources cannot be alienated and in respect to lands of the public domain, private corporations with the required ownership by Filipino citizens can only lease the same. Necessarily, insofar as other natural resources are concerned, it would only be the State which can exploit, develop, explore and utilize the same. However, the State may enter into a joint venture, co-production or production-sharing.  Is that not correct?

MR. VILLEGAS:        Yes.

MR. DAVIDE:            Consequently, henceforth upon the approval of this Constitution, no timber or forest concessions, permits or authorization can be exclusively granted to any citizen of the Philippines nor to any corporation qualified to acquire lands of the public domain?

MR. VILLEGAS:        Would Commissioner Monsod like to comment on that? I think his answer is “yes.”

MR. DAVIDE:            So, what will happen now to licenses or concessions earlier granted by the Philippine government to private corporations or to Filipino citizens? Would they be deemed repealed?

MR. VILLEGAS:        This is not applied retroactively. They will be respected.[10] (Emphasis supplied)

To carry out this intent, the 1987 Constitution uses a different phraseology from that used in the 1935 and 1973 Constitutions.  The previous Constitutions used the phrase “license, concession or lease” in referring to exploitation of natural resources. The 1987 Constitution uses the phrase “co-production, joint venture or production-sharing agreements,” with “full control and supervision” by the State.  The change in language was a clear rejection of the old system of “license, concession or lease.”

The 1935 and 1973 Constitutions also used the words “belong to” in stating the Regalian doctrine, thus declaring that natural resources “belong to the State.” The 1987 Constitution uses the word “owned,” thus prescribing that natural resources are “owned” by the State. In using the word “owned,” the 1987 Constitution emphasizes the attributes of ownership, among which is the right to the income of the property owned.[11]

The State as owner of the natural resources must receive income from the exploitation of its natural resources.  The payment of taxes, fees and charges, derived from the taxing or police power of the State, is not a substitute.   The State is duty bound to secure for the Filipino people a fair share of the income from any exploitation of the nation’s precious and exhaustible natural resources. As explained succinctly by a textbook writer:

Under the former licensing, concession, or lease schemes, the government benefited from such activities only through fees, charges and taxes.  Such benefits were very minimal compared with the enormous profits reaped by the licensees, concessionaires or lessees who had control over the particular resources over which they had been given exclusive right to exploit.  Moreover, some of them disregarded the conservation of natural resources. With the new role, the State will be able to obtain a greater share in the profits.  It can also actively husband our natural resources and engage in development programs that will be beneficial to the nation.[12] (Emphasis supplied)

Thus, the 1987 Constitution commands the State to exercise full control and supervision over the exploitation of natural resources to insure that the State receives its fair share of the income. In Miners Association of the Philippines v. Hon. Factoran, Jr., et al.,[13] the Court ruled that “the old system of exploration, development and utilization of natural resources through ‘license, concession or lease’ x x x has been disallowed by Article XII, Section 2 of the 1987 Constitution.”  The Court explained:

Upon the effectivity of the 1987 Constitution on February 2, 1987, the State assumed a more dynamic role in the exploration, development and utilization of the natural resources of the country.  Article XII, Section 2 of the said Charter explicitly ordains that the exploration, development and utilization of natural resources shall be under the full control and supervision of the State. Consonant therewith, the exploration, development and utilization of natural resources may be undertaken by means of direct act of the State, or it may opt to enter into co-production, joint venture, or production-sharing agreements, or it may enter into agreements with foreign-owned corporations involving either technical or financial assistance for large-scale exploration, development, and utilization of minerals, petroleum, and other mineral oils according to the general terms and conditions provided by law, based on real contributions to the economic growth and general welfare of the country.  (Emphasis supplied)

The old system of “license, concession or lease” which merely gave the State a pittance in the form of taxes, fees and charges is now buried in history.  Any attempt to resurrect it is unconstitutional and deserves outright rejection by this Court.

The Constitution prohibits the alienation of all natural resources except agricultural lands.[14] The Constitution, however, allows the State to exploit commercially its natural resources and sell the marketable products from such exploitation.  This the State may do through a co-production, joint venture or production-sharing arrangement with companies at least 60% Filipino owned. The necessary implication is that the State, as owner of the natural resources, must receive a fair share of the income from such commercial operation.  The State may receive its share of the net income in cash or in kind.

The State may also directly exploit its natural resources in either of two ways.  The State may set up its own company to engage in the exploitation of natural resources.  Alternatively, the State may enter into a financial or technical assistance agreement (“FTAA”) with private companies who act as contractors of the State.  The State may seek from such contractors either financial or technical assistance, or both, depending on the State’s own needs.  Under an FTAA, the contractor, foreign or local, manages the contracted work or operations to the extent of its financial or technical contribution, subject to the State’s control and supervision.

Except in large-scale exploitation of certain minerals, the State’s contractors must be 60% Filipino owned companies.  The State pays such contractors, for their technical services or financial assistance, a share of the income from the exploitation of the natural resources.  The State retains the remainder of the income after paying the Filipino owned contractor.

In large-scale exploitation of minerals, petroleum and other mineral oils, the Constitution allows the State to contract with “foreign-owned corporations” under an FTAA.  This is still a direct exploitation by the State but using a foreign instead of a local contractor.  However, the Constitution requires that the participation of foreign contractors must make a real contribution to the national economy and the general welfare.  The State pays the foreign contractor, for its technical services or financial assistance, a share of the income from the exploitation of the minerals, petroleum or other mineral oils.  The State retains the rest of the income after paying the foreign contractor.

Whether the FTAA contractor is local or foreign, the State must retain its fair share of the income from the exploitation of the natural resources that it owns.  To insure it retains its fair share of the income, the State must exercise full control and supervision over the exploitation of its natural resources.  And whether the FTAA contractor is local or foreign, the State is directly undertaking the exploitation of its natural resources, with the FTAA contractor providing technical services or financing to the State.  Since the State is directly undertaking the exploitation, all exploration permits and similar authorizations are in the name of the Philippine Government, which then authorizes the contractor to act on its behalf.

The State exercises full control and supervision over the mining operations in the Philippines of the foreign contractor.  However, the State does not exercise control and supervision over the foreign contractor itself or its board of directors.  The State does not also exercise any control or supervision over the foreign contractor’s mining operations in other countries, or even its non-mining operations in the Philippines.  There is no conflict of power between the State and the foreign contractor’s board of directors.  By entering into an FTAA, the foreign contractor, through its board of directors, agrees to manage the contracted work or operations to the extent of its financial or technical contribution subject to the State’s control and supervision.

No government should contract with a corporation, local or foreign, to exploit commercially the nation’s natural resources without the State receiving any income as owner of the natural resources.  Natural resources are non-renewable and exhaustible assets of the State.  Certainly, no government in its right mind should give away for free its natural resources to private business enterprises, local or foreign, amidst widespread poverty among its people.

In sum, two basic constitutional principles govern the exploitation of natural resources in the country. First, the State owns the country’s natural resources and must benefit as owner from any exploitation of its natural resources.  Second, to insure that it receives its fair share as owner of the natural resources, the State must exercise full control and supervision over the exploitation of its natural resources.

We shall subject RA 7942 to constitutional scrutiny based on these two basic principles.

C.        Waiver of Beneficial Rights from Ownership of Mineral

Resources

RA 7942 contains five provisions which waive the State’s right to receive income from the exploitation of its mineral resources.  These provisions are Sections 39, 80, 81, 84 and 112:

Section 39.  Option to Convert into a Mineral Agreement. — The contractor has the option to convert the financial or technical assistance agreement to a mineral agreement at any time during the term of the agreement, if the economic viability of the contract area is found to be inadequate to justify large-scale mining operations, after proper notice to the Secretary as provided for under the implementing rules and regulations: Provided, That the mineral agreement shall only be for the remaining period of the original agreement.

In the case of a foreign contractor, it shall reduce its equity to forty percent (40%) in the corporation, partnership, association, or cooperative.  Upon compliance with this requirement by the contractor, the Secretary shall approve the conversion and execute the mineral production-sharing agreement.

Section 80. Government Share in Mineral Production Sharing Agreement.  —  The total government share in a mineral production sharing agreement shall be the excise tax on mineral products as provided in Republic Act No. 7729, amending Section 151(a) of the National Internal Revenue Code, as amended.

Section 81.           Government Share in Other Mineral Agreements. — The share of the Government in co-production and joint-venture agreements shall be negotiated by the Government and the contractor taking into consideration the:  (a) capital investment of the project, (b) risks involved, (c) contribution of the project to the economy, and (d) other factors that will provide for a fair and equitable sharing between the Government and the contractor.  The Government shall also be entitled to compensation for its other contributions which shall be agreed upon by the parties, and shall consist, among other things, the contractor’s income tax, excise tax, special allowance, withholding tax due from the contractor’s foreign stockholders arising from dividend or interest payments to the said foreign stockholders, in case of a foreign national, and all such other taxes, duties and fees as provided for under existing laws.

The Government share in financial or technical assistance agreement shall consist of, among other things, the contractor’s corporate income tax, excise tax, special allowance, withholding tax due from the contractor’s foreign stockholders arising from dividend or interest payments to the said foreign stockholder in case of a foreign national and all such other taxes, duties and fees as provided for under existing laws.

The collection of Government share in financial or technical assistance agreement shall commence after the financial or technical assistance agreement contractor has fully recovered its pre-operating expenses, exploration, and development expenditures, inclusive.

Section 84. Excise Tax on Mineral Products. — The contractor shall be liable to pay the excise tax on mineral products as provided for under Section 151 of the National Internal Revenue Code: Provided, however, That with respect to a mineral production sharing agreement, the excise tax on mineral products shall be the government share under said agreement.

Section 112.  Non-impairment of Existing Mining/Quarrying Rights. - All valid and existing mining lease contracts, permits/licenses, leases pending renewal, mineral production–sharing agreements granted under Executive Order No. 279, at the date of effectivity of this Act, shall remain valid x x x Provided, That the provisions of Chapter XIV[15] on government share in mineral production-sharing agreement x x x shall immediately govern and apply to a mining lessee or contractor unless the mining lessee or contractor indicates his intention to the Secretary, in writing, not to avail of said provisions: x x x.

(Emphasis supplied)

Section 80 of RA 7942 limits to the excise tax the State’s share in a mineral production-sharing agreement (“MPSA”).  Section 80 expressly states that the excise tax on mineral products shall constitute the “total government share in a mineral production sharing agreement.” Under Section 151(A) of the Tax Code, this excise tax on metallic and non-metallic minerals is only 2% of the market value, as follows:

Section 151.         Mineral Products. —

(A) Rates of Tax. — There shall be levied, assessed and collected on minerals, mineral products and quarry resources, excise tax as follows:

(1)  On coal and coke, a tax of Ten pesos (P10.00) per metric ton;

(2)  On all nonmetallic minerals and quarry resources, a tax of two percent (2%) based on the actual market value of the gross output thereof at the time of removal, in the case of those locally extracted or produced; or the value used by the Bureau of Customs in determining tariff and customs duties, net of excise tax and value-added tax, in the case of importation.

xxx

(3) On all metallic minerals, a tax based on the actual market value of the gross output thereof at the time of removal, in the case of those locally extracted or produced; or the value used by the Bureau of Customs in determining tariff and customs duties, net of excise tax and value-added tax, in the case of importation, in accordance with the following schedule:

(a) Copper and other metallic minerals:

(i)   On the first three (3) years upon the effectivity of Republic Act No. 7729, one percent (1%);

(ii)   On the fourth and the fifth years, one and a half percent (1½%); and

(iii)  On the sixth year and thereafter, two percent (2%).

(b) Gold and chromite, two percent (2%).

x x x. (Emphasis supplied)

Section 80 of RA 7942 does not allow the State to receive any income as owner of the mineral resources.  The proviso in Section 84 of RA 7942 reiterates this when it states that “the excise tax on mineral products shall be the government share under said agreement.”[16] The State receives only an excise tax flowing from its taxing power, not from its ownership of the mineral resources.  The excise tax is imposed not only on mineral products, but also on alcohol, tobacco and automobiles[17] produced by companies that do not exploit natural resources owned by the State.  The excise tax is not payment for the exploitation of the State’s natural resources, but payment for the “privilege of engaging in business.”[18] Clearly, under Section 80 of RA 7942, the State does not receive as owner of the mineral resources any income from the exploitation of its mineral resources.

The second paragraph of Section 81 of RA 7942 also limits the State’s share in FTAAs with foreign contractors to taxes, duties and fees.  Section 81 of RA 7942 provides that the State’s share in FTAAs with foreign contractors –

shall consist of, among other things, the contractor’s corporate income tax, excise tax, special allowance, withholding tax due from the contractor’s foreign stockholders arising from dividend or interest payments to the said foreign stockholder in case of a foreign national and all such other taxes, duties and fees as provided for under existing laws.  (Emphasis supplied)

RA 7942 does not explain the phrase “among other things.” The Solicitor General states correctly that the phrase refers to taxes.[19] The phrase is an ejusdem generis phrase, and means “among other taxes, duties and fees” since the items specifically enumerated are all taxes, duties and fees. The last phrase “all such other taxes, duties and fees as provided for under existing laws” at the end of the sentence clarifies further that the phrase “among other things” refers to taxes, duties and fees.

The second paragraph of Section 81 does not require the Government and the foreign FTAA contractor to negotiate the State’s share.  In contrast, the first paragraph of Section 81 expressly provides that the “share of the Government in co-production and joint-venture agreements shall be negotiated by the Government and the contractor” which is 60% Filipino owned.

In a co-production or joint venture agreement, the Government contributes other inputs or equity in addition to its mineral resources.[20] Thus, the first paragraph of Section 81 requires the Government and the 60% Filipino owned company to negotiate the State’s share.  However, in an FTAA with a foreign contractor under the second paragraph of Section 81, the Government’s contribution is only the mineral resources.  Section 81 does not require the Government and the foreign contractor to negotiate the State’s share from the net proceeds because there is no share for the State.  Section 81 does not recognize the State’s contribution of mineral resources as worthy of any share of the net proceeds from the mining operations.

Thus, in FTAAs with foreign contractors under RA 7942, the State’s share is limited to taxes, fees and duties.  The taxes include “withholding tax due from the contractor’s foreign stockholders arising from dividend or interest payments.” All these taxes, fees and duties are imposed pursuant to the State’s taxing power.  The tax on income, including dividend and interest income, is imposed on all taxpayers whether or not they are stockholders of mining companies.  These taxes, fees and duties are not contractual payments to the State as owner of the mineral resources but are mandatory exactions based on the taxing power of the State.

Section 112 of RA 7942 is another provision that violates Section 2, Article XII of the 1987 Constitution.  Section 112 “immediately” reverts all mineral agreements to the old and discredited “license, concession or lease” system outlawed by the 1987 Constitution.  Section 112 states that “the provisions of Chapter XIV[21] on government share in mineral production-sharing agreement x x x shall immediately govern and apply to a mining lessee or contractor.” The contractor, local or foreign, will now pay only the “government share in a mineral production-sharing agreement” under RA 7942.  Section 80 of RA 7942, which specifically governs MPSAs, limits the “government share” solely to the excise tax on mineral products - 2% on metallic and non-metallic minerals and 3% on indigenous petroleum.

In allowing the payment of the excise tax as the only share of the government in any mineral agreement, whether co-production, joint venture or production-sharing, Section 112 of RA 7942 reinstates the old “license, concession or lease” system where the State receives only minimal taxes, duties and fees. This clearly violates Section 2, Article XII of the Constitution and is therefore unconstitutional. Section 112 of RA 7942 is a sweeping negation of the clear letter and intent of the 1987 Constitution that the exploitation of the State’s natural resources must benefit primarily the Filipino people.

Of course, Section 112 gives contractors the option not to avail of the benefit of Section 112.   This is in the guise that the enactment of RA 7942 shall not impair pre-existing mining rights, as the heading of Section 112 states.  It is doubtful, however, if any contractor of sound mind would refuse to receive 100% rather than only 40% of the net proceeds from the exploitation of minerals under the FTAA.

Another provision that violates Section 2, Article XII of the Constitution is Section 39 of RA 7942.  Section 39 grants the foreign contractor the option to convert the FTAA into a “mineral production-sharing agreement” if the foreign contractor finds that the mineral deposits do not justify large-scale mining operations.  Section 39 of RA 7942 operates to deprive the State of income from the mining operations and limits the State to the excise tax on mineral products.

Section 39 grants the foreign contractor the option to revert to the “license, concession or lease” system which the 1987 Constitution has banned.  The only requirement for the exercise of the option is for the foreign contractor to divest 60% of its equity to a Philippine citizen or to a corporation 60% Filipino owned.  Section 39 states, “Upon compliance with this requirement by the contractor, the Secretary shall approve the conversion and execute the mineral production-sharing agreement.” The foreign contractor only needs to give “proper notice to the Secretary as provided for under the implementing rules and regulations” if the contractor finds the contract area not viable for large-scale mining.  Thus, Section 39 of RA 7942 is unconstitutional.

Sections 39, 80, 81, 84 and 112 of RA 7942 operate to deprive the State of the beneficial rights arising from its ownership of mineral resources.  What Section 2, Article XII of the 1987 Constitution vests in absolute ownership to the State, Sections 80, 81, 84 and 112 of RA 7942 take away and give for free to private business enterprises, including foreign-owned companies.

The legislature has discretion whether to tax a business or product.  If the legislature chooses to tax a business or product, it is free to determine the rate or amount of the tax, provided it is not confiscatory.[22] The legislature has the discretion to impose merely a 2% excise tax on mineral products.  Courts cannot inquire into the wisdom of the amount of such tax, no matter how meager it may be.  This discretion of the legislature emanates from the State’s taxing power, a power vested solely in the legislature.

However, the legislature has no power to waive for free the benefits accruing to the State from its ownership of mineral resources.  Absent considerations of social justice, the legislature has no power to give away for free what forms part of the national patrimony of the State.  Any surrender by the legislature of the nation’s mineral resources, especially to foreign private enterprises, is repugnant to the concept of national patrimony.  Mineral resources form part of the national patrimony under Article XII (National Economy and Patrimony) of the 1987 Constitution.

Under the last paragraph of Section 81, the collection of the State’s so-called “share” (consisting of taxes) in FTAAs with foreign contractors is not even certain.  This paragraph provides that the State’s “share x x x shall commence after the financial or technical assistance agreement contractor has fully recovered its pre-operating expenses, exploration, and development expenditures.”  There is no time limit in RA 7942 for this grace period when the collection of the State’s “share” does not run.[23]

RA 7942 itself does not require government approval for the pre-operating, exploration and development expenses of the foreign contractor.  The determination of the amount of pre-operating, exploration and development expenses is left solely to the discretion of the foreign contractor.  Nothing prevents the foreign contractor from recording pre-operating, exploration and development expenses equal to the mining revenues it anticipates for the first 10 years.  If that happens, the State’s share is ZERO for the first 10 years.

The Government cannot tell the Filipino people when the State will start to receive its “share” (consisting of taxes) in mining revenues under the FTAA.  The Executive Department cannot correct these deficiencies in RA 7942 through remedial implementing rules.  The correction involves substantive legislation, not merely filling in the implementing details of the law.

