Malampaya

In a recent and closely watched decision, the Supreme Court has ruled that the three companies involved in the Malampaya natural gas project—Shell Exploration B.V., PNOC Exploration Corporation, and Chevron Malampaya LLC—are not obligated to pay over P53 billion in income taxes as previously claimed by the Commission on Audit (COA).

This decision reverses the COA's post-audit finding that the contractors improperly deducted income taxes from the government’s share in the Malampaya project. The Supreme Court, in a 19-page ruling penned by Associate Justice Japar Dimaampao, sided with the companies, citing both the terms of their 1990 service contract and existing Philippine laws.

At the heart of the issue is the so-called tax assumption clause found in Service Contract No. 38, the agreement that governs the Malampaya Project. Under this contract, the contractors are required to remit 60% of the net proceeds to the government. They are generally exempt from all taxes except income tax—but the contract clearly states that from 2002 to 2009, the government’s 60% share already includes the amount needed to cover these income taxes.

The COA had disagreed, arguing that there was no legal basis to consider income taxes as part of the government’s share and claimed that the contractors still owed the government billions. In response, the companies elevated the matter to the Supreme Court.

While the International Chamber of Commerce (ICC) had already issued a separate arbitral ruling in favor of the contractors, the Supreme Court made clear that its decision was reached independently and based on Philippine law.

The Court pointed to Presidential Decree 87, or the Oil Exploration and Development Act, as a key legal basis. This law encourages private investment in petroleum exploration by allowing the government to shoulder the contractors’ income taxes through its share in the project's net proceeds. The ruling also cited PD 1206 and PD 1459, which reinforce that all taxes are covered by the government’s share.

Importantly, the Supreme Court clarified that this arrangement does not mean the companies are exempt from paying income tax. Instead, it affirmed that they remain liable—but the government, under the contract and applicable law, must pay the tax on their behalf.

“The Court is on all fours with COA to zealously ensure that the Government is never placed at a disadvantage,” the ruling stated. However, it also emphasized that the state must honor its commitments, especially when those are clearly outlined in contracts it voluntarily entered into.

In closing, the decision acknowledged the COA's role in protecting public funds but reminded government agencies that they cannot retroactively reinterpret binding agreements. “The Government cannot be allowed to renege on its obligation, especially when such has been distinctly outlined in the contract it freely entered into and agreed to,” the Court concluded.

This ruling not only settles a major legal and financial dispute but also reinforces the legal principle that the government must abide by its own agreements—particularly those that aim to foster private sector participation in critical national projects.