Summary
Highlights
Local government units (LGUs) in the Philippines derive revenue from local sources like real property tax, business taxes, fees, and charges, as well as external sources such as internal revenue allotment (IRA), shares from national wealth, grants, and loans. Real property taxes include basic real property tax and special levies.
Real property tax is based on the assessed value of properties (land, buildings, improvements, and machinery). Provinces can tax up to 1% of assessed value, while cities and municipalities can tax up to 2%. LGUs regularly review market values and assessment levels. Properties are classified (residential, agricultural, commercial) with commercial properties incurring higher taxes. Depreciation is important for machinery, as seen in a case where a client questioned the lack of depreciation for air conditioners, leading to a tax base reduction.
Certain properties are exempt from RPT, including those owned by the government, charitable institutions, churches, and non-profit cemeteries. Machineries and equipment used by local water districts, properties owned by registered cooperatives, and those used for pollution control are also exempt. Special levies include the 1% Special Education Fund (SEF) and a 5% tax on idle lands, chargeable unless prevented by force majeure. Special levies can also be imposed for public improvement projects, not exceeding 60% of the cost.
RPT accrues on January 1st and can be paid in advance for discounts, or in quarterly installments. Transfer taxes on real property, incurred upon sale, inheritance, or donation, must be paid within 60 days to avoid surcharges and penalties. Transfers under the comprehensive agrarian reform law are exempt.
Provincial taxes include taxes on printing, publication, franchises, sand and gravel, professional tax (300 pesos annually), and amusement tax. Municipal and city taxes include business taxes, which can be graduated, fixed, or percentage-based. There's a concern that LGUs might require businesses to report inflated gross receipts, especially for MSMEs, affecting their tax base. Barangay taxes include taxes on retailers and stores (up to 1% of gross sales) and community tax.
Community tax for individuals is 5 pesos plus 1 peso per 1,000 income, up to 5,000 pesos. For corporations, it's 500 pesos plus 2 pesos per 5,000 net income, up to 10,000 pesos. Exemptions include diplomatic and consular representatives and transient visitors staying less than three months.
LGUs also generate revenue from service fees, public utility charges, and toll fees. Barangays collect fees for certifications and clearances. The Philippines is moving towards fiscal decentralization, recognizing the crucial role of LGUs in providing basic public services. Tax rates can be adjusted up to 10% every five years, and market values revalued every three years. Active LGUs perform tax reviews regularly, while inactive ones show poor collection and service performance.
Intergovernmental transfers, such as the Internal Revenue Allotment (IRA), are shared from the national government to LGUs based on classification (provinces, cities, municipalities, barangays), population, and land area. LGUs also share in national wealth, tobacco excise taxes, revenues from government corporations, and economic zones. In return, LGUs are responsible for health, social services, agriculture, environmental protection, infrastructure, tourism, and regulatory functions.
If local and external sources are insufficient, LGUs can borrow to finance infrastructure and development projects through loans, bonds, grants, subsidies, and foreign sources. These borrowings are limited to 20% of their regular income and are monitored by the Department of Finance and the Bureau of Local Government Finance.