Taxes, fees and duties cannot constitute payment for the State’s share as owner of the mineral resources.  This was the mode of payment used under the old system of “license, concession or lease” which the 1987 Constitution abrogated.  Obviously, Sections 80, 81, 84 and 112 of RA 7942 constitute an ingenious attempt to resurrect the old and discredited system, which the 1987 Constitution has now outlawed.  Under the 1987 Constitution, the State must receive its fair share as owner of the mineral resources, separate from taxes, fees and duties paid by taxpayers.  The legislature may waive taxes, fees and duties, but it cannot waive the State’s share in mining operations.

Any law waiving for free the State’s right to the benefits arising from its ownership of mineral resources is unconstitutional.  Such law negates Section 2, Article XII of the 1987 Constitution vesting ownership of mineral resources in the State.  Such law will not contribute to “economic growth and the general welfare of the country” as required in the fourth paragraph of Section 2.  Thus, in waiving the State’s income from the exploitation of mineral resources, Section 80, the second paragraph of Section 81, the proviso in Section 84, and Section 112 of RA 7942 violate the Constitution and are therefore void.

D.        Abdication of the State’s Duty to Control and Supervise Fully

the Exploitation of Mineral Resources

The 1987 Constitution commands the State to exercise “full control and supervision” over the exploitation of natural resources.  The purpose of this mandatory directive is to insure that the State receives its fair share in the exploitation of natural resources. The framers of the Constitution were determined to avoid the disastrous mistakes of the past.  Under the old system of “license, concession or lease,” the State gave full control to the concessionaires who enriched themselves while paying the State minimal taxes, fees and charges.

Under the 1987 Constitution, for a co-production, joint venture or production-sharing agreement to be valid the State must exercise full control and supervision over the mining operations. This means that the State should approve all capital and operating expenses in the exploitation of the natural resources.  Approval of capital expenses determines how much capital is recoverable by the mining contractor.  Approval of operating expenses determines the reasonable amounts deductible from the annual income from mining operations. Such approvals are essential because the net income from mining operations, which is the basis of the State’s share, depends on the allowable amount of capital and operating expenses.  There is approval of capital and operating expenses when the State approves them, or if the State disapproves them and a dispute arises, when their final allowance is subject to arbitration.

The provisions of RA 7942 on MPSAs and FTAAs do not give the State any control and supervision over mining operations.  The reason is obvious.  The State’s so-called “share” in a mineral production-sharing agreement under Section 80 is limited solely to the excise tax on mineral products.  This excise tax is based on the market value of the mineral product determined without reference to the capital or operating expenses of the mining contractor.

Likewise, the State’s “share” in an FTAA under Section 81 has no relation to the capital or operating expenses of the foreign contractor.  The State’s “share” constitutes the same excise tax on mineral products, in addition to other direct and indirect taxes.  The basis of the excise tax is the selling price of the mineral product. Hence, there is no reason for the State to approve or disapprove the capital or operating expenses of the mining contractor.  Consequently, RA 7942 does not give the State any control and supervision over mining operations contrary to the express command of the Constitution.  This makes Section 80, the second paragraph of Section 81, the proviso in Section 84, and Section 112 of RA 7942 unconstitutional.

E.        RA 7942 Will Not Contribute to Economic Growth or General

Welfare of the Country

The fourth paragraph of Section 2, Article XII of the 1987 Constitution requires that FTAAs with foreign contractors must make “real contributions to the economic growth and general welfare of the country.” Under Section 81 of RA 7942, all the net proceeds arising from the exploitation of mineral resources accrue to the foreign contractor even if the State owns the mineral resources. The foreign contractor will naturally repatriate the entire after-tax net proceeds to its home country. Sections 94(a) and 94(b) of RA 7942 guarantee the foreign contractor the right to repatriate its after-tax net proceeds, as well as its entire capital investment, after the termination of its mining operations in the country.[24]

Clearly, no FTAA under Section 81 will ever make any real contribution to the growth of the economy or to the general welfare of the country.  The foreign contractor, after it ceases to operate in the country, can even remit to its home country the scrap value of its capital equipment.  Thus, the second paragraph of Section 81 of RA 7942 is unconstitutional for failure to meet the constitutional requirement that the FTAA with a foreign contractor should make a real contribution to the national economy and general welfare.

F.         Example of FTAA that Complies with Section 2, Article XII

of the 1987 Constitution

The Solicitor General warns that declaring unconstitutional RA 7942 or its provisions will endanger the Philippine Government’s contract with the foreign contractor extracting petroleum in Malampaya, Palawan.[25] On the contrary, the FTAA with the foreign petroleum contractor meets the essential constitutional requirements since the State receives a fair share of the income from the petroleum operations. The State also exercises control and supervision over the exploitation of the petroleum.  The petroleum FTAA provides enough safeguards to insure that the petroleum operations will make a real contribution to the national economy and general welfare.

The Service Contract dated 11 December 1990 between the Philippine Government as the first party, and Occidental Philippines, Inc. and Shell Exploration B.V. as the second party[26] (“Occidental-Shell FTAA”), covering offshore exploitation of petroleum in Northwest Palawan, contains the following provisions:

a.  There is express recognition that the “conduct of Petroleum Operations shall be under the full control and supervision of the Office of Energy Affairs,”[27] now Department of Energy (“DOE”), and that the “CONTRACTOR shall undertake and execute the Petroleum Operations contemplated hereunder under the full control and supervision of the OFFICE OF ENERGY AFFAIRS;”[28]

b.  The State receives 60% of the net proceeds from the petroleum operations, while the foreign contractor receives the remaining 40%;[29]

c.  The DOE has a right to inspect and audit every year the foreign contractor’s books and accounts relating to the petroleum operations, and object in writing to any expense (operating and capital expenses)[30] within 60 days from completion of the audit, and if there is no amicable settlement, the dispute goes to arbitration;[31]

d.  The operating expenses in any year cannot exceed 70% of the gross proceeds from the sale of petroleum in the same year, and any excess may be carried over in succeeding years;[32]

e.  The Bureau of Internal Revenue (“BIR”) can inspect and examine all the accounts, books and records of the foreign contractor relating to the petroleum operations upon 24 hours written notice;[33]

f.   The petroleum output is sold at posted or market prices;[34]

g.  The foreign contractor pays the 32% Philippine corporate income tax on its 40% share of the net proceeds, including withholding tax on dividends or remittances of profits.[35] (Emphasis supplied)

The Occidental-Shell FTAA gives the State its fair share of the income from the petroleum operations of the foreign contractor.  There is no question that the State receives its rightful share, amounting to 60% of the net proceeds, in recognition of its ownership of the petroleum resources.  In addition, Occidental-Shell’s 40% share in the net proceeds is subject to the 32% Philippine income tax.  The Occidental-Shell FTAA also gives the State, through the DOE and BIR, full control and supervision over the petroleum operations of the foreign contractor.  The foreign contractor can recover only the capital and operating expenses approved by the DOE or by the arbitral panel.[36] The Occidental-Shell FTAA also contains other safeguards to protect the interest of the State as owner of the petroleum resources.  While the foreign contractor manages the contracted work or operations to the extent of its financial or technical contribution, there are sufficient safeguards in the FTAA to insure compliance with the constitutional requirements.  The terms of the Occidental-Shell FTAA are fair to the State and to Occidental-Shell.

In FTAAs with a foreign contractor, the State must receive at least 60% percent of the net proceeds from the exploitation of its mineral resources.  This share is the equivalent of the constitutional requirement that at least 60% of the capital, and hence 60% of the income, of mining companies should remain in Filipino hands.  Intervenor CMP and even respondent WMCP agree that the State has a 60% interest in the mining operations under an FTAA with a foreign contractor. Intervenor CMP asserts that the Philippine Government “stands in the place of the 60% Filipino-owned company.”[37] Intervenor CMP also states that “the contractor will get 40% of the financial benefits,”[38] admitting that the State, which is the owner of the mineral resources, will retain the remaining 60% of the net proceeds. 

Respondent WMCP likewise admits that the 60%-40% “sharing ratio between the Philippine Government and the Contractor is also in accordance with the 60%-40% equity requirement for Filipino-owned corporations.”[39] Respondent WMCP even adds that the 60%-40% sharing ratio is “in line with the intent behind Section 2 of Article XII that the Filipino people, as represented by the State, benefit primarily from the exploration, development, and utilization of the Philippines’ natural resources.”[40] If the State has a 60% interest in the mining operations under an FTAA, then it must retain at least 60% of the net proceeds.

Otherwise, there is no sense exploiting the State’s natural resources if all or a major part of the profits are remitted abroad, precluding any real contribution to the national economy or the general welfare.  The constitutional requirement of full control and supervision necessarily means that the State must receive the income that corresponds to the party exercising full control, and this logically means a majority of the income.

The Occidental-Shell FTAA satisfies these constitutional requirements because the State receives 60% of the net proceeds and exercises full control and supervision of the petroleum operations.  The State’s right to receive 60% of the net proceeds and its exercise of full control and supervision are the essential constitutional requirements for the validity of any FTAA.  The name given to the contract is immaterial – whether a “Service Contract” or any other name - provided these two essential constitutional requirements are present.  Thus, the designation of the Occidental-Shell FTAA as a “Service Contract” is inconsequential since the two essential constitutional requirements for the validity of the contract as an FTAA are present.

With the State’s right to receive 60% of the net proceeds, coupled with its control and supervision, the petroleum operations in the Occidental-Shell FTAA are legally and in fact 60% owned and controlled by Filipinos.  Indeed, the State is directly undertaking the petroleum exploitation with Occidental-Shell as the foreign contractor.  The Occidental-Shell FTAA does not provide for the issuance of exploration permits to Occidental-Shell precisely because the State itself is directly undertaking the petroleum exploitation.

Section 3(aq) of RA 7942 allows the foreign contractor to hold the exploration permit under the FTAA.  However, Section 2, Article XII of the 1987 Constitution does not allow foreign owned corporations to undertake directly mining operations.  Foreign owned corporations can only act as contractors of the State under the FTAA, which is one method for the State to undertake directly the exploitation of its natural resources.  The State, as the party directly undertaking the exploitation of its natural resources, must hold through the Government all exploration permits and similar authorizations.  Section 3(aq) of RA 7942, in allowing foreign owned corporations to hold exploration permits, is unconstitutional.

The Occidental-Shell FTAA, involving a far riskier offshore venture than land-based mining operations, is a model for emulation if foreign contractors want to comply with the constitutional requirements.  Section 112 of RA 7942, however, negates the benefits of the State from the Occidental-Shell FTAA.

Occidental-Shell can invoke Section 112 of RA 7942 and deny the State its 60% share of the net proceeds from the exploitation of petroleum.  Section 112 allows the foreign contractor to pay only the “government share in a mineral production-sharing agreement” under RA 7942.  Section 80 of RA 7942 on MPSAs limits the “government share” solely to the excise tax – 2% on metallic and non-metallic mineral products and 3% on petroleum. Section 112 of RA 7942 is unconstitutional since it is contrary to Section 2, Article XII of the 1987 Constitution.

G.        The WMCP FTAA Violates Section 2, Article XII of the 1987

Constitution

The WMCP FTAA[41] ostensibly gives the State 60% share of the net mining revenue.  In reality, this 60% share is illusory.  Section 7.7 of the WMCP FTAA provides that:

From the Commencement of Commercial Production, the Contractor shall pay a government share of sixty per centum (60%) of Net Mining Revenues, calculated in accordance with the following provisions (the Government Share).  The Contractor shall be entitled to retain the balance of all revenues from the Mining Operations. (Emphasis supplied)

However, under Section 7.9 of the WMCP FTAA, if WMCP’s foreign stockholders sell 60% of their equity to a Philippine citizen or corporation, the State loses its right to receive its 60% share of the net mining revenues under Section 7.7. Thus, Section 7.9 provides:

The percentage of Net Mining Revenues payable to the Government pursuant to Clause 7.7 shall be reduced by 1% of Net Mining Revenues for every 1% ownership interest in the Contractor held by a Qualified Entity. (Emphasis supplied)

What Section 7.7 gives to the State, Section 7.9 takes away without any offsetting compensation to the State.  In reality, the State has no vested right to receive any income from the exploitation of its mineral resources.  What the WMCP FTAA gives to the State in Section 7.7 is merely by tolerance of WMCP’s foreign stockholders, who can at anytime cut off the State’s entire 60% share by selling 60% of WMCP’s equity to a Philippine citizen or corporation.[42] The proceeds of such sale do not accrue to the State but belong entirely to the foreign stockholders of WMCP.

Section 2.1 of the WMCP FTAA defines a “Qualified Entity” to include a corporation 60% Filipino owned and 40% foreign owned.[43] WMCP’s foreign stockholders can sell 60% of WMCP’s equity to such corporation and the sale will still trigger the operation of Section 7.9 of the WMCP FTAA.  Thus, the State will receive ZERO percent of the income but the foreign stockholders will own beneficially 64% of WMCP, consisting of their remaining 40% equity and 24% pro-rata share in the buyer-corporation.  WMCP will then invoke Section 39 of RA 7942 allowing it to convert the FTAA into an MPSA, thus subjecting WMCP to pay only 2% excise tax on mineral products in lieu of sharing its mining income with the State.  This violates Section 2, Article XII of the 1987 Constitution requiring that only corporations “at least sixty per centum of whose capital is owned by such citizens” can enter into co-production, joint venture or production-sharing agreements with the State.

The State, as owner of the mineral resources, must receive a fair share of the income from any commercial exploitation of its mineral resources.  Mineral resources form part of the national patrimony, and so are the net proceeds from such resources.  The Legislature or Executive Department cannot waive the State’s right to receive a fair share of the income from such mineral resources.

The intervenor Chamber of Mines of the Philippines (“CMP”) admits that under an FTAA with a foreign contractor, the Philippine Government “stands in the place of the 60% Filipino owned company” and hence must retain 60% of the net proceeds.  Thus, intervenor CMP concedes that:

x x x In other words, in the FTAA situation, the Government stands in the place of the 60% Filipino-owned company, and the 100% foreign-owned contractor company takes all the risks of failure to find a commercially viable large-scale ore body or oil deposit, for which the contractor will get 40% of the financial benefits.[44] (Emphasis supplied)

For this reason, intervenor CMP asserts that the “contractor’s stipulated share under the WMCP FTAA is limited to a maximum of 40% of the net production.”[45] Intervenor CMP further insists that “60% of its (contractor’s) net returns from mining, if any, will go to the Government under the WMCP FTAA.”[46] Intervenor CMP, however, fails to consider that the Government’s 60% share is illusory because under Section 7.9 of the WMCP FTAA the foreign stockholders of WMCP can reduce at any time to ZERO percent the Government’s share.

If WMCP’s foreign stockholders do not immediately sell 60% of WMCP’s equity to a Philippine citizen or corporation, the State in the meantime receives its 60% share.  However, under Section 7.10 of the WMCP FTAA, the State shall receive its share “after the offsetting of the items referred to in Clauses 7.8 and 7.9,” namely:

7.8.           The Government Share shall be deemed to include all of the following sums:

(a)   all Government taxes, fees, levies, costs, imposts, duties and royalties including excise tax, corporate income tax, customs duty, sales tax, value added tax, occupation and regulatory fees, Government controlled price stabilization schemes, any other form of Government backed schemes, any tax on dividend payments by the Contractor or its Affiliates in respect of revenues from the Mining Operations and any tax on interest on domestic and foreign loans or other financial arrangements or accommodation, including loans extended to the Contractor by its stockholders;

(b)   any payments to local and regional government, including taxes, fees, levies, costs, imposts, duties, royalties, occupation and regulatory fees and infrastructure contributions;

(c)   any payments to landowners, surface rights holders, occupiers, indigenous people or Claim-owners;

(d)   costs and expenses of fulfilling the Contractor’s obligations to contribute to national development in accordance with Clause 10.1(i)(1) and 10.1(i)(2);

(e)   an amount equivalent to whatever benefits that may be extended in the future by the Government to the Contractor or to financial or technical assistance agreement contractors in general;

(f)    all of the foregoing items which have not previously been offset against the Government Share in an earlier Fiscal year, adjusted for inflation.

7.9.           The percentage of Net Mining Revenues payable to the Government pursuant to Clause 7.7 shall be reduced by 1% of Net Mining Revenues for every 1% ownership interest in the Contractor held by a Qualified Entity.

It makes no sense why under Section 7.8(e) money spent by the Government for the benefit of the contractor, like building roads leading to the mine site, is deductible from the State’s 60% share of the Net Mining Revenues. Unless of course the purpose is solely to reduce further the State’s share regardless of any reason.  In any event, the numerous deductions from the State’s 60% share make one wonder if the State will ever receive anything for its ownership of the mineral resources.  Even assuming the State will receive something, the foreign stockholders of WMCP can at anytime take it away by selling 60% of WMCP’s equity to a Philippine citizen or corporation.

In short, the State does not have any right to any share in the net income from the mining operations under the WMCP FTAA.  The stipulated 60% share of the Government is illusory.  The State is left to collect only the 2% excise tax as its sole share from the mining operations.

Indeed, on 23 January 2001, WMCP’s foreign stockholders sold 100% of WMCP’s equity to Sagittarius Mines, Inc., a domestic corporation 60% Filipino owned and 40% foreign owned.[47] This sale automatically triggered the operation of Section 7.9 of the WMCP FTAA reducing the State’s share in the Net Mining Revenues to ZERO percent without any offsetting compensation to the State. Thus, as of now, the State has no right under the WMCP FTAA to receive any share in the mining revenues of the contractor, even though the State owns the mineral resources being exploited under the WMCP FTAA.

Intervenor CMP anchors its arguments on the erroneous interpretation that the WMCP FTAA gives the State 60% of the net income of the foreign contractor.  Thus, intervenor CMP states that “60% of its (WMCP’s) net returns from mining, if any, will go to the Government under the WMCP FTAA.”[48] This basic error in interpretation leads intervenor CMP to erroneous conclusions of law and fact.

Like intervenor CMP, respondent WMCP also maintains that under the WMCP FTAA, the State is “guaranteed” a 60% share of the foreign contractor’s Net Mining Revenues.  Respondent WMCP contends, after quoting Section 7.7 of the WMCP FTAA, that:

In other words, the State is guaranteed a sixty per centum (60%) share of the Mining Revenues, or 60% of the actual fruits of the endeavor. This is in line with the intent behind Section 2 of Article XII that the Filipino people, as represented by the State, benefit primarily from the exploration, development, and utilization of the Philippines’ natural resources.

Incidentally, this sharing ratio between the Philippine Government and the Contractor is also in accordance with the 60%-40% equity requirement for Filipino-owned corporations in Paragraph 1 of Section 2 of Article XII.[49] (Italics and underscoring in the original)

This so-called “guarantee” is a sham.  Respondent WMCP gravely misleads this Court.  Section 7.9 of the WMCP FTAA provides that the State’s share “shall be reduced by 1% of Net Mining Revenues for every 1% ownership interest in the Contractor held by a Qualified Entity.” This reduction is without any offsetting compensation to the State and constitutes a waiver of the State’s share to WMCP’s foreign stockholders.  The Executive Department cannot give away for free, especially to foreigners, what forms part of the national patrimony. This negates the constitutionally mandated State ownership of mineral resources for the benefit of the Filipino people.

WMCP’s stockholders may also invoke Section 112 of RA 7942 allowing a mining contractor to pay the State’s share in accordance with Section 80 of RA 7942.  WMCP will end up paying only the 2% excise tax to the Philippine Government for the exploitation of the mineral resources the State owns.  In short, the old and discredited system of “license, concession or lease” will govern the WMCP FTAA.

