REVENUE ASSIGNMENT and TAX POLICY

Republic Act 7160, otherwise known as Local Government Code of 1991 which was signed into law on 10 October 1991 and took effect on 1 January 1992.

Power to Create Sources of Revenue (Sec. 129)

• Each local government unit (LGU) has the power to create its own sources of revenue and to levy taxes, fees, and charges• The grant of power to create sources of revenue is

consistent with the basic policy of local autonomy• The taxes, fees and charges shall accrue exclusively to the

LGUs

Fiscal decentralization requires a clear assignment of

functional responsibilities among different levels of

government, together with sufficient budgetary

autonomy for sub national governments.

Tax assignment should provide sub national

governments with their own revenues whose level they can control.

I. 1987 Constitution

II. Laws - the basic source of Philippine tax law is the National Internal

Revenue

III. Treaties - the Philippines has entered into several tax treaties for the

avoidance of double taxation and prevention of fiscal evasion with

respect to income taxes. At present, there are 31 Philippine Tax

Treaties in force.

IV. Administrative Material - needful rules and regulations for the

effective enforcement of the provisions of the Tax Code (interpretation of

tax code

V. Case Law - are adhered to and recognized as binding interpretations

of Philippine tax law.

VI. Treatises and other books - various Philippine authors have come

up with annotated versions of the Tax Code

VII. Periodicals

VIII. Local Government Tax Law - based on the constitutional grant of

the power to tax to the local governments.

Sources of Philippine Tax Law

1. Real Property Tax - (RPT) is an ad valorem tax on real properties such as lands, buildings, and other improvements, and machineries imposed by provinces, cities and municipalities2. Municipal Taxes - a. Business Taxes There are three (3) kinds of business taxes imposed by municipalities: (a) a combination of a graduated-fixed and percentage business taxes; (b) percentage tax; and (c) annual tax3. City Taxes - The city government may impose and collect any of the taxes, fees and charges imposed by the province or municipality.4. Barangay Taxes The barangay may impose a tax on stores or retailers with fixed business establishments with annual gross sales or receipts of P50,000.00 or less in the case of cities; and P30,000.00 or less, in the case of municipalities, at a rate not exceeding 1% of gross sales or receipts.5. Community Tax31 City and municipal government may impose a community tax at the following rates:

The dependence on IRA results in weaker local fiscal autonomy, whichcreates opportunities for greater control by the central government, contrary to the envisaged situation of local governments able to respondto local needs and to match local outputs with local preferences.Improving the collection of real property and local business taxes is animportant step to boost local fiscal autonomy

Local government units (LGUs) derive their revenues from local and external sources. Local sources include tax revenues from the real property tax and the business tax, and non-tax revenues from fees and charges, receipts from government business operations and proceeds from sale of assets. External sources, on the other hand, include the Internal Revenue Allotment (IRA) and other shares from special laws, grants and aids and borrowings

LGUs are not allowed to touch and that are reserved for the central government. These include the income tax (individual and corporate), customs duties, value-added tax, and excise taxes on alcoholic beverages, tobacco products, and petroleum products. At the same time, the National Internal Revenue Code does not provide for a central government real property tax or for a central government community tax (poll tax).The 1991 Local Government Code assigned taxing and spending powers to local government units. It is an acknowledged principle that matching expenditure and tax assignments is desirable because this will enable the local governments to shape the supply of public goods according to local preferences and willingness to pay (Jourmard and Kongsrud 2003)

SHARES OF LOCAL GOVERNMENT UNITS IN THE PROCEEDS OF NATIONAL TAXESA. INTERNAL REVENUE ALLOTMENT - Local government units shall have a share

in the national internal revenue taxes based on the collection of the third fiscal year preceding the current fiscal year at 40% allocated in the following manner.

1) Provinces 23% 2) Cities 23%3) Municipalities 34%4) Barangays 20%

The share of each province, city and municipality shall be determined on the bases of the following formula.

a) Population 50%b) Land Area 25%

c) Equal Sharing 25%

B. SHARES OF LGU IN THE PROCEEDS OF NATIONAL WEALTH Local government units shall have an equitable share in the proceeds derived

from the utilization and development areas at 40% of the gross collection derived by the national government from the preceding year from mining taxes, royalties, forestry and fishery charges in addition to the internal revenue allotment.

