MANILA — The Supreme Court (SC) has ruled that the Philippine government’s 60 percent share in the profits from the Malampaya Natural Gas Project includes the income taxes of its private contractors, effectively lifting the Commission on Audit’s (COA) charges against Shell Exploration B.V., PNOC Exploration Corporation, and Chevron Malampaya LLC.

In a decision penned by Associate Justice Japar B. Dimaampao, the SC En Banc reversed COA’s ruling that the companies were liable for over ₱53 billion in income taxes allegedly deducted from the government’s share between 2002 and 2009.

The case stemmed from a 1990 Service Contract signed by the government and the contractors, which required the latter to remit 60 percent of the project’s net proceeds to the government. While the contractors were exempt from all taxes except income tax, the contract also contained a tax assumption provision stating that the government’s share already covered these income taxes.

COA, following a post-audit, had argued that no law explicitly allowed such an arrangement and that the contractors should still be held liable for the unpaid taxes.

The SC disagreed, citing Presidential Decree (PD) No. 87 or the Oil Exploration and Development Act, which states that income taxes paid by or on behalf of contractors are part of the government’s guaranteed 60 percent share. The ruling also referenced PD 1206 and PD 1459, which reaffirm that the government’s share includes all applicable taxes.

“The contractors are still liable for income tax, but the government pays it on their behalf as part of its share in the project’s income,” the SC clarified. “Tax assumption is not tax exemption.”

The High Court also took note of an arbitral ruling issued by the International Chamber of Commerce (ICC), which upheld the validity of the tax assumption provision. While expressing respect for the arbitral ruling, the SC said it would have arrived at the same conclusion independently, based on its own legal analysis.

The Court emphasized that honoring such contracts is essential in a constitutional democracy.

“While acknowledging COA’s role in protecting public funds, the government must honor its contractual obligations, especially when the terms are clearly stated in agreements it voluntarily entered into,” the SC said.

In his Dissenting Opinion, Senior Associate Justice Marvic M.V.F. Leonen argued that PD 87 does not expressly state that income taxes should be part of the government’s share.

Concurring opinions were issued by Justices Alfredo Benjamin S. Caguioa, Ramon Paul L. Hernando, and Jhosep Y. Lopez. Caguioa said the provision is backed by the clear language of PD 87; Hernando stressed the importance of respecting arbitration rulings; while Lopez pointed out that the Constitution does not bar arbitration even in matters within COA’s jurisdiction.