The WMCP FTAA is also emphatic in stating that WMCP shall have exclusive right to exploit, utilize, process and dispose of all mineral products produced under the WMCP FTAA.  Section 1.3 of the WMCP FTAA provides:

The Contractor shall have the exclusive right to explore, exploit, utilise, process and dispose of all Mineral products and by-products thereof that may be derived or produced from the Contract Area but shall not, by virtue only of this Agreement, acquire any title to lands encompassed within the Contract Area.

Under the WMCP FTAA, the contractor has exclusive right to exploit, utilize and process the mineral resources to the exclusion of third parties and even the Philippine Government.  Since WMCP’s right is exclusive, the Government has no participation in approving the operating expenses of the foreign contractor relating to the exploitation, utilization, and processing of mineral resources. The Government will have to accept whatever operating expenses the contractor decides to incur in exploiting, utilizing and processing mineral resources.

Under the WMCP FTAA, the contractor has exclusive right to dispose of the minerals recovered in the mining operations. This means that the contractor can sell the minerals to any buyer, local or foreign, at the price and terms the contractor chooses without any intervention from the State.  There is no requirement in the WMCP FTAA that the contractor must sell the minerals at posted or market prices.  The contractor has the sole right to “mortgage, charge or encumber” the “Minerals produced from the Mining Operations.”[50]

Section 8.3 of the WMCP FTAA also makes a sham of the DENR Secretary’s authority to approve the foreign contractor’s Work Program.  Section 8.3 provides:

If the Secretary gives a Rejection Notice the Parties shall promptly meet and endeavour to agree on amendments to the Work Program or budget.  If the Secretary and the Contractor fail to agree on the proposed revision within 30 days from delivery of the Rejection Notice then the Work Programme or Budget or variation thereof proposed by the Contractor shall be deemed approved, so as not to unnecessarily delay the performance of the Agreement.  (Emphasis supplied)

The DENR Secretary is the representative of the State which owns the mineral resources.  The DENR Secretary implements the mining laws, including RA 7942.  Section 8.3, however, treats the DENR Secretary like a subservient non-entity whom the contractor can overrule at will.  Under Section 8.3 of the WMCP FTAA, the DENR Secretary has no authority whatsoever to disapprove the Work Program.  This is not what the Constitution means by full control and supervision by the State of mining operations.

Section 10.4(i) of the WMCP FTAA compels the Philippine Government to agree to any request by the foreign contractor to amend the WMCP FTAA to satisfy the conditions of creditors of the contractor.  Thus, Section 10.4(i) states:

(i)   the Government shall favourably consider any request, from Contractor for amendments of this Agreement which are necessary in order for the Contractor to successfully obtain the financing;

x x x.  (Emphasis supplied)

This provision requires the Government to favorably consider any request from the contractor - which means that the Government must render a response favorable to the contractor. In effect, the contractor has the right to amend the WMCP FTAA even against the will of the Philippine Government just so the contractor can borrow money from banks.

True, the preceding Section 10.4(e) of the WMCP FTAA provides that “such financing arrangements will in no event reduce the Contractor’s obligations or the Government’s rights.”  However, Section 10.4(i) binds the Government to agree to any future amendment requested by the foreign contractor even if the Government does not agree with the wisdom of the amendment.  This provision is contrary to the State’s full control and supervision in the exploitation of mineral resources.

Clearly, under the WMCP FTAA the State has no full control and supervision over the mining operations of the contractor.  Provisions in the WMCP FTAA that grant the State full control and supervision are negated by other provisions that take away such control and supervision.

The WMCP FTAA also violates the constitutional limits on the term of an FTAA. Section 2, Article XII of the 1987 Constitution limits the term of a mineral agreement to “a period not exceeding twenty-five years, renewable for not more than twenty-five years, and under such terms and conditions as may be provided by law.”  The original term cannot exceed 25 years, and at the end of such term, either the Government or the contracting party may decide not to renew the mineral agreement.  However, both the Government and the contracting party may also decide to renew the agreement, in which case the renewal cannot exceed another 25 years.  What is essential is that either party has the option to renew or not to renew the mineral agreement at the end of the original term.

However, Section 3.3 of the WMCP FTAA binds the Philippine Government to an ironclad 50-year term.  Section 3.3 compels the Government to renew the FTAA for another 25 years after the original 25-year term expires. Thus, Section 3.3 states:

This Agreement shall be renewed by the Government for a further period of twenty-five (25) years under the same terms and conditions provided that the Contractor lodges a request for a renewal with the Government not less than sixty (60) days prior to the expiry of the initial term of this Agreement and provided that the Contractor is not in breach of any of the requirements of this Agreement.  (Emphasis supplied)

Under Section 3.3, the contractor has the option to renew or not to renew the agreement.  The Government has no such option and must renew the agreement once the contractor makes a request for renewal.   Section 3.3 violates the constitutional limits because it binds the Government to a 50-year FTAA at the sole option of the contractor. 

H.        Arguments of the Solicitor General and the NEDA Secretary

The Solicitor General states that the “basic share” of the State in FTAAs involving large-scale exploitation of minerals, petroleum and other mineral oils –

x x x consists of all direct taxes, fees and royalties, as well as other payments made by the Contractor during the term of the FTAA.  The amounts are paid to the (i) national government, (ii) local governments, and (iii) persons directly affected by the mining project. Some of the major taxes paid are as follows Section 3(g) of DAO-99-56:

A. Payments to National Government

· Excise tax on minerals – 2% of gross output of mining  operations

· Contractor’s income tax – 32%  of taxable income for corporation

· Customs duties and fees -  rate is set by Tariff and Customs Code

· VAT on imported equipment, goods and services - 10% of value

· Royalty on minerals extracted from mineral reservations, if applicable – 5% of the actual market value of the minerals produced

· Documentary stamp tax – rate depends on the type of transaction

· Capital gains tax on traded stocks –  5 to 10% of the value

· Tax on interest payments on foreign loans – 15%  of the  interest

· Tax on foreign stockholders dividends  -  15% of the dividend

· Wharfage and port fees

· Licensing fees (e.g., radio permit, firearms permit, professional fees)

B. Payments to Local Governments

· Local business tax - maximum of 2% of gross sale or  receipt

· Real property tax - 2% of the fair market value  of property based on an assessment level set by the local government

· Local business tax - maximum of 2% of gross sale or  receipt

· Special education levy  - 1% of the basis used in real property tax

· Occupation tax - 50 pesos per hectare per year; 100 pesos per hectare per year if located in a mineral concession

· Community tax  - 10,500 pesos maximum per year

· Other local taxes and fees - rate and type depends on the local government

C. Other Payments

· Royalty to indigenous cultural communities, if any  -  not less than 1% of the gross output from mining operations

· Special allowance – payment to claim owners or surface right owners

The Solicitor General argues that the phrase “among other things” in the second paragraph of Section 81 of RA 7942 means that the State “is entitled to an additional government share to be paid by the Contractor.”  The Solicitor General explains:

An additional government share is collected from an FTAA contractor to fulfill the intent of Section 81 of RA No. 7942, to wit:

Sec. 81.  The Government share in an FTAA shall consist of, among other things, the Contractor’s corporate income tax, excise tax, special allowance, withholding tax due from the Contractor’s foreign stockholders arising from dividends or interest payments to the said foreign stockholders in case of a foreign-owned corporation and all such other taxes, duties and fees as provided for in existing laws.  (Underscoring supplied)

The phrase “among other things” indicates that the Government is entitled to an additional share to be paid by the Contractor, aside from the basic share in order to achieve the fifty-fifty sharing of net benefits from mining.

By including indirect taxes and other financial contributions in the form of fuel tax; employees’ payroll and fringe benefits; various withholding taxes on royalties to land owners and claim owners, and employees’ income; value added tax on local goods, equipment, supplies and services; and expenditures for social infrastructures in the mine site (hospitals, schools, etc.) and development of host and neighboring communities, geosciences and mining technology, the government share will be in the range of 60% or more of the total financial benefits.  (Bold and underscoring in the original)

The Solicitor General enumerates this “additional government share” as “indirect taxes and other financial contributions in the form of fuel tax; employees’ payroll and fringe benefits; various withholding taxes on royalties to land owners and claim owners, and employees’ income; value added tax on local goods, equipment, supplies and services; x x x.” The Solicitor General’s argument merely confirms that under Section 81 of RA 7942 the State only receives taxes, duties and fees under the FTAA. The State does not receive, as owner of the mineral resources, any income from the mining operations of the contractor.

In short, the “basic share” of the State consists of direct taxes by the national and local governments.  The “additional share” of the State consists of indirect taxes including even fringe benefits to employees and compensation to private surface right owners.  Direct and indirect taxes, however, are impositions by the taxing authority, a burden borne by all taxpayers whether or not they exploit the State’s mineral resources. Fringe benefits of employees are compensation for services rendered under an employer-employee relationship.  Compensation to surface right owners is payment for the damage suffered by private landowners arising from the mining operations.  All these direct and indirect taxes, as well as other expenses of the contractor, do not constitute payment for the share of the State as owner of the mineral resources.

Clearly, the so-called “share” of the State consists only of direct and indirect taxes, as well as other operating expenses not even payable to the State.  The Solicitor General in effect concedes that under the second paragraph of Section 81, the State does not receive any share of the net proceeds from the mining operations of the FTAA contractor. Despite this, the Solicitor General insists that the State remains the owner of the mineral resources and exercises full control over the mining operations of the FTAA contractor.  The Solicitor General has redefined the civil law concept of ownership,[51] by giving the owner full control in the exploitation of the property he owns but denying him the fruits or income from such exploitation.  The only satisfaction of the owner is that the FTAA contractor pays taxes to the Government.

However, even this psychological satisfaction is dubious.  Under the third paragraph of Section 81 of RA 7942, the “collection of Government share in financial and technical assistance agreement shall commence after the financial and technical assistance agreement contractor has fully recovered its pre-operating expenses, exploration, and development expenditures, inclusive.”  This provision does not defer the collection of the State’s “share,” but prevents the accrual of the State’s “share” until the contractor has fully recovered all its pre-operating, exploration and development expenditures.  This provision exempts for an undefined period the contractor from all existing taxes that are part of the Government’s so-called “share” under Section 81.[52] The Solicitor General has interpreted these taxes to include “other national taxes and fees” as well as “other local taxes and fees.”

Secretary Romulo L. Neri of the National Economic and Development Authority (“NEDA”) has warned this Court of the supposed dire repercussions to the nation’s long-term economic growth if this Court declares the assailed provisions of RA 7942 unconstitutional.[53] Under the Constitution, the NEDA is the “independent (economic) planning agency of the government.”[54] However, in this case the NEDA Secretary has joined the chorus of the foreign chambers of commerce to uphold the validity of RA 7942 as essential to entice foreign investors to exploit the nation’s mineral resources.

We cannot fault the foreign chambers of commerce for driving a hard bargain to maximize the profits of foreign investors.  We are, however, saddened that the NEDA Secretary is willing to give away for free to foreign investors the State’s share of the income from its ownership of mineral resources.  If the NEDA Secretary owns the mineral resources instead of the State, will he allow the foreign contractor to exploit his mineral resources for free, the only obligation of the foreign contractor being to pay taxes to the Government?

Secretary Neri claims that the potential tax collection from the mining industry alone is P57 billion as against the present collection of P2 billion. Secretary Neri adds that the potential tax collection from incremental activities linked to mining is another P100 billion, thus putting the total potential tax collection from mining and related industries at P157 billion.[55] Secretary Neri also estimates the “potential mining wealth in the Philippines” at P47 trillion or US$840 billion, 15 times our total foreign debt of US$56 billion.[56]

If all that the State will receive from its P47 trillion potential mineral wealth is the P157 billion in direct and indirect taxes, then the State will truly receive only a pittance.  The P157 billion in taxes constitute a mere .33% or a third of 1% of the total mineral wealth of P47 trillion.  Even if the P157 billion is collected annually over 25 years, the original term of an FTAA, the total tax collection will amount to only P3.92 trillion, or a mere 8.35% of the total mineral wealth.  The rest of the country’s mineral wealth will flow out of the country if foreign contractors exploit our mineral resources under FTAAs pursuant to RA 7942.

Secretary Neri also warns that foreign investors who have acquired local cement factories in the last ten years will find their investments illegal if the Court declares unconstitutional the assailed provisions of RA 7942.[57] Such specious arguments deserve scant consideration. Cement manufacturing is not a nationalized activity. Hence, foreigners can own 100% of cement companies in this country.  When the foreign investors acquired the local cement factories, they spun off the quarry operations into separate companies 60% owned by Filipino citizens.  The foreign investors knew the constitutional requirements of holding quarry permits.

Besides, the quarrying requirement of cement companies is just a simple surface mining of limestone. Such activity does not constitute large-scale exploitation of mineral resources. It definitely cannot qualify for FTAAs with foreign contractors under the fourth paragraph of Section 2, Article XII of the Constitution. Obviously, only a company at least 60% Filipino owned can engage in such mining activity.

The offshore Occidental-Shell FTAA shows that even in riskier ventures involving far more capital investments, the State can negotiate and secure at least 60% of the net proceeds from the exploitation of mineral resources.  Foreign contractors like Occidental-Shell are willing to pay the State 60% of the net proceeds from petroleum operations, in addition to paying the Government the 32% corporate income tax on its 40% share of the net proceeds.  Even intervenor CMP and respondent WMCP agree that the State has a 60% interest in mining operations under an FTAA.  I simply cannot fathom why the NEDA Secretary is willing to accept a ZERO percent share in the income from the exploitation of inland mineral resources.

FTAAs like the WMCP FTAA, which gives the State an illusory 60% share of the net proceeds from mining revenues, will only impoverish further the Filipino people.  The nation’s potential mineral wealth of P47 trillion will contribute to economic development only if the bulk of the wealth remains in the country, not if remitted abroad by foreign contractors.

I.          Refutation of Arguments of Majority Opinion

The majority opinion advances the following arguments:

1.  DENR Department Administrative Order No. 56-99 (“DAO 56-99”) is the basis for determining the State’s share in the mining income of the foreign FTAA contractor.  The DENR Secretary issued DAO 56-99 pursuant to the phrase “among other things” in Section 81 of RA 7942.  The majority opinion claims that the phrase “among other things” “clearly and unmistakably reveals the legislative intent to have the State collect more than just the usual taxes, duties and fees.” The majority opinion anchors on the phrase “among other things” its argument that RA 7942 allows the State to collect a share in the mining income of the foreign FTAA contractor, in addition to taxes, duties and fees.  Thus, on the phrase “among other things” depends whether the State and the Filipino people are entitled under RA 7942 to share in the vast mineral wealth of the nation, estimated by NEDA at P47 trillion or US$840 billion.

2.  FTAAs, like the WMCP FTAA, are not subject to the term limit in Section 2, Article XII of the 1987 Constitution.  In short, while co-production, joint venture and production-sharing agreements cannot exceed 25 years, renewable for another 25 years, as provided in Section 2, Article XII of the 1987 Constitution, the WMCP FTAA is not governed by the constitutional limitation.  The majority opinion states that the “constitutional term limitations do not apply to FTAAs.” Thus, the majority opinion upholds the validity of Section 3.3 of the WMCP FTAA providing for a 50-year term at the sole option of WMCP.

3.  Section 112 of RA 7942, placing “all valid and existing” mining agreements under the fiscal regime prescribed in Section 80 of RA 7942, does not apply to FTAAs.  Thus, the majority opinion states, “[W]hether Section 112 may properly apply to co-production or joint venture agreements, the fact of the matter is that it cannot be made to apply to FTAAs.”

4.  Foreign FTAA contractors and even foreign corporations can hold exploration permits, despite Section 2, Article XII of the 1987 Constitution reserving to Philippine citizens and to corporations 60% Filipino owned the “exploration, development and utilization of natural resources.” Thus, the majority opinion states that “there is no prohibition at all against foreign or local corporations or contractors holding exploration permits.”

5.  The Constitution does not require that the State’s share in FTAAs or other mineral agreements should be at least 60% of the net mining revenues.  Thus, the majority opinion states that “the Charter did not intend to fix an iron-clad rule on the 60 percent share, applicable to all situations at all times and in all circumstances.”

I respond to the arguments of the majority opinion.

1.         DAO 99-56 as Basis for Government’s Share in FTAAs

The main thrust of my separate opinion is that mineral agreements under RA 7942, whether FTAAs under Section 81 or MPSAs under Section 80, do not allow the State to receive any share from the income of mining companies.  The State can collect only taxes, duties and fees from mining companies.

The majority opinion, however, points to the phrase “among other things” in the second paragraph of Section 81 as the authority of the State to collect in FTAAs a share in the mining income separate from taxes, duties and fees.  The majority opinion can point to no other provision in RA 7942 allowing the State to collect any share.  The majority opinion admits that limiting the State’s share in any mineral agreement to taxes, duties and fees is unconstitutional.  Thus, the majority opinion’s case rises or falls on whether the phrase “among other things” allows the State to collect from FTAA contractors any income in addition to taxes, duties and fees.

In the case of MPSAs, the majority opinion cannot point to any provision in RA 7942 allowing the State to collect any share in MPSAs separate from taxes, duties and fees. The language of Section 80 is so crystal clear – “the total government share in a mineral production sharing agreement shall be the excise tax on mineral products” - that there is no dispute whatsoever about it.  The majority opinion merely states that the constitutionality of Section 80 is not in issue in the present case.  Section 81, the constitutionality of which the majority opinion admits is in issue here, is intertwined with Sections 39, 80, 84 and 112. Resolving the constitutionality of Section 81 necessarily involves a determination of the constitutionality of Sections 39, 80, 84 and 112.

The WMCP FTAA, the constitutionality of which is certainly in issue, is governed not only by Section 81 but also by Sections 39, 80 and 112.  The reason is that the WMCP FTAA is a reversible contract that gives WMCP the absolute option at anytime to convert the FTAA into an MPSA.  In short, the WMCP FTAA is like a single coin with two sides - one an FTAA and the other an MPSA.

a.         The Integrated Intent, Plan and Structure of RA 7942

The clear intent of RA 7942 is to limit the State’s share from mining operations to taxes, duties and fees, unless the State contributes equity in addition to the mineral resources.  RA 7942 does not recognize the mere contribution of mineral resources as entitling the State to receive a share in the net mining revenues separate from taxes, duties and fees.  Thus, Section 80 expressly states that the “total government share in a mineral production sharing agreement shall be the excise tax on mineral products.”  Section 84 reiterates this by stating that “with respect to mineral production sharing agreement, the excise tax on mineral products shall be the government share under said agreement.”  The only share of the State in an MPSA is the excise tax.  Ironically, Sections 80 and 84 disallow the State from sharing in the production or income, even as the contract itself is called a mineral production sharing agreement.

In co-production and joint venture agreements, where the State contributes equity in addition to the mineral resources, the first paragraph of Section 81 expressly requires that “the share of the government x x x shall be negotiated by the Government and the contractor.” However, in FTAAs where the State contributes only its mineral resources, the second paragraph of Section 81 states –

The Government share in financial or technical assistance agreement shall consist of, among other things, the contractor’s corporate income tax, excise tax, special allowance, withholding tax due from the contractor’s foreign stockholders arising from dividend or interest payments to the said foreign stockholder in case of a foreign national and all such other taxes, duties and fees as provided for under existing laws.

