Prescribing the Rules for the Preferential Royalty Rates of Marginal Mines.

April 29, 1981 REVENUE REGULATIONS NO. 15-81 SUBJECT : Prescribing the Rules for the Preferential Royalty Rates of Marginal Mines TO : All Internal Revenue Officers and Others Concerned SECTION 1 . Scope . Pursuant to the provisions of Sec. 326 in relation to the provisions of Sec. 4, both of the National Internal Revenue Code, these regulations are hereby promulgated to implement the provisions of Executive Order No. 674-B which provides for preferential rates of royalty due from marginal mines. SECTION 2 . Marginal Mines Defined . For purposes of determining who may avail of the preferential rates of royalty extended by the President under Executive Order No. 674-B to marginal mines, the following definitions shall govern: " Marginal mines " are those individual mining project or projects of mining companies whose rate of return on investment in the preceding taxable year do not exceed ten per centum (10%). cdt Under such concept, a mining company engaged in development two or more mining projects may qualify as a marginal mine only with respect to a mining project whose rate of return on investment is less than ten per centum (10%). Thus, assume that "X" Mining Company has two (2) projects separately registered with the Bureau of mines namely: a gold project in Benguet and a copper project in Pangasinan. For the year 1980, the gold project has a rate of return on investment of 8% and their copper project in Pangasinan has a rate of return on investment of 12%. In this situation, their gold mining project shall be classified as a marginal mine entitled to the preferential royalty rates prescribed in Sec. 6 hereof, whereas their copper project shall be subject to the new rate prescribed under Batas Pambansa Blg . 84. For this purpose (a) " Rate of return on investment " shall mean the rate arrived at by dividing net income from mining operation (before income tax) by the average net assets used in business during the same taxable year. (b) The term " net income from mining operations " shall mean gross income from operation of a specific mining project less all allowable deductions directly attributable to the mining operations of such mining project such as mining, milling and marketing expenses, depreciation and depletion allowances of properties directly used in such mining project and royalties. Depreciation on appraisal increase shall not be allowed. In addition, in computing net income from mining operation (1) income not recognized in whole or in part under existing incentive laws shall be included; (2) non-mining and other extraneous income shall be included; (3) general and administrative expenses shall be allowed as a deduction provided that in no case shall such aggregate exceed five per centum (5%) of the fair market value of gross mining output; (4) in the event such projects are partly financed through borrowings, interest on such loan shall be allowed as a deduction only to the extent such interest paid or accrued corresponds to a debt financing not exceeding four (4) times the equity invested in such project; and (5) accelerated exploration and development expenditures and other benefits of any tax incentives under existing laws except reinvestment expansion allowance provided by the Investment Incentive Act, as amended, shall be considered as deductions. If a mining company is engaged in the exploitation of two or more mining projects, the above items of income and deductions shall be prorated to such projects on the basis of gross income ratio; provided, however , that interest on loan which can be ascertained to have been used to finance a particular project, shall no longer be prorated but shall be allowed as a direct expense of such project. (c) " Average net assets " shall mean the average of the net assets used in business at the beginning and at the end of the same year. On the other hand, net assets shall be the actual cost of acquisition or construction cost of all assets used in business, less the corresponding depreciation. Appraisal increase in assets valuation shall not be considered. In the case of mining companies engaged in the exploitation of two or more mining projects, common assets, such as office buildings, warehouses, refinery, etc., shall be apportioned on the basis of tons milled per project. ILLUSTRATION I. COMPUTATIONS Assume that for the calendar year ended 1980, "X" Mining Company, engaged in the exploitation of metallic minerals, derived a net income from mining operation in the amount of P1,000,000, before corporate income tax arrived at as follows: 1980 Sales of metallic products P20,000,000 Less: Direct mining cost, including Royalty tax 10,000,000 Net income from mining operation P10,000,000 Less: Gen. and adm. expenses 2,000,000 Net income from operation P 8,000,000 Less: interest expense 7,000,000 Net income before corporate income tax P1,000,000 =========== Assume further that as of December 31, 1980 it has a) Stockholders equity P10,000,000 b) Long term debt (used to finance plant facilities at 10% p.a.) 70,000,000 c) Net asset of P69,000,000 as compared to a net asset of P71,000,000 as of January 1, 1980. II. COMPUTATIONS a) Computation of allowable General and Administrative expenses. Gross proceeds P20,000,000 Prescribed rate .050 Maximum allowable P1,000,000.00 Amount claimed 2,000,000.00 Excess Gen. & Adm. Expenses P1,000,000.00 ========== b) Computation of allowable interest expenses Stockholders equity P10,000,000.00 Prescribed debt-equity ratio 4 times Desirable debt financing P40,000,000.00 ============ Actual debt financing P70,000,000.00 ============ Therefore, allowable interest expenses should only be 4/7 of interest expense claimed. 