The document discusses revenue assignment and tax policy for local government units (LGUs) in the Philippines. It covers the following key points: - The 1991 Local Government Code granted LGUs the power to create their own revenue sources and levy taxes. However, LGUs remain highly dependent on the Internal Revenue Allotment from national taxes. - Improving the collection of real property taxes and business taxes could boost LGU fiscal autonomy. However, LGUs face challenges in updating property values, identifying businesses, and collecting during election periods. - The document examines Quezon City's financial recovery efforts from 2001-2002 which included auctioning delinquent properties, computerizing systems, and increasing

1. REVENUE ASSIGNMENT and TAX POLICY

2. 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

3. 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.

4. 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

5. 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 municipalities
2. 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 tax
3. 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:

6. The dependence on IRAresults in weaker local fiscal autonomy, which
creates opportunities for greater control by thecentral government,
contrary to the envisaged situation of local governments able to respond
to local needs and to match local outputswith local preferences.
Improving the collectionof real property and local business taxes is an
important 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

7. 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)

8. SHARES OF LOCAL GOVERNMENT UNITS IN THE PROCEEDS OF NATIONAL TAXES
A. 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.

9. 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

10. The local government unitsdepended more on the IRA and this has
eroded the effort of local government units tocollect own-source
revenues. For many localgovernment units, it is much easier to just rely
on the IRA transfer than it is to collect realproperty taxes and business
taxes

11. Business tax and licenses, or
taxes on goodsand services in
other years, includes business
tax, franchise tax, occupation
tax, printing and publication
taxes, tax on fishing vessels
and tax on delivery trucks and
vans among others.
Other Taxes are
community tax,
amusement
tax, tax on sand
and gravel and
other quarry
products, etc
Non-Tax Revenues
consists of Service
Income, Business
Income, Other
Income 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, Economic
Zones, EVAT and Tobacco Exise Tax, and other miscellaneous income

12. Distribution of Income of LGUs 1989 - 2009

13. 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 cities
than 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 higher
amounts of IRA individually
because there are fewer of them
to divide the pie.
This has motivated municipalities
to convince legislators to pass
special laws converting them
into cities.

14. Manasan (2005) provides assestment

15. 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

16. Local Structural
Problems

17. • 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)
2001
356,982 333,272 107.11
2011
1,097,765 634,456 173.02
Annual
Growth
Rate
11.89% 6.65% 4.91%
Year
Taxable
Assessed
Value
No. of
Property
Units (PU)
Taxable
Value/PU
2001 1,245,954,78
3,602
30,398,830 40,987
2011 2,515,274,28
7,897
33,217,384 75,722
Annual
Growth
Rate
7.28% 0.89% 6.33%

18. • 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)
2001
356,982 333,272 107.11
2011
1,097,765 634,456 173.02
Annual
Growth
Rate
11.89% 6.65% 4.91%
Year RPT Collection
No. 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%

19. • 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
52,433,591,9
50
Collection
efficiency based
on
gross taxable
value
52.3%
Taxable value net
of problematic
account
29,413,036,5
23
Net taxable values
as
a % of gross
taxable value
56.10%
Collection
efficiency based
on net taxable
value
93.2%

20. » 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).

21. • LGU growth lagging
behind population growth
and inflation.
• For the past decade the
growth of LGU revenues
have 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 City
Municipali
ty
Total
Local
Sources
7.65% 5.97% 4.72% 5.92%
IRA and
other grants
and aids
5.12% 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%

22. 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

23. • 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.

24. • 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.

25. 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

26. 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 years
2. 2. For commercial and industrial – 3 years
3. 3. For machineries – 3 years This is an internal rule promulgated by
the auction committee
2.) 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

27. 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.

28. 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

29. 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