All the items enumerated in the second paragraph of Section 81 as comprising the “Government share” refer to taxes, duties and fees.  The phrase “all such other taxes, duties and fees as provided for under existing laws” makes this clear.

Section 112 places “all valid and existing mining” agreements “at the date of effectivity” of RA 7942 under the fiscal regime prescribed in Section 80.  Section 112 expressly states that the “government share in mineral production sharing agreement x x x shall immediately govern and apply to a mining lessee or contractor.”  Section 112 provides:

Section 112.         Non-impairment of Existing Mining/Quarrying Rights. — All valid and existing mining lease contracts, permits/licenses, leases pending renewal, mineral production-sharing agreements granted under Executive Order No. 279, at the date of effectivity of this Act, shall remain valid, shall not be impaired, and shall be recognized by the Government: Provided, That the provisions of Chapter XIV on government share in mineral production-sharing agreement and of Chapter XVI on incentives of this Act shall immediately govern and apply to a mining lessee or contractor unless the mining lessee or contractor indicates his intention to the secretary, in writing, not to avail of said provisions: Provided, further, That no renewal of mining lease contracts shall be made after the expiration of its term: Provided, finally, That such leases, production-sharing agreements, financial or technical assistance agreements shall comply with the applicable provisions of this Act and its implementing rules and regulations.  (Emphasis supplied)

Thus, Section 112 requires “all” FTAAs and MPSAs, as of the date of effectivity of RA 7942, to pay only the excise tax - 2% on metallic and non-metallic minerals and 3% on petroleum[58] - instead of the stipulated mining income sharing, if any, in their respective FTAAs or MPSAs.

This means that Section 112 applies even to the Occidental-Shell FTAA, which was executed before the enactment of RA 7942.  This reduces the State’s share in the Malampaya gas extraction from 60% of net proceeds to 3% of the market price of the gas as provided in Section 80 of RA 7942 in relation to Section 151 of the National Internal Revenue Code.  This is disastrous to the national economy because Malampaya under the original Occidental-Shell FTAA generates annually some US$0.5 billion to the National Treasury.

Section 112 applies to all agreements executed “under Executive Order No. 279.” The WMCP FTAA expressly states in its Section 1.1, “This Agreement is a Financial & Technical Assistance Agreement entered into pursuant to Executive Order No. 279.”  Thus, Section 112 applies to the WMCP FTAA.

Section 39 of RA 7942 grants the FTAA contractor the “option to convert” the FTAA into an MPSA “at any time during the term” of the FTAA if the contract areas are not economically viable for large-scale mining.  Once the contractor reduces its foreign equity to not more than 40%, the Secretary “shall approve the conversion and execute the mineral production sharing agreement.  Thus, Section 39 provides:

Section 39.           Option to Convert into a Mineral Agreement. — The contractor has the option to convert the financial or technical assistance agreement to a mineral agreement at any time during the term of the agreement, if the economic viability of the contract area is found to be inadequate to justify large-scale mining operations, after proper notice to the Secretary as provided for under the implementing rules and regulations: Provided, That the mineral agreement shall only be for the remaining period of the original agreement.

In the case of a foreign contractor, it shall reduce its equity to forty percent (40%) in the corporation, partnership, association, or cooperative. Upon compliance with this requirement by the contractor, the Secretary shall approve the conversion and execute the mineral production-sharing agreement. (Emphasis supplied)

The only requirement in the second paragraph of Section 39 is that the FTAA contractor shall reduce its foreign equity to 40%. The second paragraph states, “Upon compliance with this requirement, the Secretary shall approve the conversion and execute the mineral production sharing agreement.” The determination of the economic viability of the contract area for large-scale mining, which is left to the foreign contractor with “proper notice” only to the DENR Secretary, is not even made a condition for the conversion.

Under Section 3(aq) of RA 7942, the foreign contractor holds the exploration permit and conducts the physical exploration. The foreign contractor controls the release of the technical data on the mineral resources.  The foreign contractor can easily justify the non-viability of the contract area for large-scale mining.  The Philippine Government will have to depend on the foreign contractor for technical data on whether the contract area is viable for large-scale mining.  Obviously, such a situation gives the foreign contractor actual control in determining whether the contract area is viable for large-scale mining.

The conversion from an FTAA into an MPSA is solely at the will of the foreign contractor because the contractor can choose at any time to sell 60% of its equity to a Philippine citizen.  The price or consideration for the sale of the contractor’s 60% equity does not go to the State but to the foreign stockholders of the contractor.  Under Section 80 of RA 7942, once the FTAA is converted into an MPSA the only share of the State is the 2% excise tax on mineral products.  Thus, under RA 7942 the FTAA contractor has the absolute option to pay the State only the 2% excise tax, despite any other stipulated consideration in the FTAA.

Clearly, Sections 3(aq), 39, 80, 81, 84 and 112 are tightly integrated under a single intent, plan and structure:  unless the State contributes equity in addition to the mineral resources, the State shall receive only taxes, duties and fees.  The State’s contribution of mineral resources is not sufficient to entitle the State to receive any income from the mining operations separate from taxes, duties and fees.

b.         The Meaning of the Phrase “Among Other Things”

As far as the State and the Filipino people are concerned, the most important part of an FTAA is the consideration:  how much will the State receive from the exploitation of its non-renewable and exhaustible mineral resources?

Section 81 of RA 7942 does not require the foreign FTAA contractor to pay the State any share from the mining income apart from taxes, duties and fees.  The second paragraph of Section 81, just like Section 80, only allows the State to collect taxes, duties and fees as the State’s share from the mining operations.  The intent of RA 7942 is that the State cannot share in the income from mining operations, separate from taxes, duties and fees, based only on the mineral resources that the State contributes to the mining operations.

This is also the position of the Solicitor General – that the State’s share under Section 81 refers only to direct and indirect taxes.  Thus, the Solicitor General agrees that Section 81 does not allow the State to collect any share from the mining income separate from taxes, duties and fees.  The majority opinion agrees that Section 81 is unconstitutional if it does not require the foreign FTAA contractor to pay the State any share of the net mining income apart from taxes, duties and fees.

However, the majority opinion says that the phrase “among other things” in Section 81 is the authority to require the FTAA contractor to pay a consideration separate from taxes, duties and fees. The majority opinion cites the phrase “among other things” as the source of power of the DENR Secretary to adopt DAO 56-99[59] prescribing the formulae on the State’s share from mining operations separate from taxes, duties and fees.

In short, the majority opinion says that the phrase “among other things” is a delegation of legislative power to the DENR Secretary to adopt the formulae on the share of the State from mining operations. The issue now is whether the phrase “among other things” in the second paragraph of Section 81 is intended as a delegation of legislative power to the DENR Secretary.  If so, the issue turns on whether it is a valid delegation of legislative power.  I reproduce again the second paragraph of Section 81 for easy reference:

The Government share in financial or technical assistance agreement shall consist of, among other things, the contractor’s corporate income tax, excise tax, special allowance, withholding tax due from the contractor’s foreign stockholders arising from dividend or interest payments to the said foreign stockholder in case of a foreign national and all such other taxes, duties and fees as provided for under existing laws. (Emphasis supplied)

Section 81 of RA 7942 does not delegate any legislative power to the DENR Secretary to adopt the formulae in determining the share of the State.  There is absolutely no language in the second paragraph of Section 81 granting the DENR Secretary any delegated legislative power.  Thus, the DENR Secretary acted without authority or jurisdiction in issuing DAO 56-99 based on a supposed delegated power in the second paragraph of Section 81.  This makes DAO 56-99 void.

Even assuming, for the sake of argument, that there is language in Section 81 delegating legislative power to the DENR Secretary to adopt the formulae in DAO 56-99, such delegation is void.  Section 81 has no standards by which the delegated power shall be exercised.  There is no specification on the minimum or maximum share that the State must receive from mining operations under FTAAs.  No parameters on the extent of the delegated power to the DENR Secretary are found in Section 81.  Neither were such parameters ever discussed even remotely by Congress when it enacted RA 7942.

In sharp contrast, the first paragraph of the same Section 81, in prescribing the State’s share in co-production and joint venture agreements, expressly specifies the standards in determining the State’s share as follows: “(a) capital investment of the project, (b) risks involved, (c) contribution of the project to the economy, and (d) other factors that will provide for a fair and equitable sharing between the Government and the contractor.” The reason for the absence of similar standards in the succeeding paragraph of Section 81 in determining the State’s share in FTAAs is obvious - the State’s share in FTAAs is limited solely to taxes, duties and fees.  Thus, such standards are inapplicable and irrelevant.

The majority opinion now makes the formulae in DAO 56-99 the heart and soul of RA 7942 because the formulae supposedly determine the consideration of the FTAA.  The consideration is the most important part of the FTAA as far as the State and Filipino people are concerned.  The formulae in DAO 56-99 derive life solely from the phrase “among other things.” DAO 56-99 itself states that it is issued “[P]ursuant to Section 81 and other pertinent provisions of Republic Act No. 7942.”  Without the phrase “among other things,” the majority opinion could not point to any other provision in RA 7942 to support the existence of the formulae in DAO 56-99.

Thus, the phrase “among other things” determines whether the FTAA has the third element of a valid contract – the commercial value or consideration that the State will receive.  The majority opinion in effect says that Congress made the wealth and even the future prosperity of the nation to depend on the phrase “among other things.”

The DENR Secretary can change the formulae in DAO 56-99 any time even without the approval of the President or Congress.  The DENR Secretary is the sole authority to determine the amount of consideration that the State shall receive in an FTAA.  Section 5 of DAO 56-99 states:

x x x any amendment of an FTAA other than the provision on fiscal regime shall require the negotiation with the Negotiation Panel and the recommendation of the Secretary for approval of the President of the Republic of the Philippines. (Emphasis supplied)

Under Section 5, if the amendment in the FTAA involves non-fiscal matters, the amendment requires the approval of the President. However, if the amendment involves a change in the fiscal regime –referring to the consideration of the FTAA - the DENR Secretary has the final authority and approval of the President is not required.  This makes the DENR Secretary more powerful than the President.

Section 5 of DAO 56-99 violates paragraphs 4 and 5 of Section 2, Article XII of the 1987 Constitution mandating that the President shall approve all FTAAs and send copies of all approved FTAAs to Congress.  The consideration of the FTAA is the most important part of the FTAA as far as the State and the Filipino people are concerned.  The DENR Secretary, in issuing DAO 56-99, has arrogated to himself the power to approve FTAAs, a power vested by the Constitution solely in the President. By not even informing the President of changes in the fiscal regime and thus preventing such changes from reaching Congress, DAO 56-99 even seeks to hide changes in the fiscal regime from Congress.  By its provisions alone, DAO 56-99 is clearly unconstitutional and void.

Section 5 of DAO 56-99 also states that “[A]ll FTAAs approved prior to the effectivity of this Administrative Order shall remain valid and be recognized by the Government.”  This means that the fiscal regime of an FTAA executed prior to the effectivity of DAO 56-99 "shall remain valid and be recognized." If the earlier FTAA provides for a fiscal regime different from DAO 56-99, then the fiscal regime in the earlier FTAA shall prevail.  In effect, DAO 56-99 exempts an FTAA approved prior to its effectivity from paying the State the share prescribed in the formulae under DAO 56-99 if the earlier FTAA provides for a different fiscal regime.  Such is the case of the WMCP FTAA.

Based on the majority opinion’s position that the 1987 Constitution requires payment in addition to taxes, duties and fees, this makes DAO 56-99 unconstitutional and void.  DAO 56-99 does not require prior FTAAs to pay the State the share prescribed in the formulae under DAO 56-99 even if the consideration in the prior FTAAs is limited only to taxes, duties and fees.  DAO 56-99 recognizes such payment of taxes, duties and fees as a "valid" consideration. Certainly, the DENR Secretary has no authority to exempt foreign FTAA contractors from a constitutional requirement.  Not even Congress or the President can do so.

Ironically, DAO 56-99, the very authority the majority opinion cites to support its claim that the WMCP FTAA has a consideration, does not apply to the WMCP FTAA.  By its own express terms, DAO 56-99 does not apply to FTAAs executed before the issuance of DAO 56-99, like the WMCP FTAA.  The majority opinion’s position has no leg to stand on since even DAO 56-99, assuming it is valid, cannot save the WMCP FTAA from want of consideration.

The formulae prescribed in DAO 56-99 are totally alien to the phrase “among other things.”  There is no relationship whatsoever between the phrase “among other things” and the highly esoteric formulae prescribed in DAO 56-99.  No one in this Court can assure the Filipino people that the formulae in DAO 56-99 will guarantee the State 60%, or 30% or even 10% of the net proceeds from the mining operations.  And yet the majority opinion trumpets DAO 56-99 as the savior of Section 81 from certain constitutional infirmity.

The majority opinion gives the stamp of approval and legitimacy on DAO 56-99.  This assumes that the majority understand fully the formulae in DAO 56-99. Can the majority tell the Court and the Filipino people the minimum share that the State will receive under the formulae in DAO 56-99?  The formulae in DAO 56-99 are fuzzy since they do not guarantee the minimum share of the State, unlike the clear and specific income sharing provisions in the Occidental-Shell FTAA or in the case of Consolidated Mines, Inc. v. Court of Tax Appeals.[60]

The Solicitor General asserts that the phrase “among other things” refers to indirect taxes, an interpretation that contradicts the DENR Secretary’s interpretation under DAO 56-99.  The Solicitor General is correct. The ejusdem generis rule of statutory interpretation applies squarely to the phrase “among other things.”

In Philippine Bank of Communications v. Court of Appeals,[61] the Court held:

Under the rule of ejusdem generis, where a description of things of a particular class or kind is ‘accompanied by words of a generic character, the generic words will usually be limited to things of a kindred nature with those particularly enumerated x x x.’

In Grapilon v. Municipal Council of Cigara,[62] the Court construed the general word “absence” in the phrase “absence, suspension or other temporary disability of the mayor” in Section 2195 of the Revised Administrative Code as “on the same level as ‘suspension’ and ‘other forms of temporary disability’.” The Court quoted with approval the following Opinion of the Secretary of Interior:

The phrase ‘other temporary disability’ found in section 2195 of the Code, follows the words ‘absence’ and ‘suspension’ and is used as a modifier of the two preceding words, under the principle of statutory construction known as ejusdem generis.

In City of Manila v. Entote,[63] the Court ruled that broad expressions such as “and all others” or “any others” or “other matters,” when accompanied by an enumeration of items of the same kind or class, “are usually to be restricted to persons or things of the same kind or class with those specifically named” in the enumeration.  Thus, the Court held:

In our jurisdiction, this Court in Ollada vs. Court of Tax Appeals, et al.   applied the rule of “ejusdem generis” to construe the purview of a general phrase “other matters” appearing after an enumeration of specific cases decided by the Collector of Internal Revenue and appealable to the Court of Tax Appeals found in section 7, paragraph 1, of Republic Act No. 1125, and it held that in order that a matter may come under said general clause, it is necessary that it belongs to the same kind or class of cases therein specifically enumerated.  (Emphasis supplied)

The four requisites of the ejusdem generis rule[64] are present in the phrase “among other things” as appearing in Section 81 of RA 7942.  First, the general phrase “among other things” is accompanied by an enumeration of specific items, namely, “the contractor’s corporate income tax, excise tax, special allowance, withholding tax due from the contractor’s foreign stockholders arising from dividend or interest payments to the said foreign stockholder in case of a foreign national and all such other taxes, duties and fees as provided for under existing laws.” Second, all the items enumerated are of the same kind or class - they are all taxes, duties and fees. Third, the enumeration of the specific items is not exhaustive because “all such other taxes, duties and fees” are included.  Thus, the enumeration of specific items is merely illustrative. Fourth, there is no indication of legislative intent to give the general phrase “among other things” a broader meaning. On the contrary, the legislative intent of RA 7942 is to limit the State’s share from mining operations to taxes, duties and fees.

In short, the phrase “among other things” refers to taxes, duties and fees.  The phrase “among other things” is even followed at the end of the sentence by the phrase “and all such other taxes, duties, and fees,” reinforcing even more the restriction of the phrase “among other things” to taxes, duties and fees.  The function of the phrase “and such other taxes, duties and fees” is to clarify that the taxes enumerated are not exhaustive but merely illustrative.

c.         Formulae in DAO 56-99 a Mere Creation of DENR

The majority opinion praises the DENR for “conceiving and developing” the formulae in DAO 56-99.  Thus, the majority opinion states:

As can be seen from DAO 56-99, the agencies concerned did an admirable job of conceiving and developing not just one formula, but three different formulas for arriving at the additional government share.  (Emphasis supplied)

Indeed, we credit the DENR for conceiving and developing on their own the formulae in DAO 56-99.  The formulae are the creation of DENR, not of Congress.

The DENR conceived and developed the formulae to save Section 81 not only from constitutional infirmity, but also from blatantly depriving the State and Filipino people from any share in the income of mining companies.  However, the DENR's admittedly “admirable job” cannot amend Section 81 of RA 7942.  The DENR has no legislative power to correct constitutional infirmities in RA 7942.  The DENR does not also possess the constitutional power to prescribe the sharing of mining income between the State and mining companies, the act the DENR attempts to do in adopting DAO 56-99.

d.         DAO 56-99 is an Exercise in Futility

Even assuming arguendo the majority opinion is correct that the phrase “among other things” constitutes sufficient legal basis to issue DAO 56-99, the FTAA contractor can still prevent the State from collecting any share of the mining income.  By invoking Section 39 of RA 7942 giving the foreign FTAA contractor the option to convert the FTAA into an MPSA, the FTAA contractor can easily place itself outside the scope of DAO 56-99 which expressly applies only to FTAAs.

Also, by invoking Section 112, the foreign contractor need not even convert its FTAA into a mineral production agreement to place its contract under Section 80 and outside of Section 81.  Section 112 automatically and immediately places all FTAAs under the fiscal regime applicable to MPSAs, forcing the State to collect only the 2% excise tax.  Thus, DAO 56-99 is an exercise in futility.   This now compels the Court to resolve the constitutionality of Sections 39 and 112 of RA 7942 in the present case.

e.         Congress Prescribes the Terms and Conditions of FTAAs.

In a last-ditch attempt to justify the constitutionality of DAO 56-99, the majority opinion now claims that the President has the prerogative to prescribe the terms and conditions of FTAAs, including the fiscal regime of FTAAs.   The majority opinion states:

x x x It is the President who is constitutionally mandated to enter into FTAAs with foreign corporations, and in doing so, it is within the President's prerogative to specify certain terms and conditions of the FTAAs, for example, the fiscal regime of FTAAs -  i.e., the sharing of the net revenues between the contractor and the State.  (Emphasis in the original; underscoring supplied)

The majority opinion is re-writing the 1987 Constitution and even RA 7942. Paragraph 4, Section 2, Article XII of the 1987 Constitution expressly provides:

The President may enter into agreements with foreign-owned corporations involving either technical or financial assistance for large-scale exploration, development, and utilization of minerals, petroleum, and other mineral oils according to the general terms and conditions provided by law, x x x.   (Emphasis supplied)

Clearly, the 1987 Constitution mandates that the President may enter into FTAAs only “according to the general terms and conditions provided by law.”  There is no doubt whatsoever that it is Congress that prescribes the terms and conditions of FTAAs, not the President as the majority opinion claims. The 1987 Constitution mandates the President to comply with the terms and conditions prescribed by Congress for FTAAs.