4/7 of P7,000,000 = P4,000,000 Amount claimed 7,000,000 Excess interest exp. P3,000,000 ========= c) Computation of net income from mining operations Net income from mining operation P1,000,000 (per problem) Add: 1) Excess Gen. & Adm. expenses (per II-A above) 1,000,000 2) Excess Interest expenses (per II-B above) 3,000,000 Adjusted net income from mining operation P5,000,000 d) Computation of rate of return on investment Formula Net income from mining operation Net asset, beginning + net asset, and 2 By substitution P5,000,000 P71,000,000 + 69,000,000 OR 2 P5,000,000 OR 140,000,000 2 P5,000,000 = .071 or 7.1% 70,000,000 Considering that the rate of return on investment of "X" Mining Company of 7% is below the benchmark of 10%, it shall be considered as a marginal mine entitled to the preferential royalty rates. As shown in Sec. 6 hereof, for the year 1981 it would only be liable to 3% royalty since the rate of return on investment is within the bracket of 6% up to 7.99%. SECTION 3 . Who May Avail . Any person, whether individual or corporation, with a mining project or projects duly registered with the Bureau of Mines to engage in the exploitation of metallic or nonmetallic minerals may avail themselves of the privileges, assistance and incentives given to marginal mines. SECTION 4 . Application for a Marginal Mine Certificate . Those who would like to avail themselves of the privileges of a marginal mine must file an application in writing on or before the 15th day of April of each year on a per project basis with the Bureau of Internal Revenue, Attn.: The Chief, Agriculture and Natural Resources Division (Audit Division), Diliman, Quezon City. The application must show among others, name and location of projects, date registered with the Bureau of Mines, and kind of minerals extracted. Such application must be accompanied by financial statements, together with, on a per project basis, schedules of sales, cost of operations, general and administrative expenses, interest payments, royalties paid and other schedules that would support their claim and certified true copy of registration of their project with the Bureau of Mines. On the basis of their representation, the Commissioner of Internal Revenue shall issue a marginal mine certificate, B.I.R. Form No.________, copy of which is hereto attached as Annex "A", if the applicant meets the conditions for the grant thereof. The data and facts upon which the issuance of the certification was based shall be subject to field investigation to be undertaken jointly by personnel of the Bureau of Internal Revenue and the Bureau of Mines. Should any misrepresentation or misrepresentations be found upon investigation, the privileges granted under such certificate shall be withdrawn and the correct royalties, together with the penalties incident to late payment corresponding to the year covered by the certificate shall be collected. Any excess payment made during the period that would be covered by the marginal mine certificate up to the time their marginal mine certificate is issued by the Commissioner shall be allowed as an automatic offset against their future royalty obligations. SECTION 5 . Issuance of the Marginal Mine Certificate and Duration Thereof . An applicant who qualifies as a marginal mine shall be issued a marginal mine certificate signed by the Commissioner of Internal Revenue which shall entitle the holder thereof to the preferential royalty rates applicable on gross output of mineral products mined beginning on the first day of the calendar year in which the application was filed and shall be valid for a period of one year only except as stated hereunder. Thus, if a mining entity qualified as a marginal mine in 1981 on the basis of his representation that for the previous year, 1980, his rate of return on investment is less than 10%, it shall only be entitled to the preferential royalty rates for the year 1981. Thereafter, a mining company desiring to enjoy the privilege of a marginal mine for the succeeding year must file a new application as prescribed in Sec. 4 hereof; otherwise it shall not be entitled to the preferential royalty rates. cdt If the rate of return on investment of a project of a mining company for the first semester of the year they are entitled to the preferential royalty is lower than the rate upon which their classification was based, the mining company may request for a reconsideration of their classification for the remaining six months. In such case, it should file on or before September 15 of the same year an application for reconsideration in the same form and manner as prescribed in Sec. 4 hereof. If the application is in order, an amended marginal mine certificate shall be issued stating therein the revised preferential royalty rates applicable for the remaining six months. SECTION 6 . Benefits of a Marginal Mine . A marginal mine certificate holder shall be entitled to the preferential royalty rates as shall be prescribed on an annual basis by the President of the Philippines upon recommendation of the Minister of Finance. cd For the calendar year 1981, the royalty rates shall be: A. For marginal mines engaged in exploitation of metallic minerals: Rate of Return Royalty On Investment Rate 10% up 5% 8% up to 9.9% 4% 6% up to 7.9% 3% 0% up to 5.9% 2.5% B. For marginal mines engaged in exploitation of non-metallic minerals: Rate of Return Royalty on Investment Rate 10% up 3% 5% up to 9.5% 2% 0% up to 4.9% 1.5% SECTION 7 . Manner of Availment . A marginal mine certificate holder shall attach a certified copy of such certificate to the required B.I.R. Form in filing and paying its royalty liabilities as prescribed by law. SECTION 8 . Reports Required from a Marginal Mine . All marginal mine certificate holders are required to maintain books of accounts on a per project basis where all the data used in the application may be secured. Such records shall be maintained in their principal place of business and shall be made readily available. SECTION 9 . Repealing Clause . Any and all regulations, circulars which are inconsistent herewith are hereby modified or repealed accordingly. cdt SECTION 10 . Effectivity . These regulations shall take effect immediately. (SGD.) EFREN I. PLANA Acting Minister Recommended by: (SGD.) RUBEN B. ANCHETA Acting Commissioner ANNEX A REPUBLIC OF THE PHILIPPINES MINISTRY OF FINANCE BUREAU OF INTERNAL REVENUE QUEZON CITY MARGINAL MINE CERTIFICATE Number ___ TO WHOM IT MAY CONCERN: THIS IS TO CERTIFY that ______________________ project of ________________________ is considered a MARGINAL MINE pursuant to Executive Order No. ________ and is entitled to a reduced royalty of __________ to be imposed on the fair market value of the gross mineral output of such project for the period from January 1 up to December 31, 19 ___ Given, this _________ day of _____, 19___, in Manila, Philippines. __________________________ (SGD.) RUBEN B. ANCHETA Acting Commissioner