40% of Provincial

Collection

25% of Provincial

Collection

30% of Provincial

Collection

40% of Provincial

Collection

50% of Provincial

Collection

50% of Collection

By baranggay

The 1991 Code have put certain limits on their taxing powers. Cities are more

fortunate because they have broader taxing powers than municipalities and

provinces

The local government units depended more on the IRA and this haseroded the effort of local government units to collect own-source revenues. For many local government units, it is much easier to just relyon the IRA transfer than it is to collect real property taxes and business taxes

Business tax and licenses, or taxes on goods and services in other years, includes businesstax, franchise tax, occupation tax, printing and publication taxes, tax on fishing vesselsand tax on delivery trucks and vans among others.

Other Taxes arecommunity tax, amusement tax, tax on sandand gravel and other quarry products, etc

Non-Tax Revenues consists of Service Income, Business Income, OtherIncome and Capital Revenues.

Business Income LEES such as markets, slaughterhouses, waterworks and transportation systems, and hospital fees

Other Income consists of LGU Shares from National Wealth, EconomicZones, EVAT and Tobacco Exise Tax, and other miscellaneous income

Distribution of Income of LGUs 1989 - 2009

The source of income of LGUs before (1990) the passage of the 1991 Code and after several years (2009). The broad taxing powers benefited more the citiesthan provinces and municipalities. They have been dominant in all types of local taxes and the internal revenue allotment. The cities have also the advantage of getting higheramounts of IRA individually because there are fewer of them to divide the pie.This has motivated municipalitiesto convince legislators to pass special laws converting them into cities.

Manasan (2005) provides assestment

Strategic Areas to Consider in improving

Revenue Generation Capabilities of

LGUs

• Track 1 - Proper Management of LGUs Taxing and Revenue Raising Power

• Track 2 – Stimulate Progress through Investments and Other Economic Activities

• Track 3 - Exercise of Corporate Powers and Partnership Arrangements

• Track 4 – LGC Review and Amendments

Local Structural Problems

• Delay in updating of the Schedule of Market Values (SMV).

• The inability of most LGUs to regularly enact updated schedules of market values is indicative of considerable delay problems (10 to 20 years) associated with the politicalization of the LGU SMV updating process.

Year

Gross Value Added in

Real Estate at Current Prices

Gross Value Added in

Real Estate at

Constant 2000 Prices

Implicit Price Index for

Real Estate (2000 = 100)

2001356,982 333,272 107.11

20111,097,765 634,456 173.02

Annual Growth

Rate11.89% 6.65% 4.91%

YearTaxable

Assessed Value

No. of Property

Units (PU)

Taxable Value/PU

2001 1,245,954,783,602

30,398,830 40,987

2011 2,515,274,287,897

33,217,384 75,722

Annual Growth

Rate7.28% 0.89% 6.33%

• Institutional deficiencies. Institutional bottlenecks like the issue of titling delays for properties covered by the Comprehensive Agrarian Reform Program (CARP) and system deficiencies like lack of information sharing between LGU departments

Year

Gross Value Added in Real

Estate at Current Prices

Gross Value

Added in Real Estate

at Constant

2000 Prices

Implicit Price

Index for Real

Estate (2000 =

100)

2001356,982 333,272 107.11

20111,097,765 634,456 173.02

Annual Growth

Rate11.89% 6.65% 4.91%

Year RPT CollectionNo. of

Property Units (PU) Collection/PU

2001 16,842,815,948 30,398,830 554

2011 27,399,920,255 33,217,384 825

Annual Growth Rate

4.99% 0.89% 4.06%

• Problematic real property accounts Collection efficiencies as of 2011 are still low primarily because of problematic real property accounts.

• Net of problematic accounts, the collection efficiency in 2010 would have been 93.2%, but because of the problematic accounts, RPT collection efficiency is a low of 56.10%.

Weighted average RPT rate

2.1%

Gross Taxable Value

52,433,591,950

Collection efficiency based

on gross taxable

value

52.3%

Taxable value net of problematic

account29,413,036,5

23 Net taxable values

as a % of gross

taxable value

56.10%

Collection efficiency based on net taxable

value

93.2%

» Difficulty in capturing business income levels for taxation.

The slow growth of business taxes is saddled by problems related to the identification of new businesses for taxation purposes and the undervaluation of declared gross sales.

The full capture of business taxes is estimated to have the potential to increase LGU business tax revenue by a factor ranging from 1.5 to 2.0. (ADB TA 7451, Aug. 2012).

• LGU growth lagging behind population growth and inflation.

• For the past decade the growth of LGU revenueshave failed to catch up with the combined growth of population as well as prices.

• LGU revenues grew annually by 5.85% compared to the combined growth of population and prices of 6.46%.