Indeed, RA 7942 stipulates the terms and conditions for FTAAs.  Section 35 of RA 7942 provides that the “following terms, conditions, and warranties shall be incorporated in the financial or technical assistance agreement to wit: x x x.” Section 38 of RA 7942 expressly limits an FTAA to a “term not exceeding twenty-five (25) years,” which is one of the issues in the present case.

The majority opinion claims that the President has the power to prescribe “the fiscal regime of FTAAs – i.e., the sharing of the net mining revenues between the contractor and the State.” This claim of the majority opinion renders the entire Chapter XIV of RA 7942 an act of usurpation by Congress of Presidential power. Chapter XIV – entitled “Government Share”  -  prescribes the fiscal regimes of MPSAs and FTAAs.  The constitutionality of Sections 80 and 81 of Chapter XIV - whether the fiscal regimes prescribed in these sections of RA 7942 comply with the 1987 Constitution - is the threshold issue in this case.

The majority opinion seeks to uphold the constitutionality of Section 81 of RA 7942, an act of Congress prescribing the fiscal regime of FTAAs.  If it is the President who has the constitutional authority to prescribe the fiscal regime of FTAAs, then Section 81 is unconstitutional for being a usurpation by Congress of a Presidential power.  The majority opinion not only re-writes the 1987 Constitution, it also contradicts itself.

That is not all.  By claiming that the President has the prerogative to prescribe the fiscal regime of FTAAs, the majority opinion contradicts its basic theory that DAO 56-99 draws life from the phrase "among other things" in Section 81 of RA 7942.  Apparently, the majority opinion is no longer confident of its position that DAO 56-99 draws life from the phrase “among other things.”  The majority opinion now invokes a non-existent Presidential power that directly collides with the express constitutional power of Congress to prescribe the “general terms and conditions” of FTAAs.

f.          Sections 80 and 84 of RA 7942 are Void on their Face

Definitely, Section 80 of RA 7942 is constitutionally infirm even based on the reasoning of the majority opinion.  The majority opinion agrees that the 1987 Constitution requires the mining contractor to pay the State “more than just the usual taxes, duties and fees.” Under Section 80, the excise tax – 2% for metallic and non-metallic minerals and 3% for petroleum - is the only and total share of the State from mining operations.  Section 80 provides:

Section 80.           Government Share in Mineral Production Sharing Agreement. — The total government share in a mineral production sharing agreement shall be the excise tax on mineral products as provided in Republic Act No. 7729, amending Section 151(a) of the National Internal Revenue Code, as amended. (Emphasis supplied)

Section 80 has no ifs or buts.  Section 84 even reiterates Section 80 that “with respect to a mineral production sharing agreement, the excise tax on mineral products shall be the government share under said agreement.”  There is no ejusdem generis phrase like “among other things” in Section 80 that the majority opinion can cling on to save it from constitutional infirmity.  DAO 56-99, the magic wand of the majority opinion, expressly applies only to FTAAs and not to MPSAs. By any legal yardstick, even by the arguments of the majority opinion, Sections 80 and 84 are void and unconstitutional.

g.         Necessity of Resolving Constitutionality of Sections 39, 80 and

84

The majority opinion states that the constitutionality of Sections 80 and 84 of RA 7942 is not in issue in the present case. The majority opinion forgets that petitioners have assailed the constitutionality of RA 7942 and the WMCP FTAA for violation of Section 2, Article XII of the 1987 Constitution.  Petitioner specifically assails the “inequitable sharing of wealth” in the WMCP FTAA, which petitioners assert is “contrary to Section 1, paragraph 1, and Section 2, paragraph 4, Article XII of the Constitution.”

Section 9.1 of the WMCP FTAA grants WMCP the absolute option, by mere notice to the DENR Secretary, to convert the FTAA into an MPSA under Section 80.  The “sharing of wealth” in Section 80 is “inequitable” and “contrary to x x x Section 2, paragraph 4, Article XII of the Constitution” because the State will only collect the 2% excise tax in an MPSA.  Such a pittance of a sharing will not make any “real contributions to the economic growth and general welfare of the country” as required in paragraph 4, Section 2, Article XII of the 1987 Constitution.

Section 39 of RA 7942 also grants foreign FTAA contractors the option, by mere notice to the DENR Secretary, to convert their FTAAs into MPSAs under Section 80.  Necessarily, the constitutionality of the WMCP FTAA must be resolved in conjunction with Section 80 of RA 7942.

The WMCP FTAA is like a coin with two sides, one side is an FTAA, and the other an MPSA. By mere notice to the DENR Secretary, WMCP can convert the contract from an FTAA to an MPSA, a copy of which, complete with all terms and conditions, is annexed to the WMCP FTAA.[65] The DENR Secretary has no option but to sign the annexed MPSA. There are only two conditions to WMCP’s exercise of this option: the reduction of foreign equity in WMCP to 40%, and notice to the DENR Secretary.  The first condition is already fulfilled since all the equity of WMCP is now owned by a corporation 60% Filipino owned.  The notice to the DENR Secretary is solely at the will of WMCP.

What this Court is staring at right now is a dual contract - an FTAA which, by mere notice to the DENR Secretary, immediately becomes an MPSA. The majority opinion agrees that the provisions of the WMCP FTAA, which grant a sham consideration to the State, are void.  Since the majority opinion agrees that the WMCP FTAA has a sham consideration, the WMCP FTAA thus lacks the third element of a valid contract.  The majority opinion should declare the WMCP FTAA void for want of consideration unless the majority opinion treats the contract as an MPSA under Section 80.  Indeed, the only recourse of WMCP to save the validity of its contract is to convert it into an MPSA.

Thus, with the absence of consideration in the WMCP FTAA, what is actually before this Court is an MPSA.  This squarely puts in issue whether an MPSA is constitutional if the only consideration or payment to the State is the 2% excise tax as provided in Section 80 of RA 7942.

The basic constitutional infirmity of the WMCP FTAA is the absence of a fair consideration to the State as owner of the mineral resources.  Petitioners call this the “inequitable sharing of wealth.” The constitutionality of the consideration for the WMCP FTAA cannot be resolved without determining the validity of both Sections 80 and 81 of RA 7942 because the consideration for the WMCP FTAA is anchored on both Sections 80 and 81. 

The majority opinion refuses to face the issue of whether the WMCP contract can validly rely on Section 80 for its consideration.  If this issue is not resolved now, then the WMCP FTAA has no consideration. The majority opinion admits that the consideration in the WMCP FTAA granting the State 60% share in the mining revenues is a sham and thus void ab initio.

Strangely, the majority opinion claims that the share of the State in the mining revenues is not the principal consideration of the FTAA.  The majority opinion claims that the principal consideration of the FTAA is the “development” of the minerals by the foreign contractor.  The foreign contractor can bring equipment to the mine site, tunnel the mines, and construct underground rails to bring the minerals to the surface - in short develop the mines.  What will the State and the Filipino people benefit from such activities unless they receive a share of the mining proceeds?  After the minerals are exhausted, those equipment, tunnels and rails would be dilapidated and even obsolete.  Besides, those equipment belong to the foreign contractor even after the expiration of the FTAA.

Plainly, even a businessman with limited experience will not agree that the principal consideration in an FTAA, as far as the State and Filipino people are concerned, is the development of the mines.  It is obvious why the majority opinion will not accept that the principal consideration is the share of the State in the mining proceeds.  Otherwise, the majority opinion will have to admit that the WMCP FTAA lacks the third element of a valid contract - the consideration.  This will compel the majority opinion to admit that the WMCP FTAA is void ab initio.

The only way for the majority opinion to save the WMCP FTAA from nullity is to treat it as an MPSA and thus apply Section 80 of RA 7942.  This puts in issue the constitutionality of Section 80.  The majority opinion, however, refuses to treat the WMCP FTAA as an MPSA.  Thus, the WMCP FTAA still lacks a valid consideration.  However, the majority opinion insists that the WMCP FTAA is valid.

If the majority opinion puts the constitutionality of Section 80 in issue, the majority opinion will have to declare Section 80 unconstitutional. The majority opinion agrees that the 1987 Constitution requires the State to collect “more than the usual taxes, duties and fees.” Section 80 indisputably limits the State to collect only the excise tax and nothing more.

The equivocal stance of the majority opinion will not put an end to this litigation.  Once WMCP converts its FTAA into an MPSA to avoid paying “more than the usual taxes, duties and fees,” petitioners will immediately question the validity of WMCP’s MPSA as well as the constitutionality of Section 80.  The case will end up again in this Court on the same issue of whether there is a valid consideration for such MPSA, which necessarily involves a determination of the constitutionality of Section 80.  Clearly, this Court has no recourse but to decide now the constitutionality of Section 80.

As the Solicitor General reported in his Compliance dated 20 October 2004, the DENR has signed five MPSAs with different parties.[66] These five MPSAs uniformly contain the following provision:

Share of the Government -  The Government Share shall be the excise tax on mineral products at the time of removal and at the rate provided for in Republic Act No. 7729 amending Section 151(a) of the National Internal Revenue Code, as amended, as well as other taxes, duties, and fees levied by existing laws. (Emphasis supplied)

If the constitutionality of Section 80 is not resolved now, these five MPSAs, including the WMCP FTAA once converted into an MPSA, will remain in limbo. There will be no implementation of these MPSAs until the Court finally resolves this constitutional issue.

Even if evaded now, the constitutionality of Section 80 will certainly resurface, resulting in a repeat of this litigation, most probably even between the same parties.  To avoid unnecessary delay, this Court must rule now on the constitutionality of Section 80 of RA 7942.

2.         The Constitutional Term Limit Applies to FTAAs

Section 3.3 of the WMCP FTAA provides a fixed contract term of 50 years at the option of WMCP.  Thus, Section 3.3 provides:

This Agreement shall be renewed by the Government for a further period of twenty-five (25) years under the same terms and conditions provided that the Contractor lodges a request for a renewal with the Government not less than sixty (60) days prior to the expiry of the initial term of this Agreement and provided that the Contractor is not in breach of any of the requirements of this Agreement.  (Emphasis supplied)

This provision grants WMCP the absolute right to extend the first 25-year term of the FTAA to another 25-year term upon mere lodging of a request or notice to the Philippine Government.  WMCP has the absolute right to extend the term of the FTAA to 50 years and all that the Government can do is to acquiesce to the wish of WMCP. 

Section 3.3 of the WMCP FTAA is void because it violates Section 2, Article XII of the 1987 Constitution, the first paragraph of which provides:

All lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the State. With the exception of agricultural lands, all other natural resources shall not be alienated.  The exploration, development, and utilization of natural resources shall be under the full control and supervision of the State. The State may directly undertake such activities, or it may enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or corporations or associations at least sixty per centum of whose capital is owned by such citizens. Such agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and under such terms and conditions as may be provided by law. In cases of water rights for irrigation, water supply, fisheries, or industrial uses other than the development of water power, beneficial use may be the measure and limit of the grant. (Emphasis supplied)

The majority opinion, however, makes the startling assertion that FTAAs are not covered by the term limit under Section 2, Article XII of the 1987 Constitution.  The majority opinion states:

I believe that the constitutional term limits do not apply to FTAAs.  The reason is that the above provision is found within paragraph 1 of Section 2 of Article XII, which refers to mineral agreements – co-production agreements, joint venture agreements and mineral production sharing agreements -  which the government may enter into with Filipino citizens and corporations, at least 60 percent owned by Filipino citizens.  (Emphasis supplied)

If the term limit does not apply to FTAAs because the term limit is found in the first paragraph of Section 2, then the other limitations in the same first paragraph of Section 2 do not also apply to FTAAs.  These limitations are three: first, that the State owns the natural resources; second, except for agricultural lands, natural resources shall not be alienated; third, the State shall exercise full control and supervision in the exploitation of natural resources.  Under the majority opinion’s interpretation, these three limitations will no longer apply to FTAAs, leading to patently absurd results.  The majority opinion will also contradict its own admission that even in FTAAs the State must exercise full control and supervision in the exploitation of natural resources.

Section 2, Article XII of the 1987 Constitution is a consolidation of Sections 8 and 9, Article XIV of the 1973 Constitution, which state:

Section  8.  All lands of public domain, waters, minerals, coal, petroleum and other mineral oils, all forces of potential energy, fisheries, wildlife, and other natural resources of the Philippines belong to the State. With the exception of agricultural, industrial or commercial, residential, or resettlement lands of the public domain, natural resources shall not be alienated, and no license, concession, or lease for the exploration, or utilization of any of the natural resources shall be granted for a period exceeding twenty-five years, except as to water rights for irrigation, water supply, fisheries, or industrial uses other than development of water power, in which cases, beneficial use may be the measure and the limit of the grant.

Section 9.  The disposition, exploration, development, exploitation, or utilization of any of the natural resources of the Philippines shall be limited to citizens of the Philippines, or to corporations or associations at least sixty per centum of the capital which is owned by such citizens. The Batasang Pambansa, in the national interest, may allow such citizens, corporations or associations to enter into service contracts for financial, technical, management, or other forms of assistance with any foreign person or entity for the exploration, or utilization of any of the natural resources. Existing valid and binding service contracts for financial, technical, management, or other forms of assistance are hereby recognized as such.

Section 9, Article XIV of the 1973 Constitution, a one-paragraph section, contained the provision reserving the exploration, development and utilization of natural resources to Philippine citizens or corporations 60% Filipino owned as well as the provision on FTAAs.  The provision on the 25-year term limit was found in the preceding Section 8 of Article XIV.  If the 25-year term limit under the 1973 Constitution did not apply to FTAAs, then it should not also have applied to non-FTAA mining contracts, an interpretation that is obviously wrong.  Thus, the term limit in Section 8, Article XIV of the 1973 Constitution necessarily applied to both non-FTAA mining contracts and FTAAs in Section 9.

What the framers of the 1987 Constitution did was to consolidate Sections 8 and 9, Article XIV of the 1973 Constitution into one section, the present Section 2, Article XII of the 1987 Constitution. The consolidation necessitated re-arranging the sentences and paragraphs without any intention of destroying their unity and coherence.  Certainly, the consolidation did not mean that the FTAAs are no longer subject to the 25-year term limit.  If anything, the consolidation merely strengthened the need, following the rules of statutory construction, to read and interpret together all the paragraphs, and even the sentences, of Section 2, Article XII of the 1987 Constitution.

In his book The 1987 Constitution of the Republic of the Philippines: A Commentary, Father Joaquin G. Bernas, S.J., who was a leading member of the 1986 Constitutional Commission, discussed the limitations on the exploitation of natural resources. Father Bernas states:

4.       Other limitations

Agreements for the exploitation of the natural resources can have a life of only twenty-five years.  This twenty-five year limit dates back to the 1935 Constitution and is considered to be a “reasonable time to attract capital, local and foreign, and to enable them to recover their investment and make a profit.   The twenty-five year limit on the exploitation of natural resources is not applicable to “water rights for irrigation, water supply, fisheries, or industrial uses other than the development of water power.”  In these cases, “beneficial use may be the measure and the limit of the grant.”  But in the case of water rights for water power, the twenty-five year limit is applicable.”[67] (Emphasis supplied)

The 1935, 1973 and 1987 Constitutions all limit the exploitation of natural resources to 25-year terms.  They also limit franchises for public utilities, leases of alienable lands of public domain, and water rights for power development to 25-year terms.  If a different term is intended, the Constitution expressly says so as in water rights for uses other than power development.  Under the 1973 and 1987 Constitutions, there is no separate term for FTAAs other than the 25-year term for the exploitation of natural resources.

The WMCP FTAA draws life from Executive Order No. 279 issued on 25 July 1987 by then President Corazon C. Aquino when she still exercised legislative powers.  Section 1.1 of the WMCP FTAA expressly states, “This Agreement is a Financial & Technical Assistance Agreement entered into pursuant to Executive Order No. 279.”  Section 7 of Executive Order No. 279 provides:

Section 7.  All provisions of Presidential Decree No. 463, as amended, other existing mining laws, and their implementing rules and regulations, or parts thereof, which are not inconsistent with the provisions of this Executive Order, shall continue in force and effect. (Emphasis supplied)

Section 40 of Presidential Decree No. 463 (“PD 463”), as amended by Presidential Decree No. 1385, provides:

Section 40. Issuance of Mining Lease Contracts  - x x x After the mining claim has been verified as to its mineral contents and its actual location on the ground as determined through reports submitted to the Director, the Secretary shall approve and issue the corresponding mining lease contract, which shall be for a period not exceeding twenty-five (25) years, renewable upon the expiration thereof for another period not exceeding twenty-five (25) years under such terms and conditions as provided by law.  (Emphasis supplied)

Thus, at the time of execution of the WMCP FTAA, statutory law limited the term of all mining contracts to 25-year terms.  PD 463 merely implemented the mandate of the 1973 Constitution on the 25-year term limit, which is the same 25-year term limit in the 1987 Constitution.  Under Section 7 of Executive Order No. 279, Section 40 of PD 463 limiting mining contracts to a 25-year term applies to the WMCP FTAA.  Therefore, Section 3.3 of the WMCP FTAA providing for a 50-year term is void.

Then President Aquino also issued Executive Order No. 211 on 10 July 1987, a bare 17 days before issuing Executive Order No. 279.   Section 3 of Executive Order No. 211 states:

Section 3.  The processing, evaluation and approval of all mining applications, declarations of locations, operating agreements and service contracts as provided for in Section 2 above, shall be governed by Presidential Decree No. 463, as amended, other existing mining laws, and their implementing rules and regulations:  Provided, However, that the privileges granted as well as the terms and conditions thereof shall be subject to any and all modifications or alterations which Congress may adopt pursuant to Section 2, Article XII of the 1987 Constitution. (Emphasis supplied)

Section 3 of Executive Order No. 211 applies to the WMCP FTAA which was executed on 22 March 1995, more than seven years after the issuance of Executive Order No. 211.  Subsequently, Congress enacted RA 7942 to prescribe new terms and conditions for all mineral agreements.  RA 7942 took effect on 9 April 1995.

RA 7942 governs the WMCP FTAA because Executive Order No. 211 expressly makes mining agreements like the WMCP FTAA subject to “any and all modifications or alterations which Congress may adopt pursuant to Section 2, Article XII of the 1987 Constitution.” Section 38 of RA 7942 provides for a 25-year term limit specifically for FTAAs, thus:

Section  38.  Term of Financial or Technical Assistance Agreement. — A financial or technical assistance agreement shall have a term not exceeding twenty-five (25) years to start from the execution thereof, renewable for not more than twenty-five (25) years under such terms and conditions as may be provided by law.  (Emphasis supplied)

Thus, the 25-year term limit specifically for FTAAs in Section 38 of RA 7942 applies to the WMCP FTAA.  Again, Section 3.3 of the WMCP FTAA providing for a 50-year term is void.

What is clear from the foregoing is that the 25-year statutory term limit on mining contracts is merely an implementation of the 25-year constitutional term limit, whether under the 1935, 1973 or 1987 Constitutions. The majority opinion’s assertion that the 25-year term in the first paragraph of Section 2, Article XII of the 1987 Constitutions does not apply to FTAAs is obviously wrong.

