The Philippine government’s share in profits from the Malampaya Natural Gas Project includes the income taxes of its private contractors, the Supreme Court has ruled.

In a decision dated 25 February 2025, penned by Associate Justice Japar B. Dimaampao, the SC En Banc lifted the charges against Shell Exploration B.V., PNOC Exploration Corp., and Chevron Malampaya LLC for unpaid income taxes.

In 1990, the government signed a Service Contract with these companies for the Malampaya Project. Under the contract, the contractors are required to remit 60 percent of the project’s net proceeds to the government.

They are exempt from all taxes except income tax. However, the contract includes a “tax assumption” clause, stating that the government’s 60 percent share already covers the contractors’ income taxes from 2002 to 2009.

After a post-audit, the Commission on Audit found that over P53 billion in income taxes had been deducted from the government’s share. The COA ruled that the contractors were liable for these taxes, arguing that no law explicitly states that income taxes should be included in the government’s share. The contractors challenged this before the SC.

While the case was pending, the International Chamber of Commerce issued an arbitral award upholding the validity of the tax assumption clause in the Service Contract.

Presidential Decree 87, or the Oil Exploration and Development Act, provides that income taxes paid by or on behalf of contractors are included in the government’s guaranteed 60 percent share of net proceeds from petroleum operations. The law further states that the government assumes and pays these taxes to encourage private investment in petroleum exploration.

This is reiterated in PD 1206 and PD 1459, which confirm that the government’s share includes all taxes.

The SC clarified that tax assumption is not equivalent to tax exemption. 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.

It added that it respects the ICC ruling, in line with the state policy favoring arbitration, but emphasized that even without the ICC’s decision, the high court would have reached the same conclusion upon its own review.

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

In his dissenting opinion, Senior Associate Justice Marvic M.V.F. Leonen argued that PD 87 does not expressly state that the government’s share includes income taxes.

In his concurring opinion, Justice Alfredo Benjamin S. Caguioa said the tax assumption clause is supported by the clear language of PD 87.

Justice Ramon Paul L. Hernando, in his separate concurring opinion, said arbitration rulings should be given the highest respect.

Justice Jhosep Y. Lopez, also concurring, noted that the Constitution does not prohibit arbitration, even in matters under COA’s jurisdiction.