THE Supreme Court (SC) has ruled that the income taxes of private contractors in the Malampaya natural gas project are included in the government’s 60% share of the project’s net proceeds, effectively reversing a Commission on Audit (CoA) finding that flagged over P53 billion in alleged underpaid taxes.
In a decision dated July 30, 2025, the Court resolved the dispute between Shell Philippines Exploration B.V., Chevron Malampaya LLC, and PNOC Exploration Corp. and the CoA in favor of the contractors.
The SC held that under Presidential Decree (PD) No. 87, or the Oil Exploration and Development Act, income taxes paid by or on behalf of petroleum contractors form part of the government’s guaranteed 60% share of net proceeds from petroleum operations.
It noted that the law aims to encourage private investment by allowing the state to assume contractors’ income tax obligations.
This policy is reinforced by Presidential Decree Nos. 1206 and 1459, which affirm that the government’s share encompasses all applicable taxes.
The Court said that the tax assumption clause under the Malampaya contract does not constitute a tax exemption.
“The contractors are not exempt from income tax. Rather, the Government assumes the same as part of its share in the net proceeds,” the decision read.
“The Court is on all fours with CoA to zealously ensure that the Government is never placed at a disadvantage and that it rightfully receives what is due it in all its transactions,” Associate Justice Japar B. Dimaampao wrote in the 19-page ruling.
“Nevertheless, remaining bound by the Constitution and the laws of the land, 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.”
In 1990, the government entered into a service contract with Shell, Chevron, and PNOC for the development of the offshore gas field. Under the contract, the contractors were to remit 60% of the project’s net proceeds to the state.
While they were exempt from all taxes except income tax, the agreement included a tax assumption clause, specifying that their income taxes from 2002 to 2009 would be covered by the government’s share.
Following a post-audit, the CoA found that over P53 billion in income taxes had been deducted from the state’s share. The agency ruled that the contractors were liable for the amount, citing the absence of an express legal provision stating that the government should cover their tax obligations.
While the case was pending, the International Chamber of Commerce (ICC) issued an arbitral ruling upholding the validity of the tax assumption clause. The SC acknowledged the ruling, citing the state’s policy favoring arbitration, but emphasized that it would have reached the same conclusion based on Philippine law alone.
“Even sans the ICC award, the Court will still rule the same,” the decision said.
The justices issued several separate opinions. In his dissenting opinion, Senior Associate Justice Marvic M.V.F. Leonen argued: “PD 87 does not expressly state that the Government’s share shall include the contractors’ income tax.”
In contrast, Justice Alfredo Benjamin S. Caguioa said the tax assumption provision is “clearly supported by the text of PD 87.”
Justice Ramon Paul L. Hernando, in a separate concurring opinion, said arbitral rulings “should be given the highest respect.”
Justice Jhosep Y. Lopez added that “nothing in the Constitution prohibits arbitration, even in matters under the jurisdiction of the Commission on Audit.” — Chloe Mari A. Hufana