3.         Section 112 of RA 7942 Applies to the WMCP FTAA

The majority opinion insists that Section 112 of RA 7942 does not apply to the WMCP FTAA.  Section 112 provides:

Section 112.         Non-impairment of Existing Mining/Quarrying Rights. — All valid and existing mining lease contracts, permits/licenses, leases pending renewal, mineral production-sharing agreements granted under Executive Order No. 279, at the date of effectivity of this Act, shall remain valid, shall not be impaired, and shall be recognized by the Government: Provided, That the provisions of Chapter XIV on government share in mineral production-sharing agreement and of Chapter XVI on incentives of this Act shall immediately govern and apply to a mining lessee or contractor unless the mining lessee or contractor indicates his intention to the secretary, in writing, not to avail of said provisions: Provided, further, That no renewal of mining lease contracts shall be made after the expiration of its term: Provided, finally, That such leases, production-sharing agreements, financial or technical assistance agreements shall comply with the applicable provisions of this Act and its implementing rules and regulations.  (Emphasis supplied)

Section 112 “immediately” applies the fiscal regime under Section 80 on “mineral production sharing agreement” to “all valid and existing mining” contracts, including those “granted under Executive Order No. 279.” If Section 112 applies to the WMCP FTAA, then the WMCP FTAA is subject only to the 2% excise tax under Section 80 as the “total share” of the Philippine Government.

The majority opinion states, “Whether Section 112 may properly apply to co-production or joint venture agreements, the fact of the matter is that it cannot be made to apply to FTAAs.” This position of the majority opinion is understandable. If Section 112 applies to FTAAs, the majority opinion would have to rule on the constitutionality of Section 80 of RA 7942.  The majority opinion already agrees that the 1987 Constitution requires the FTAA contractor to pay the State “more than the usual taxes, duties and fees.” If Section 112 applies to FTAAs, the majority opinion would have no choice but declare unconstitutional Section 80.

Thus, the majority opinion insists that Section 112 “cannot be made to apply to FTAAs.” This insistence of the majority opinion collides with the very clear and plain language of Section 112 of RA 7942 and Section 1.1 of the WMCP FTAA.  This insistence of the majority opinion will lead to absurd results.

First, Section 112 of RA 7942 speaks of “all valid and existing mining” contracts.  The phrase “all valid and existing mining” contracts means the entire or total mining contracts in existence “at the date of effectivity” of RA 7942 without exception.  The word “all” negates any exception.  This certainly includes the WMCP FTAA, unless the majority opinion concedes that the WMCP FTAA is not a mining contract, or if it is, that it is not a valid contract.

Second, the last proviso of Section 112 itself expressly states that “financial or technical assistance agreements shall comply with the applicable provisions of this Act and its implementing rules and regulations.” There is no shadow of doubt whatsoever that Section 112, by its own plain, clear and indisputable language, commands that FTAAs shall comply with RA 7942.  I truly cannot fathom how the majority opinion can assert that Section 112 cannot apply to FTAAs.

Third, Section 112 expressly refers to Chapters XIV and XVI of RA 7942. Chapter XIV refers to the “Government Share” and covers Sections 80, 81 and 82 of RA 7942.  Section 81, as the majority opinion concedes, applies to FTAAs. Chapter XVI refers to “Incentives” and covers Section 90 to 94 of RA 7942. Section 90 states that the “contractors in mineral agreements, and financial technical and assistance agreements shall be entitled to the fiscal and non-fiscal incentives as provided under Executive Order No. 226 x x x.” Clearly, Section 112 applies to FTAAs.

Fourth, Section 1.1 of the WMCP FTAA expressly states, “This Agreement is a Financial & Technical Assistance Agreement entered into pursuant to Executive Order No. 279.” Section 112 states in unequivocal language that “all valid and existing” agreements “granted under Executive Order No. 279” are immediately placed under the fiscal regime of MPSAs.  In short, mining agreements granted under Executive Order No. 279 are expressly among the agreements included in Section 112 and placed under the fiscal regime prescribed in Section 80.  There is no doubt whatsoever that Section 112 applies to the WMCP FTAA which was “entered into pursuant to Executive Order No. 279.”

Fifth, Section 3 of Executive Order No. 211 expressly subjects all mining contracts executed by the Executive Department to the terms and conditions of new mining laws that Congress might enact in the future. Thus, Section 3 of Executive Order No. 211 states:

Section 3.     The processing, evaluation and approval of all mining applications, declarations of locations, operating agreements and service contracts as provided for in Section 2 above, shall be governed by Presidential Decree No. 463, as amended, other existing mining laws, and their implementing rules and regulations:  Provided, However, that the privileges granted as well as the terms and conditions thereof shall be subject to any and all modifications or alterations which Congress may adopt pursuant to Section 2, Article XII of the 1987 Constitution.  (Emphasis supplied)

There is no dispute that Executive Order No. 211, issued prior to the execution of the WMCP FTAA, applies to the WMCP FTAA.  There is also no dispute that RA 7942 took effect after the issuance of Executive Order No. 211 and after the execution of the WMCP FTAA.  Therefore, Section 112 of RA 7942 applies specifically to the WMCP FTAA.

Indeed, it is plain to see why Section 112 of RA 7942 applies to FTAAs, like the WMCP FTAA, that were executed prior to the enactment of RA 7942.   Section 112 is found in Chapter XX of RA 7942 on “Transitory and Miscellaneous Provisions.”  The title of Section 112 refers to the “[N]on-impairment of Existing Mining Quarrying Rights.” RA 7942 is the general law governing all kinds of mineral agreements, including FTAAs.  In fact, Chapter VI of RA 7942, covering nine sections, deals exclusively on FTAAs.  The fiscal regime in FTAAs executed prior to the enactment of RA 7942 may differ from the fiscal regime prescribed in RA 7942.  Hence, Section 112 provides the transitory provisions to resolve differences in the fiscal regimes, ostensibly to avoid impairment of contract obligations.  Clearly, Section 112 applies to FTAAs.

There are no ifs or buts in Section 112.  The plain, simple and clear language of Section 112 makes FTAAs, like the WMCP FTAA, subject to Section 112.  We repeat the express words of Section 112  -

(1)   “All valid and existing mining lease contracts x x x mineral production-sharing agreements granted under Executive Order No. 279, at the date of effectivity of this Act x x x.”

(2)   the “x x x government share in mineral production- sharing agreement x x x shall immediately govern and apply to a mining lessee or contractor x x x.”

(3)   “financial or technical assistance agreements shall comply with the applicable provisions of this Act and its implementing rules and regulations.”

With such clear and unequivocal language, how can the majority opinion blithely state that Section 112 “cannot be made to apply to FTAAs”?  It defies common sense, simple logic and plain English to assert that Section 112 does not apply to FTAAs.   It defies the fundamental rule of statutory construction as repeated again and again in jurisprudence:

Time and time again, it has been repeatedly declared by this Court that where the law speaks in clear and categorical language, there is no room for interpretation.  There is only room for application.[68]

For nothing is better settled than that the first and fundamental duty of courts is to apply the law as they find it, not as they like it to be.  Fidelity to such a task precludes construction or interpretation, unless application is impossible or inadequate without it.[69]

Where the law is clear and unambiguous, it must be taken to mean exactly what it says and the court has no choice but to see to it that its mandate is obeyed.[70]

If Section 112 of RA 7942 does not apply to FTAAs as the majority opinion asserts, what will govern FTAAs executed before the enactment of RA 7942, like the WMCP FTAA?  Section 112 expressly addresses FTAAs executed before the enactment of RA 7942, requiring these earlier FTAAs to comply with the provisions of RA 7942 and its implementing rules.  Executive Order No. 211, issued seven years before the execution of the WMCP FTAA, requires all FTAAs subsequently executed to comply with the terms and conditions of any future mining law that Congress may enact.  That law is RA 7942 which took effect after the execution of the WMCP FTAA.

The majority opinion allows the WMCP FTAA to become sui generis, an FTAA outside the scope of RA 7942 which expressly governs “all” mining agreements, whether MPSAs or FTAAs.  This means that the WMCP FTAA is not even governed by Section 81 of RA 7942 and its phrase “among other things,” which the majority opinion claims is the authority to subject the WMCP FTAA to the payment of consideration that is “more than the usual taxes, duties and fees.”

This makes the majority opinion’s position self-contradictory and inutile.  The majority opinion claims that the WMCP FTAA is subject to the phrase “among other things” in Section 81. At the same time, the majority opinion asserts that Section 112, which requires earlier FTAAs to comply with Section 81 and other provisions of RA 7942, does not apply to the WMCP FTAA.  The majority opinion is caught in a web of self-contradictions.

This exemption by the majority opinion of the WMCP FTAA from Section 112 is judicial class legislation.  Why is the WMCP FTAA so special that the majority opinion wants it exempted from Section 112 of RA 7942?  Why are only “all” other FTAAs subject to the terms and conditions of RA 7942 and not the WMCP FTAA?

4.         Foreign Corporations and Contractors Cannot Hold Exploration Permits

The majority opinion states that “there is no prohibition at all against foreign or local corporations or contractors holding exploration permits.”  This is another assertion of the majority opinion that directly collides with the plain language of the 1987 Constitution.

Section 2, Article XII of the 1987 Constitution expressly reserves to Philippine citizens and corporations 60% Filipino owned the “exploration, development and utilization of natural resources.” The majority opinion rationalizes its assertion in this manner:

Pursuant to Section 20 of RA 7942, an exploration permit merely grants to a qualified person the right to conduct exploration for minerals in specified areas. Such a permit does not amount to an authorization to extract and carry off the mineral resources that may be discovered.  x x x.  (Italics in original)

The issue is not whether an exploration permit allows a foreign contractor or corporation to extract mineral resources, for apparently by its language alone a mere exploration permit does not.  There is no dispute that an exploration permit merely means authority to explore, not to extract.  The issue is whether the issuance of an exploration permit to a foreign contractor violates the constitutional limitation that only Philippine citizens or corporations 60% Filipino owned can engage in the “exploration x x x of natural resources.”

The plain language of Section 2, Article XII of the 1987 Constitution clearly limits to Philippine citizens or to corporations 60% Filipino owned the right to engage in the “exploration x x x of natural resources.” To engage in “exploration” is simply to explore, not to develop, utilize or extract.  To engage in exploration one must secure an exploration permit.  The mere issuance of the exploration permit is the authority to engage in the exploration of natural resources.

This activity of exploration, which requires an exploration permit, is a reserved activity not allowed to foreign contractors or foreign corporations.  Foreign contractors and foreign corporations cannot secure exploration permits because they cannot engage in the exploration of natural resources. If, as the majority opinion asserts, foreign contractors or foreign corporations can secure and hold exploration permits, then they can engage in the “exploration x x x of natural resources.” This violates Section 2, Article XII of the 1987 Constitution. 

Consequently, Section 3(aq) of RA 7942, which provides that “a legally organized foreign-owned corporation shall be deemed a qualified person for purposes of granting an exploration permit,” is void and unconstitutional.

However, the State may directly undertake to explore, develop and utilize the natural resources.  To do this the State may contract a foreign corporation to conduct the physical act of exploration in the State’s behalf, as in an FTAA.  In such a case, the foreign FTAA contractor is merely an agent of the State which holds the right to explore.  No exploration permit is given to the foreign contractor because it is the State that is directly undertaking the exploration, development and utilization of the natural resources.

The requirement reserving “exploration x x x of natural resources” to Philippine citizens or to corporations 60% Filipino owned is not a matter of constitutional whim.  The State cannot allow foreign corporations, except as contractual agents under the full control and supervision of the State, to explore our natural resources because information derived from such exploration may have national security implications.

If a Chinese company from the People’s Republic of China is allowed to explore for oil and gas in the Spratlys, the technical information obtained by the Chinese company may only bolster the resolve of the Chinese Government to hold on to their occupied reefs in the Spratlys despite these reefs being within the Exclusive Economic Zone of the Philippines.  Certainly, we cannot expect the Chinese company to disclose to the Philippine Government the important technical data obtained from such exploration.

In Africa, foreign mining companies who have explored the mineral resources of certain countries shift their support back and forth between government and rebel forces depending on who can give them better terms in exploiting the mineral resources.  Technical data obtained from mineral exploration have triggered or fueled wars and rebellions in many countries. The right to explore mineral resources is not a trivial matter as the majority opinion would want us to believe.

Even if the foreign companies come from countries with no territorial dispute with the Philippines, can we expect them to disclose fully to the Philippine Government all the technical data they obtain on our mineral resources?  These foreign companies know that the Philippine Government will use the very same data in negotiating from them a higher share of the mining revenues.  Why will the foreign companies give to the Philippine Government technical data justifying a higher share for the Philippine Government and a lower share for the foreign companies?  The framers of the 1935, 1973 and 1986 Constitutions were acutely aware of this problem.  That is why the 1987 Constitution not only reserves the “exploration x x x of natural resources” to Philippine citizens and to corporations 60% Filipino owned, it also now requires the State to exercise “full control and supervision” over the “exploration x xx of natural resources.”

5.         The State is Entitled to 60% Share in the Net Mining Revenues

The majority opinion claims that the Constitution does not require that the State’s share in FTAAs or other mineral agreements should be at least 60% of the net mining revenues.  Thus, the majority opinion states that “the Charter did not intend to fix an iron-clad rule on the 60 percent share, applicable to all situations at all times and in all circumstances.”

The majority opinion makes this claim despite the express admission by intervenor CMP and respondent WMCP that the State, as owner of the natural resources, is entitled to 60% of the net mining revenues.  The intervenor CMP admits that under an FTAA, the Philippine Government “stands in the place of the 60% Filipino owned company” and hence must retain 60% of the net income.  Thus, intervenor CMP concedes that:

x x x In other words, in the FTAA situation, the Government stands in the place of the 60% Filipino-owned company, and the 100% foreign-owned contractor company takes all the risks of failure to find a commercially viable large-scale ore body or oil deposit, for which the contractor will get 40% of the financial benefits.[71] (Emphasis supplied)

As applied to the WMCP FTAA, intervenor CMP asserts that the “contractor’s stipulated share under the WMCP FTAA is limited to a maximum of 40% of the net production.”[72] Intervenor CMP further insists that “60% of its (contractor’s) net returns from mining, if any, will go to the Government under the WMCP FTAA.”[73]

Like intervenor CMP, respondent WMCP also maintains that under an FTAA, the State is “guaranteed” a 60% share of the foreign contractor’s Net Mining Revenues.  Respondent WMCP admits that:

In other words, the State is guaranteed a sixty per centum (60%) share of the Mining Revenues, or 60% of the actual fruits of the endeavor. This is in line with the intent behind Section 2 of Article XII that the Filipino people, as represented by the State, benefit primarily from the exploration, development, and utilization of the Philippines’ natural resources.

Incidentally, this sharing ratio between the Philippine Government and the Contractor is also in accordance with the 60%-40% equity requirement for Filipino-owned corporations in Paragraph 1 of Section 2 of Article XII.[74] (Emphasis supplied)

In short, the entire mining industry, as represented by intervenor CMP, is willing to pay the State a share equivalent to 60% of the net mining revenues.  Even the foreign contractor WMCP agrees to pay the State 60% of its net mining revenues, albeit dishonestly.

However, the majority opinion refuses to accept that the State is entitled to what the entire mining industry is willing to pay the State. Incredibly, the majority opinion claims that “there is no independent showing that the taking of at least 60 percent share in the after-tax income of a mining company operated by a foreign contractor is fair and reasonable under most if not all circumstances.” Despite the willingness of the entire mining industry to pay the State a 60% share without exception, the majority opinion insists that such sharing is not fair and reasonable to the mining industry “under most if not all circumstances.” What is the basis of the majority opinion in saying this when the entire mining industry already admits, concedes and accepts that the State is entitled, without exception, to 60% of the net mining revenues?

Oddly, the majority opinion cites only the personal experience of the ponente, who had previously “been engaged in private business for many years.” The majority opinion even states, in insisting that the State should receive less than 60% share, that “[F]airness is a credo not only in law, but also in business.” The majority opinion cannot be more popish than the Pope.  The majority opinion ponente’s business judgment cannot supplant the unanimous business judgment of the entire mining industry, as manifested by intervenor CMP before this Court. What is obvious is that it is not fair to deprive the Filipino people, many of whom live in hand to mouth existence, of what is legally their share of the national patrimony, in light of the willingness of the entire mining industry to pay the Filipino people their rightful share.

The majority opinion gives a “simplified illustration” to show that the State does not deserve a 60% share of the net proceeds from mining revenues.  The majority opinion states:

x x x Let us base it on gross revenues of, say, P500. After deducting operating expenses, but prior to income tax, suppose a mining makes a taxable income of P100.  A corporate income tax of 32 percent results in P32 of taxable income going to the government, leaving the mining firm with P68. Government then takes 60 percent thereof, equivalent to P40.80, leaving only P27.20 for the mining firm.

The majority opinion’s “simplified illustration” is indeed too simplified because it does not even consider the exploration, development and capital expenses.  The majority opinion’s “simplified illustration” deducts from gross revenues only “operating expenses.” This is an egregious error that makes this “simplified illustration” misleading.  Exploration, development and other capital expenses constitute a huge part of the deductions from gross revenues. In the early years of commercial production, the exploration, development and capital expenses, if not subject to a cap or limitation, can wipe out the gross revenues.

The majority opinion’s operating expenses are not even taken from mining industry rates.  One can even zero out the taxable income by simply jacking up the operating expenses.  A “simplified illustration” of an income statement of an operating mining company, omitting the deduction of amortized capital expenses, serves no purpose whatsoever.  What is important is the return on the investment of the foreign contractor.  The absolute amount that goes to the contractor may be smaller than what goes to the State.  However, the amount that goes to the contractor may be a hundred times its investment.  This can only be determined if the capital expenditures of the contractor are taken into account.

Under an FTAA, the State is directly undertaking the exploitation of mineral resources.  The net proceeds are not subject to income tax since there is no separate taxable entity.  The State is an entity but not a taxable corporate entity. The State does not pay income tax to itself, and even if it does, it is just a book entry since it is the payor and payee at the same time. Only the 40% share of the FTAA contractor is subject to the 32% corporate income tax.  On this score alone, the majority opinion’s “simplified illustration” is wrong.

Intervenor CMP and respondent WMCP are correct in anchoring on Section 2, Article XII of the 1987 Constitution their admission that the State is entitled to 60% of the net mining revenues.  Their common position is based on the Constitution, existing laws and industry practice.

First, the State owns the mineral resources.  To the owner of the mineral resources belongs the income from any exploitation of the mineral resources.  The owner may share its income with the contractor as compensation to the contractor, which is an agent of the owner.  The industry practice is the owner receives an equal or larger share of the income as against the share of the contractor or agent.

In the Occidental-Shell FTAA covering Malampaya, where the contractor contributed all the capital and technology, the State receives 60% of the net proceeds.  In addition, Occidental-Shell’s 40% share is subject to the 32% Philippine income tax.  Occidental-Shell’s US$2 billion investment[75] in Malampaya is by far the single biggest foreign investment in the Philippines.  The offshore Malampaya gas extraction is also by far more capital intensive and riskier than land-based mineral extraction.  Over the 20-year life of the natural gas reserves, the State will receive US$8-10 billion[76] from its share in the Occidental-Shell FTAA.