Annual Growth Rates of LGU Sources of Revenues (in %)

2001-2010 Province CityMunicipali

tyTotal

Local Sources

7.65% 5.97% 4.72% 5.92%

IRA and other grants

and aids5.12% 4.95% 6.49% 5.66%

All other sources

4.13% 10.19% 10.36% 8.45%

Total Revenues

5.50% 5.73% 6.23% 5.85%

Adequacy of LGU Revenues

Annual Population Growth Rate

2001-2010 1.88%

Annual Inflation rate

2001-2010 4.58%

Population Growth + Inflation

2001-2010 6.46%

Year Inflation Rate Consumer Price Index

2002 2.97% 103.0

2003 3.45% 106.5

2004 5.98% 112.9

2005 7.63% 121.5

2006 6.24% 129.1

2007 2.81% 132.7

2008 9.30% 145.0

2009 3.25% 149.8

2010 3.83% 155.5

2011 4.65% 162.7

2012 3.20% 167.9

2013 3.30% 173.4

2014 (est.) 4.50% 181.2

• Continued high dependence on the Internal Revenue Allotment (IRA).

• Dependence on the Internal Revenue Allotment (IRA) and other grants at all levels of LGUs remained high – 75% for provinces, 79% for municipalities, and 42% for cities.

• Local revenue sources negatively affected by elections.

• LGU local revenue sources, especially local tax collections, are negatively affected by a 3-year election related cycle. For the different LGU levels, election-related cyclical behaviors in different local revenue sources have been observed (ADB, 2007):

– Provinces — real property tax (RPT), business tax, fees and charges and economic enterprises.

– Cities — economic enterprises, other receipts

– Municipalities — RPT, business tax, fees and charges and economic enterprises, other receipts.

THE FINANCIAL RECOVERY OF QUEZON CITY• Cash Balance in the General Fund of Quezon City was negative P10.35 million when Mayor Belmonte assumed office on July 1, 2001• Inherited claims for payment amounting to P1.4 billion, including GSIS, Phil Health, BIR, Meralco etc. • Bank Loan of P1.25 billion left by previous administration with the Land Bank of the Philippines

1. Auction Sale of real property instead of Tax Amnesty every quarter.PERIOD OF DELINQUENCY TO BE INCLUDED IN THE AUCTION SALE 1. For residential – 5 years2. 2. For commercial and industrial – 3 years 3. 3. For machineries – 3 years This is an internal rule promulgated by

the auction committee2.) Reassignment of permanent employees to avoid familiarization with

Taxpayer.3.) Prepared at least 20 delinquency letters per day per employee assigned

in the Real Estate Division. 4.) Computerization of systems and processes.5.) Issued new Official Receipts with security features to identify and curb

the proliferation of fake receipts.6.) Constructed the taxpayers assessment and payment lounges (free

Coffee & Ice Tea). 7.) Recognized the 10 outstanding Taxpayers for Business and Real

Property.

THE FINANCIAL RECOVERY OF QUEZON CITY

THE FINANCIAL RECOVERY OF QUEZON CITY

8.) Increased the discount given to Real Property Taxpayers paying annually from 10% to 20%, and from 5% to 10% for those paying promptly quarterly.

9.) Conducted Auction Sale of Government Owned and Controlled Corp. such as Heart Center, Lung Center, Kidney Center and MWSS.

10.) Hired an independent and private encoding company to encode all RPT payment records and Tax Declarations.

11.) Automatically Generated and issued Computerized Delinquency Letters amounting to P10.7 Billion Pesos.

12.) Filed anti-graft cases with the office of the Ombudsman against employees issuing fake RPT Receipts, that resulted to the dismissal of 6 employees.

13.) Declared Tax Amnesty on Machinery and Equipment from Oct. to Dec. 2002.

14.) Created a special Task Force on Machinery composed of representatives from the Treasury, Assessor’s and Engineering Departments to conduct physical inventories of all machinery and equipment which failed to avail of the Tax Amnesty.

15.) Posted 300 Billboards in major thoroughfares informing the date of the Auction Sale and the increased discount from 10% to 20%, if RP Tax is paid annually.

16.) Allowed staggered payment of Delinquent Real Property Taxes upon payment of a minimum of 30% down and the balance payable within 6 months.

17.) Verified the total value of machinery as appearing in the Tax Declaration issued by the Assessor’s Office and counter checked this ,with that appearing in the financial statements.

THE FINANCIAL RECOVERY OF QUEZON CITY

18.) Instruct the Building Official to forward to the City Assessor the building / occupancy permit, stating the total value of the construction cost, for issuance of a new tax declaration.

19.) Instruct the City Engineer to forward to the City Assessor all application for mechanical permit for issuance of a new tax declaration on machineries.

20.) Implemented the Geographic Information System (GIS) for future tax mapping of Real Property.

THE FINANCIAL RECOVERY OF QUEZON CITY