In Consolidated Mines, Inc. v. Court of Tax Appeals,[77] a case decided under the 1973 Constitution, Consolidated Mines, the concessionaire of the mines, shared equally the net mining income with Benguet Consolidated Mines, the mining operator or contractor.  Thus, as quoted in Consolidated Mines, the agreement between the concessionaire and operator stated:

X.  After Benguet has been fully reimbursed for its expenditures, advances and disbursements as aforesaid the net profits from the operation shall be divided between Benguet and Consolidated share and share alike, it being understood however, that the net profits as the term is used in this agreement shall be computed by deducting from gross income all operating expenses and all disbursements of any nature whatsoever as may be made in order to carry out the terms of this agreement. (Emphasis supplied)

Incidentally, in Consolidated Mines the State did not receive any share in the net mining income because of the “license, concession or lease” system under the 1935 and 1973 Constitutions.  The State and the Filipino people received only taxes, duties and fees.

Second, the State exercises “full control and supervision” over the exploitation of mineral resources. “Full control” as used in the Constitution means more than ordinary majority control.  In corporate practice, ordinary control of a corporation means a simple majority control, or at least 50% plus one of the total voting stock. In contrast, full or total control means two-thirds of the voting stock, which enables the owner of the two-thirds equity to amend any provision in the charter of the corporation.  However, since foreigners can own up to 40% of the equity of mining companies, “full control” cannot exceed the control corresponding to the State’s 60% equity.  Thus, the State’s share in the net proceeds of mining companies should correspond to its 60% interest and control in mining companies.

Third, Section 2, Article XII of the 1987 Constitution requires that the FTAA must make “real contributions to the economic growth and general welfare of the country.”  As respondent WMCP aptly admits, “the intent behind Section 2 of Article XII (is) that the Filipino people, as represented by the State, (shall) benefit primarily from the exploration, development, and utilization of the Philippines’ natural resources.” For the Filipino people to benefit primarily from the exploitation of natural resources, and for FTAAs to make real contributions to the national economy, the majority of the net proceeds from mining operations must accrue to the State.

Fourth, the 1987 Constitution ordains the State to “conserve and develop our patrimony.”  The nation’s mineral resources are part of our national patrimony.  The State can “conserve” our mineral resources only if the majority of the net proceeds from the exploitation of mineral resources accrue to the State.

In sum, only the majority opinion refuses to accept that the State has a right to receive at least 60% of the net proceeds from mining operations.  The principal parties involved in this case do not object that the State shall receive such share.  The entire mining industry and respondent WMCP admit that the State is entitled to a 60% share of the net proceeds.  The State, represented by the Government, will certainly not object to such share.

More than anything else, the intent and language of the 1987 Constitution require that the State receive the bulk of the income from mining operations.   Only Congress, through a law, may allow a share lesser than 60% if certain compelling conditions are present.  Congress may authorize the President to make such determination subject to standards and limitations that Congress shall prescribe.

The majority opinion wants to give the President the absolute discretion to determine the State’s share from mining revenues.  The President will be hard put accepting anything less than 60% of the net proceeds.  If the President accepts less than 60%, the President is open to a charge of entering into a manifestly and grossly disadvantageous contract to the Government because the entire mining industry, including WMCP, has already agreed to pay 60% of the net proceeds to the State.  The only way to avoid this is for Congress to enact a law providing for the conditions when the State may receive less than 60% of the net proceeds.

Conclusion

Let us assume that one of the Justices of this Court is the owner of mineral resources – say gold reserves.  A foreigner offers to extract the gold and pay for all development, capital and operating expenses.  How much will the good Justice demand as his or her share of the gold extracted by the foreigner?  If the Justice follows the Malampaya precedent, he or she will demand a 60% share of the net proceeds.  If the Justice follows the manifestation of intervenor CMP and respondent WMCP before this Court, he or she will also demand a 60% share in the net proceeds.  If the Justice follows the Consolidated Mines precedent, he or she will demand no less than 50% of the net proceeds.  In either case, the 2% excise tax on the gold extracted is part of the operating expenses to be paid by the foreigner but deducted from the gross proceeds.

Now, under the Regalian doctrine the State, not the Justice, owns the gold reserves.  How much should the State demand from the foreigner as the State’s share of the gold that is extracted?  If we follow Sections 39, 80, 81, 84 and 112 of RA 7942, the State will receive only 2% excise tax as its “total share” from the gold that is extracted.

Is this fair to the State and the Filipino people, many of whom live below the poverty line?  Is this what the 1987 Constitution mandates when it says that (a) the State must conserve and develop the nation’s patrimony, (b) the State owns all the natural resources, (c) the State must exercise full control and supervision over the exploitation of its natural resources, and (d) FTAAs must make real contributions to the national economy and the general welfare?

How this Court decides the present case will determine largely whether our country will remain poor, or whether we can progress as a nation. Based on NEDA’s estimates, the total mineral wealth of the nation is P47 trillion, or US$840 billion.   This is 15 times more than our US$56 billion foreign debt.  Can this Court in conscience agree that the State will receive only 2% of the P47 trillion mineral wealth of the nation?

In Miners Association, this Court ruled that the 1987 Constitution has abandoned the old system of “license, concession or lease” and instead installed full State control and supervision over the exploitation of natural resources.  No amount of dire warnings or media publicity should intimidate this Court into resurrecting the old and discredited system that has caused the denudation of almost all of the nation’s virgin forests without any visible benefit to the Filipino people.

The framers of the 1987 Constitution have wisely instituted the new system to prevent a repeat of the denudation of our forestlands that did not even make any real contribution to the economic growth of the nation. This Court must do its solemn duty to uphold the intent and letter of the Constitution and, in the words of the Preamble of the 1987 Constitution, “conserve and develop our patrimony” for the benefit of the Filipino people.

This Court cannot trivialize the Filipino people’s right to be the primary beneficiary of the nation’s mineral resources by ruling that the phrase “among other things” is sufficient to insure that FTAAs will “make real contributions to the economic growth and general welfare of the country.” This Court cannot tell the Filipino people that the phrase “among other things” is sufficient to “preserve and develop the national patrimony.” This Court cannot tell the Filipino people that the phrase “among other things” means that they will receive the bulk of mining revenues.

This Court cannot tell the Filipino people that Congress deliberately used the phrase “among other things” to guarantee that the Filipino people will receive their equitable share from mining revenues of foreign contractors.  This Court cannot tell the Filipino people that with the phrase “among other things,” this Court has protected the national interest as mandated by the 1987 Constitution.

I therefore vote to deny the motions for reconsideration.  I vote to declare unconstitutional Section 3(aq), Section 39, Section 80, the second paragraph of Section 81, the proviso in Section 84, and the first proviso in Section 112 of RA 7942 for violation of Section 2, Article XII of the 1987 Constitution.  In issuing the rules to implement these void provisions of RA 7942, DENR Secretary Victor O. Ramos gravely abused his discretion amounting to lack or excess of jurisdiction.

I also vote to declare unconstitutional the present WMCP FTAA for violation of the same Section 2, Article XII of the 1987 Constitution.  However, WMCP may negotiate with the Philippine Government for a new mineral agreement covering the same area consistent with this Decision.

---

[1] Philippine Mining Act of 1995.

[2] Rollo, pp. 23–24.

[3] Ibid., pp. 65-120.  Then Executive Secretary Teofisto Guingona, Jr. signed the WMCP FTAA on behalf of then President Fidel V. Ramos upon recommendation of then DENR Secretary Angel C. Alcala.

[4] Section 2, Article XII of the 1987 Constitution provides in full: “All lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the State. With the exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development, and utilization of natural resources shall be under the full control and supervision of the State. The State may directly undertake such activities, or it may enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or corporations or associations at least sixty per centum of whose capital is owned by such citizens. Such agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and under such terms and conditions as may be provided by law. In cases of water rights for irrigation, water supply, fisheries, or industrial uses other than the development of water power, beneficial use may be the measure and limit of the grant.

The State shall protect the nation’s marine wealth in its archipelagic waters, territorial sea, and exclusive economic zone, and reserve its use and enjoyment exclusively to Filipino citizens.

The Congress may, by law, allow small-scale utilization of natural resources by Filipino citizens, as well as cooperative fish farming, with priority to subsistence fishermen and fishworkers in rivers, lakes, bays, and lagoons.

The President may enter into agreements with foreign-owned corporations involving either technical or financial assistance for large-scale exploration, development, and utilization of minerals, petroleum, and other mineral oils according to the general terms and conditions provided by law, based on real contributions to the economic growth and general welfare of the country. In such agreements, the State shall promote the development and use of local scientific and technical resources.

The President shall notify the Congress of every contract entered into in accordance with this provision, within thirty days from its execution.”

[5] Chavez v. Public Estates Authority, 433 Phil. 506 (2002).

[6] The only limitation is that the State cannot alienate its natural resources except for agricultural lands.  However, the State can exploit commercially its natural resources and sell the marketable products from such exploitation.  See note 12.

[7] Article 441, Civil Code.

[8] Section 1, Article XIII of the 1935 Constitution; Section 8, Article XIV of the 1973 Constitution.

[9] Miners Association of the Philippines v. Hon. Factoran, Jr., et al., 310 Phil. 113 (1995).

[10] Records of the Constitutional Commission, Vol. III, p. 260.

[11] See note 7.

[12] Hector de Leon, PHILIPPINE CONSTITUTIONAL LAW, Vol. 2, p. 804 (1999 Ed.).

[13] See note 9.

[14] Section 2, Article XII of the 1987 Constitution provides in part: “x x x With the exception of agricultural lands, all other natural resources shall not be alienated.”

[15] Chapter XIV covers Sections 80 to 82 of RA 7942.

[16] The five Mineral Production Sharing Agreements (Annexes A to F) attached to the 20 October 2004 Compliance of the Solicitor General uniformly contain the following provision:

Share of the Government -  The Government Share shall be the excise tax on mineral products at the time of removal and at the rate provided for in Republic Act No. 7729 amending Section 151(a) of the National Internal Revenue Code, as amended, as well as other taxes, duties, and fees levied by existing laws. (Emphasis supplied)

Clearly, the State’s share is limited to taxes, duties and fees just like under the old system of “license, concession or lease.”  See the (1) Mineral Production Sharing Agreement between the Republic of the Philippines and Ungay-Malobago Mines, Inc. and Rapu-Rapu Minerals, Inc. dated 12 September 2000; (2) Mineral Production Sharing Agreement between the Republic of the Philippines and Ungay-Malobago Mines, Inc. and TVI Resource Development (Phils.), Inc. dated 17 June 1998; (3) Mineral Production Sharing Agreement between the Republic of the Philippines and Base Metals Mineral Resources Corporation (BMMRC) dated 20 November 1997; (4) Mineral Production Sharing Agreement between the Republic of the Philippines and Philex Gold Philippines, Inc. dated 29 December 1999 (MPSA No. 148-99XIII); and (5) Mineral Production Sharing Agreement between the Republic of the Philippines and Philex Gold Philippines, Inc. dated 29 December 1999 (MPSA No. 149-99-XIII).

[17] Sections 144, 145 and 149, National Internal Revenue Code.

[18] Commissioner of Internal Revenue v. Court of Appeals, 312 Phil. 337 (1995).

[19] Memorandum dated 13 July 2004, p. 56.

[20] Section 26, RA 7942.

[21] Chapter XIV covers Sections 80 to 82 of RA 7942.

[22] China Banking Corporation v. Court of Appeals, G.R. Nos. 146749 & 147938, 10 June 2003, 403 SCRA 634; City of Baguio v. De Leon, 134 Phil. 912 (1968).

[23] The 1995 Implementing Rules and Regulations of RA 7942 attempt to limit the period to five years. Thus, Section 236 of the Implementing Rules states that the “period of recovery which is reckoned from the date of commercial operation shall be for a period not exceeding five years or until the date of actual recovery, whichever comes first.”  However, the succeeding sentence of Section 236 also states, “For clarification, the Government’s entitlement to its share shall commence after the FTAA contractor has fully recovered its pre-operating, exploration and development stage expenses, inclusive and the contractor’s obligations under Chapter XXVII (on Taxes and Fees) of the rules and regulations do not arise until this time.”  What the first sentence limits the succeeding sentence cancels. The 1996 Revised Implementing Rules and Regulations of RA 7942 omit the clarificatory sentence.

[24] Section 94(a) of RA 7942 guarantees the foreign contractor the “right to repatriate the entire proceeds of the liquidation of the foreign investment in the currency in which the investment was originally made and at the exchange rate prevailing at the time of repatriation.”   Section 94(b) guarantees the “right to remit earnings from the investment in the currency in which the foreign investment was originally made and at the exchange rate prevailing at the time of remittance.”

[25] Memorandum dated 13 July 2004, p. 65.

[26] Annex 8, Compliance of the Solicitor General dated 20 October 2004.

[27] Fifth Whereas Clause, Occidental-Shell FTAA.

[28] Section 1.1, Occidental-Shell FTAA.

[29] Sections 7.3 and 7.4, Occidental-Shell FTAA.

[30] Section 2.19, Occidental-Shell FTAA.

[31] Sections 12.1 and 15.2, Occidental-Shell FTAA; Paragraph 4, Annex B on Accounting Procedures.

[32] Section 7.2, Occidental-Shell FTAA.

[33] Section 6.1.i, Occidental-Shell FTAA.

[34] Sections 2.16 and 2.17, Occidental-Shell FTAA.

[35] Sections 2.24, 6.1.j, 6.3 and 8.1, Occidental-Shell FTAA.

[36] Under  Section 12.1 of the Occidental-Shell  FTAA, the three-man arbitral panel consists of the Philippine Government’s nominee, Occidental-Shell’s nominee, and a third member mutually chosen by the nominees of the Government and Occidental-Shell.

[37] Intervenor CMP’s Motion for Reconsideration dated 10 July 2004, p. 22.

[38] Ibid.

[39] Respondent WMCP’s Memorandum dated 15 July 2004, p. 42.

[40] Ibid.

[41] See note 3.

[42] The same provision appears in the FTAA between the Republic of the Philippines and ARIMCO Mining Corporation dated 20 June 1994.  ARIMCO, a domestic corporation owned and controlled by an Australian mining company, does not need to pay the 60% share of the Philippine Government in the mining revenues if ARIMCO’s foreign parent company sells 60% of ARIMCO’s equity to a Philippine citizen or to a 60% Filipino owned corporation.  In such event, the share of the Philippine Government in the mining revenues is ZERO percent.  ARIMCO will only pay the Philippine Government the 2% excise tax due on mineral products under a mineral production sharing agreement.  See Annex 5, Compliance of Solicitor General dated 20 October 2004.

[43] Section 2.1 of the WMCP FTAA defines a “Qualified Entity” as an “entity that at the relevant time is qualified to enter into a mineral production sharing agreement with the Government under the laws restricting foreign ownership and equity in natural resource projects.”

[44] Motion for Reconsideration dated 14 July 2004, p. 22.

[45] Ibid., p. 20.

[46] Ibid., p. 12.

[47] Decision dated 27 January 2004.

[48] Memorandum dated 14 April 2004, p.12.

[49] Memorandum dated 15 July 2004, p. 42.

[50] Section 10.2 (l), WMCP FTAA.

[51] Article 441, Civil Code.

[52] Section 2.1 of the WMCP FTAA allows WMCP to recover pre-operating expenses over 10 years from  the start of commercial production.

[53] Memorandum dated 13 July 2004, p. 65.

[54] Section 9, Article XII of the 1987 Constitution.

[55] Memorandum dated 13 July 2004, p. 60.

[56] Ibid., p. 59.

[57] Ibid., p. 65.

[58] Section 151, National Internal Revenue Code.

[59] DENR ADMINISTRATIVE ORDER NO. 56-99

SUBJECT:         Guidelines Establishing the Fiscal Regime of Financial or Technical Assistance Agreements Pursuant to Section 81 and other pertinent provisions of Republic Act No. 7942, otherwise known as the Philippine Mining Act of 1995 (the “Mining Act”), the following guidelines establishing the fiscal regime of Financial or Technical Assistance Agreements (FTAA) are hereby promulgated.

SECTION 1.      Scope

This Administrative Order is promulgated to:

a.         Establish the fiscal regime for FTAAs which the Government and the FTAA Contractors shall adopt for the large-scale exploration, development and commercial utilization of mineral resources in the country; and

b.         Provide for the formulation of a Pro Forma FTAA embodying the fiscal regime established herein and such other terms and conditions as provided in the Mining Act and the Implementing Rules and Regulations (IRR) of the Mining Act.  

SECTION 2.      Objectives

The objectives of this Administrative Order are:

a.         To achieve an equitable sharing among the Government, both National and Local, the FTAA Contractor and the concerned communities of the benefits derived from mineral resources to ensure sustainable mineral resources development; and

b.         To ensure a fair, equitable, competitive and stable investment regime for the large scale exploration, development and commercial utilization of minerals.

SECTION 3.      Fiscal Regime of a Financial or Technical Assistance Agreement

The Financial or Technical Assistance Agreement which the Government and the FTAA Contractor shall enter into shall have a Fiscal Regime embodying the following provisions:

a.         General Principles. The Government Share derived from Mining Operations after the Date of Commencement of Commercial Production shall be determined in accordance with this Section.

b.         Occupation Fees. Prior to or upon registration of the FTAA and on the same date every year thereafter, the Contractor shall pay to the concerned Treasurer of the municipality(ies) or city(ies) the required Occupation Fee over the Contract Area at the rate provided for by existing laws, rules and regulations.

c.         Deductible Expenses. Allowable deductible expenses shall include all the expenses incurred by the Contractor directly, reasonably and necessarily related to the Mining Operations in the Contract Area in a Calendar Year during the Operating Phase. Allowable deductible expenses shall include the following:

1.         Mining, milling, transport and handling expenses together with smelting and refining costs other than smelting and refining costs paid to third parties;

2.         General and administrative expenses actually incurred by the Contractor in the Philippines;

3.         Consulting fees:

a)         incurred within the Philippines for work related to the project

b)         incurred outside the Philippines for work related to the project: Provided, That such fees are justifiable and subject to the approval of the Director.

4.         Environmental expenses of the Contractor including such expenses necessary to fully comply with its environmental obligations as stipulated in the environmental protection provision of the FTAA and in the IRR;

5.         Expenses for the development of host and neighboring communities and for the development of geoscience and mining technology as stipulated in the FTAA and in the IRR together with the training costs and expenses referred to in the FTAA;

6.         Royalty payments to Claimowners or surface land owners relating to the Contract Area during the Operating Phase;

7.         Continuing exploration and mine development expenses within the Contract Area after the pre-operating period;

8.         Interest expenses charged on loans or such other financing-related expenses incurred by the Contractor subject to the financing requirement in the FTAA, which shall not be more than the prevailing international rates charged for similar types of transactions at the time the financing was arranged, and where such loans are necessary for the operations; and

9.         Government taxes, duties and fees.

Ongoing Capital Expenditures shall be considered as capital expenses subject to Depreciation Charges.

“Ongoing Capital Expenditures” shall mean expenses for approved acquisitions of equipment and approved construction of buildings necessary for the Mining Operations as provided in its approved Mining Project Feasibility Study.

“Depreciation Charges” means the annual non-cash deduction from the Operating Income for the use of fixed assets that are subject to exhaustion, wear and tear and obsolescence during their employment in a Mining Operation. Its applicability and computation are regulated by existing taxation laws, the Mining Act and the IRR. Incentives relating to depreciation allowance shall be in accordance to the provisions of the Mining Act and the IRR.

“Operating Income” means the Gross Output less Deductible Expenses, while “Gross Output” has the meaning ascribed to it in the National Internal Revenue Code.

d.         Payment of Government Taxes and Fees. The Contractor shall promptly pay all the taxes and fees required by the Government in carrying out the activities covered in the FTAA and in such amount, venue, procedure and time as stipulated by the particular law and implementing rules and regulations governing such taxes and fees subject to all rights of objection or review as provided for in relevant laws, rules and regulations. In case of non-collection as covered by Clause 3-g-1 of this Section, the Contractor shall follow the prevailing procedures for availment of such non-collection in accordance with pertinent laws, rules and regulations. Where prevailing orders, rules and regulations do not fully recognize and implement the provisions covered by Clause 3-g-1 of this Section, the Government shall exert its best efforts to ensure that all such orders, rules and regulations are revised or modified accordingly.

e.         Recovery of Pre-Operating Expenses. Considering the high risk, high cost and long term nature of Mining Operations, the Contractor is given the opportunity to recover its Pre-Operating Expenses incurred during the pre-operating period, after which the Government shall receive its rightful share of the national patrimony.  The Recovery Period, which refers to the period allowed to the Contractor to recover its Pre-Operating Expenses as provided in the Mining Act and the IRR, shall be for a maximum of five (5) years or at a date when the aggregate of the Net Cash Flows from the Mining Operations is equal to the aggregate of its Pre-operating Expenses, reckoned from the Date of Commencement of Commercial Production, whichever comes first. The basis for determining the Recovery Period shall be the actual Net Cash Flows from Mining Operations and actual Pre-Operating Expenses converted into its US dollar equivalent at the time the expenditure was incurred.

“Net Cash Flow” means the Gross Output less Deductible Expenses, Pre-Operating Expenses, Ongoing Capital Expenditures and Working Capital charges.

f.          Recoverable Pre-Operating Expenses. Pre-Operating Expenses for recovery which shall be approved by the Secretary upon recommendation of the Director shall consist of actual expenses and capital expenditures relating to the following:

1.         Acquisition, maintenance and administration of any mining or exploration tenements or agreements covered by the FTAA;

2.         Exploration, evaluation, feasibility and environmental studies, production, mining, milling, processing and rehabilitation,

3.         Stockpiling, handling, transport services, utilities and marketing of minerals and mineral products;

4.         Development within the Contract Area relating to the Mining Operations;

5.         All Government taxes and fees;  

6.         Payments made to local Governments and infrastructure contributions;

7.         Payments to landowners, surface rights holders, Claimowners, including the Indigenous Cultural Communities, if any;

8.         Expenses incurred in fulfilling the Contractor's obligations to contribute to national development and training of Philippine personnel;

9.         Consulting fees incurred inside and outside the Philippines for work related directly to the Mining Operations;

10.        The establishment and administration of field and regional offices including administrative overheads incurred within the Philippines which are properly allocatable to the Mining Operations and directly related to the performance of the Contractor's obligations and exercise of its rights under the FTAA;

11.        Costs incurred in financial development, including interest loans payable within or outside the Philippines, subject to the financing requirements required in the FTAA and to a limit on debt-equity ratio of 5:1 for investments equivalent to 200 Million US Dollars or less, or for the first 200 Million US Dollars of investments in excess of 200 Million US Dollars, or 8:1 for that part of the investment which exceeds 200 Million US Dollars: Provided, That the interests shall not be more than the prevailing international rates charged for similar types of transaction at the time the financing was arranged;

12.        All costs of constructing and developing the mine incurred before the Date of Commencement of Commercial Production, including capital and property as hereinafter defined irrespective as to their means of financing, subject to the limitations defined by Clause 3-f-11 hereof, and inclusive of the principal obligation and the interests arising from any Contractor's leasing, hiring, purchasing or similar financing arrangements including all payments made to Government both National and Local; and

13.        General and administrative expenses actually incurred by the Contractor for the benefit of the Contract Area.

The foregoing recoverable Pre-Operating Expenses shall be subject to verification of its actual expenditure by an independent audit recognized by the Government and chargeable against the Contractor.

g.         Government Share.

1.         Basic Government Share. The following taxes, fees and other such charges shall constitute the Basic Government Share:

a)         Excise tax on minerals;

b)         Contractor’s income tax;

c)         Customs duties and fees on imported capital equipment;

d)         Value added tax on the purchase of imported equipment, goods and services;

e)         Withholding tax on interest payments on foreign loans;

f)          Withholding tax on dividends to foreign stockholders;

g)         Royalties due the Government on Mineral Reservations;

h)         Documentary stamps taxes,

i)          Capital gains tax;  

j)          Local business tax;

k)         Real property tax,

l)          Community tax;

m)        Occupation fees;

n)         All other local Government taxes, fees and imposts as of the effective date of the FTAA;

o)         Special Allowance, as defined in the Mining Act; and

p)         Royalty payments to any Indigenous People(s)/Indigenous Cultural Community(ies).

From the Effective Date, the foregoing taxes, fees and other such charges constituting the Basic Government Share, if applicable, shall be paid by the Contractor: Provided, That above items (a) to (g) shall not be collected from the Contractor upon the date of approval of the Mining Project Feasibility Study up to the end of the Recovery Period. Any taxes, fees, royalties, allowances or other imposts, which should not be collected by the Government, but nevertheless paid by the Contractor and are not refunded by the Government before the end of the next taxable year, shall be included in the Government Share in the next taxable year. Any Value-Added Tax refunded or credited shall not form part of Government Share.

2.         Additional Government Share. Prior to the commencement of Development and Construction Phase, the Contractor may select one of the formula for calculating the Additional Government Share set out below which the Contractor wishes to apply to all of its Mining Operations and notify the Government in writing of that selection. Upon the issuance of such notice, the formula so selected shall thereafter apply to all of the Contractor's Mining Operations.

a)         Fifty-Fifty Sharing of the Cumulative Present Value of Cash Flows. The Government shall collect an Additional Government Share from the Contractor equivalent to an amount which when aggregated with the cumulative present value of Government Share during the previous Contract Years and the Basic Government Share for the current Contract Year is equivalent to a minimum of fifty percent (50%) of the Cumulative Present Value of Project Cash Flow before financing for the current Contract Year. as defined below.

Computation.  The computation of the Additional Government Share shall commence immediately after the Recovery Period. If the computation covers a period of less than one year, the Additional Government Share corresponding to this period shall be computed pro-rata wherein the Additional Government Share during the year shall be multiplied by the fraction of the year after recovery. The Additional Government Share shall be computed as follows:

Project Cash Flow Before Financing and Tax (“CF”) for a taxable year shall be calculated as follows:

CF = GO - DE +I - PE - OC

Cumulative Present Value of Project Cash Flow (“CP”) shall be the sum of the present value of the cumulative present value of project cash flow during the previous year (CP i-1 x 1.10) and the Project Cash Flow Before Financing and Tax for the current year (“CF”), and shall be calculated as follows:

CP = (CP i-1 x 1.10)

Cumulative Present Value of Total Government Share Before Additional Government Share (“CGB”) shall be the sum of: the present value of the cumulative present value of the Total Government Share during the previous year (CGA i-J x 1.10), and the Basic Government Share for the current year (BGS), and shall be calculated as follows:

CGB = (CGA i-1 x 1.10) + BGS

The Additional Government Share (“AGS”) shall be:

If: CGB > CP x 0.5         then      AGS = 0

If CGB < CP x 0.5          then      AGS = [CP x 0.5] - CGB

Cumulative Present Value of Total Government Share (CGA):

CGA = CGB + AGS

where:

BGS     =          Basic Government Share shall have the meaning as described in Clause 3-g-1 hereof;

GO       =          Gross Output shall have the same meaning as defined in the National Internal Revenue Code;

DE        =          Deductible Expenses shall have the meaning as described in Clause 3-c hereof;

I           =          Interest payments on loans included in the Deductible Expenses shall be equivalent to those referred to in Clause 3-c-8 hereof;  

PE        =          unrecovered Pre-Operating Expenses;

OC       =          On-going Capital Expenditures as defined in Clause 3-c hereof;

CPi-1    =          cumulative present value of project cash flow during the previous year; and

CGA     =          cumulative present value of total Government Share during the previous year.

b)         Profit Related Additional Government Share. The Government shall collect an Additional Government Share from the Contractor based on twenty-five percent (25%) of the additional profits once the arithmetic average of the ratio of Net Income After Tax To Gross Output as defined in the National Internal Revenue Code, for the current and previous taxable years is 0.40 or higher rounded off to the nearest two decimal places.

Computation. The computation of the Additional Government Share from additional profit shall commence immediately after the Recovery Period. If the computation covers a period of less than a year, the additional profit corresponding to this period shall be computed pro-rata wherein the total additional profit during the year shall be multiplied by the fraction of the year after recovery.

The additional profit shall be derived from the following formula.:

If the computed average ratio as derived from above is less than 0.40:

Additional Profit = 0

If the computed average ratio is 0.40 or higher:

[NIAT-(0.40xGO)]

Additional Profit =          ------------------------------

(1-ITR)

The Additional Government Share from the additional profit is computed using the following formula:

Additional Government Share

From Additional Profit = 25% x Additional Profit

where:

NIAT = Net Income After Tax for the particular taxable year under consideration.

GO = Gross Output from operations during the same taxable year.

ITR = Income Tax Rate applied by the Bureau of Internal Revenue in computing the income tax of the Contractor during the taxable year.

c)         Additional Share Based from the Cumulative Net Mining Revenue. The Additional Government Share for a given taxable year shall be calculated as follows:

(i)         Fifty percent (50%) of cumulative Net Mining Revenue from the end of the Recovery Period to the end of that taxable year;

LESS

(ii)         Cumulative Basic Government Share for that period as calculated under Clause 3-g-1 hereof;

AND LESS (if applicable)

(iii)        Cumulative Additional Government Share in respect of the period commencing at the end of the Recovery Period and expiring at the end of the taxable year immediately preceding the taxable year in question.

“Net Mining Revenue” means the Gross Output from Mining Operations during a Calendar year less Deductible Expenses, plus Government taxes, duties and fees included as part of Deductible Expenses.

3.         Failure to Notify. If the Contractor does not notify the Government within the time contemplated by Clause 3-g-2 of the formula for calculating the Additional Government Share which the Contractor wishes to apply to all of its Mining Operations, the Government shall select and inform the Contractor which option will apply to the latter.

4.         Filing and Payment of Additional Government Share.  Payment of the Additional Government Share shall commence after the Recovery Period. The Additional Government Share shall be computed, filed and paid to the MGB within fifteen (15) clays after the filing and payment of the final income tax return during the taxable year to the Bureau of Internal Revenue. Late filing and payment of the Additional Government Share shall be subject to the same penalties applicable to late filing of income tax returns. The Contractor shall furnish the Director a copy of its income tax return not later than fifteen (15) days after the date of filing.

A record of all transactions relating to the computation of the Additional Government Share shall be maintained by the Contractor and shall be made available to the Secretary or his/her authorized representative for audit.

h.         Sales and Exportation — The Contractor shall endeavor to dispose of the minerals and by-products produced in the Contract Area at the highest commercially achievable market price and lowest commercially achievable commissions and related fees in the circumstances then prevailing and to negotiate for sales terms and conditions compatible with world market conditions. The Contractor may enter into long term sales and marketing contracts or foreign exchange and commodity hedging contracts which the Government acknowledges to be acceptable notwithstanding that the sale price of minerals may from time to time be lower, or that the terms and conditions of sales are less favorable, than those available elsewhere.

The Government shall be informed by the Contractor when it enters into a marketing agreement with both foreign and local buyers. The Contractor shall provide the Government a copy of the final marketing agreement entered into with buyers subject to the confidentiality clause of the FTAA.

The Government shall be entitled to check and inspect all sales and exportation of minerals and/or mineral products including the terms and conditions of all sales commitments.

Sales commitments with affiliates, if any, shall be made only at prices based on or equivalent to arm's length sales and in accordance with such terms and conditions at which such agreement would be made if the parties had not been affiliated, with due allowance for normal selling discounts or commissions. Such discounts or commissions allowed the affiliates must be no greater than the prevailing rate so that such discounts or commissions will not reduce the net proceeds of sales to the Contractor below those which it would have received if the parties had not been affiliated. The Contractor shall, subject to confidentiality clause of the FTAA, submit to the Government evidence of the correctness of the figures used in computing the prices discounts and commissions, and a copy of the sales contract.

The Contractor undertakes that any mining, processing or treatment of Ore by the Contractor shall be conducted in accordance with such generally accepted international standards as are economically and technically feasible, and in accordance with such standards the Contractor undertakes to use all reasonable efforts to optimize the mining recovery of Ore from proven reserves and metallurgical recovery of minerals from the Ore: Provided, That it is economically and technically feasible to do so.

For purposes of this Clause 3-h, an affiliate of an affiliated company means:

a)         any company in which the Contractor holds fifty percent (50%) or more of the shares;

b)         any company which holds fifty percent (50%) or more of the Contractor’s shares;

c)         any company affiliated by the same definition in (a) or (b) to an affiliated company of the Contractor is itself considered an affiliated company for purposes of the FTAA;

d)         any company which, directly or indirectly, is controlled by or controls, or is under common control by the Contractor;

e)         any shareholder or group of shareholders of the Contractor or of an affiliated company; or

f)          any individual or group of individuals in the employment of the Contractor or of any affiliated company.

Control means the power exercisable, directly or indirectly, to direct or cause the direction of the management and policies of a company exercised by any other company and shall include the right to exercise control or power to acquire control directly or indirectly, over the company’s affairs and the power to acquire not less than fifty percent (50%) of the share capital or voting power of the Contractor. For this purpose, a creditor who lends, directly or indirectly, to the contractor, unless he has lent money to the Contractor in the ordinary course of money-lending business, may be deemed to be a Person with power to acquire not less than fifty percent (50%) of the share capital or voting power of the Contractor if the amount of the total of its loan is not less than fifty percent (50%) of the total loan capital of the company.  cdll

If a person (“x”) would not be an affiliate of an affiliated company (“y”) on the basis of the above definition but would be an affiliate if each reference in that definition to “fifty percent (50%)” was read as a reference to “forty percent (40%)” and the Government has reasonable grounds for believing that “x” otherwise controls “y” or “x” is otherwise controlled by “y,” then, upon the Contractor being notified in writing by the Government of that belief and the grounds therefore, “x” and “y” shall be deemed to be affiliates unless the Contractor is able to produce reasonable evidence to the contrary.

i.          Price or Cost Transfers. The Contractor commits itself not to engage in transactions involving price or cost transfers in the sale of minerals or mineral products and in the purchase of input goods and services resulting either in the illegitimate loss or reduction of Government Share or illegitimate increase in Contractor’s share. If the Contractor engages affiliates or an affiliated company in the sale of its mineral products or in providing goods, services, loans or other forms of financing hereunder, it shall do so on terms no less than would be the case with unrelated persons in arms-length transactions.

SECTION 4.      Pro Forma FTAA Contract

The fiscal regime provided herein, and the terms and conditions provided in the Mining Act and IRR shall be embodied in a Pro Forma FTAA Contract to be prepared by the Department of Environment and Natural Resources. The Pro Forma FTAA Contract shall also incorporate such other provisions as the DENR may formulate as a result of consultations or negotiations conducted for that purpose with concerned entities.

The Pro Forma FTAA Contract shall be used by the DENR, the Negotiating Panel and the mining applicant for negotiation of the terms and conditions of the FTAA: Provided, That the terms and conditions provided in the Pro Forma FTAA Contract shall be incorporated in each and every FTAA.

SECTION 5.  Status of Existing FTAAs

All FTAAs approved prior to the effectivity of this Administrative Order shall remain valid and be recognized by the Government: Provided, That should a Contractor desire to amend its FTAA, it shall do so by filing a Letter of Intent (LOI) to the Secretary thru the Director. Provided, further, That if the Contractor desires to amend the fiscal regime of its FTAA, it may do so by seeking for the amendment of its FTAA’s whole fiscal regime by adopting the fiscal regime provided hereof: Provided, finally, That any amendment of an FTAA other than the provision on fiscal regime shall require the negotiation with the Negotiating Panel and the recommendation of the Secretary for approval of the President of the Republic of the Philippines.

SECTION 6.      Repealing Clause

All orders and circulars or parts thereof inconsistent with or contrary to the provisions of this Order are hereby repealed, amended or modified accordingly.

SECTION 7.      Effectivity

This Order shall take effect fifteen (15) days upon its complete publication in newspaper of general circulation and fifteen (15) days after registration with the Office of the National Administrative Register.  

(SGD.) ANTONIO H. CERILLES

Secretary

[60] G.R. Nos. L-18843 & 18844, 29 August 1974; Supra, note 77.

[61] 323 Phil. 297 (1996).

[62] 112 Phil. 24 (1961).

[63] 156 Phil. 498 (1974).

[64] Ruben E. Agpalo, STATUTORY CONSTRUCTION, p. 217 (1998 Ed.), citing Commissioner of Customs v. Court of Appeals, G.R. No. 33471, 31 January 1972, 43 SCRA 192; Asturias Sugar Central, Inc. v. Commissioner of Customs, G.R. No. 19337, 30 September 1969, 29 SCRA 617; People v. Kottinger, 45 Phil. 352 (1923).

[65] Section IX of the WMCP FTAA, entitled “Option to Convert into MPSA,” provides:

9.1 The Contractor may, at any time, give notice to the Secretary of its intention to convert this Agreement either in whole or in part into one or  more Mineral Production Sharing Agreements in the form of the Agreement annexed hereto in Annexure B (“the MPSA”) over such part or parts of the Contract Area as are specified in the notice.

[66] The five Mineral Production Sharing Agreements (Annexes A to F) attached to the 20 October 2004 Compliance of the Solicitor General are:  (1) Mineral Production Sharing Agreement between the Republic of the Philippines and Ungay-Malobago Mines, Inc. and Rapu-Rapu Minerals, Inc. dated 12 September 2000; (2) Mineral Production Sharing Agreement between the Republic of the Philippines and Ungay-Malobago Mines, Inc. and TVI Resource Development (Phils.), Inc. dated 17 June 1998; (3) Mineral Production Sharing Agreement between the Republic of the Philippines and Base Metals Mineral Resources Corporation (BMMRC) dated 20 November 1997; (4) Mineral Production Sharing Agreement between the Republic of the Philippines and Philex Gold Philippines, Inc. dated 29 December 1999 (MPSA No. 148-99XIII); and (5) Mineral Production Sharing Agreement between the Republic of the Philippines and Philex Gold Philippines, Inc. dated 29 December 1999 (MPSA No. 149-99-XIII).

[67] p. 1140, 2003 Edition.

[68] Cebu Portland Cement Company v. Municipality of Naga, Cebu, et al., 133 Phil. 695 (1968).

[69] Resins, Inc. v. Auditor General, 134 Phil. 697 (1968).

[70] Luzon Surety Co., Inc. v. De Garcia, et al., 140 Phil. 509 (1969); Quijano, et al. v. Development Bank of the Phils., et al.,  146 Phil. 283 (1970); Chartered Bank Employees Association v. Ople, No. L-44717, 28 August 1985, 138 SCRA 273.

[71] Motion for Reconsideration dated 14 July 2004, p. 22.

[72] Ibid., p. 20.

[73] Ibid., p. 12.

[74] Memorandum dated 15 July 2004, p. 42.

[75] www.malampaya.com

[76] Ibid.

[77] 157 Phil. 608 (1974).