Internal Revenue Allotment

Internal Revenue Allotment is the Local Government's share of

revenues from the National Government.

According to Section 285, the share of local government units in the

internal revenue allotment shall be allocated in the following manner:
a. Provinces – Twenty-three percent (23%)

b. Cities – Twenty-three percent (23%)

c. Municipalities – Thirty-four percent (34%); and

d. Barangays – Twenty percent (20%)

Provided, however, that the share of each province, city and

municipality shall be determined on the bases of the following formula:
a. Population – Fifty percent (50%)

b. Land Area – Twenty-five percent (25%)

c. Equal Sharing – Twenty-five percent (25%)

The share of each local government shall be released automatically,

without need of any further action, directly to the provincial, city,
municipality or barangay treasurer, and which shall not be subject to
any holdback that may be imposed by the National Government for
whatever purpose.
Each local government unit shall appropriate in its annual budget no
less than twenty percent (20%) of its annual internal revenue
allotment for development projects.

Real Property Tax

The Real Property Tax is one way of the local government to generate
revenues. It is imposed on real properties within the locality.

“WHEREAS, this country cannot progress steadily if its local

governments are not potent political subdivisions contributing their
proportionate shares to national progress;

WHEREAS, the past decade saw the passage of the Local Autonomy
Act, the Barrio Charter, the Decentralization Act and other pieces of
legislation intended to make local governments financially self-reliant
and stable;
WHEREAS, it is very apparent that in spite of all these laws, local
governments still find difficulty in providing adequate funds with which
to underwrite basic and essential public services within their respective
areas of responsibility;

WHEREAS, studies show that one of the main reasons behind this is the
failure of local governments to fully tap the income potentialities of the
real property tax;

WHEREAS, to remedy the situation, there is an urgent and compelling

need to upgrade assessment services by updating assessment
techniques, procedures and practices and thereby bring about
equitable distribution of the realty tax burden among real property
owners throughout the country;“

(Presidential Decree No. 464, Ferdinand E. Marcos)

Section 38. There shall be levied, assessed and collected in all

provinces, cities and municipalities an annual ad valorem tax on real
property, such as land, buildings, machinery and other improvements
affixed or attached to real property not hereinafter specifically
exempted.

Section 40. Exemptions from Real Property Tax. — The exemption shall
be as follows:

(a) Real property owned by the Republic of the Philippines or any of its
political subdivisions and any government-owned corporation so
exempt by its charter: Provided; however, that this exemption shall not
apply to real property of the above named entities the beneficial use of
which has been granted, for consideration or otherwise, to a taxable
person.

(b) Non-profit cemeteries or burial grounds.

(c) Charitable institutions, churches, personages or convents

appurtenant thereto, mosques, and all land, buildings, and
improvements actually, directly and exclusively used for religious or
charitable purposes.

(d) Real property in any one city or municipality belonging to a single

owner the entire assessed valuation of which is not in excess of five
hundred pesos: Provided, however, That the property so exempt shall
be assessed and records thereof kept as in other cases.
(e) Land acquired by grant, purchase or lease from the public domain
for conversion into dairy farms for a period of five years from the time
of such conversion; and machinery of a new and preferred industry as
certified by the Board of Investments used or operated for industrial,
agricultural, manufacturing or mining purposes, during the first three
years of the operation of the machinery.

(f) Perennial trees and plants of economic value, except where the land
upon which they grow is planted principally to such growth.

(g) Real property exempt under other laws.

Section 86. The proceeds of the real property tax, except as otherwise
provided in this Code, shall accrue to the province, city or municipality
where the property subject to the tax is situated and shall be applied
by the respective local government unit for its own use and benefit.

Revenue Generation and Resource Mobilization

Revenue Generation refers to the ways and means in which a

local government produces revenues. Resource Mobilization, on the
other hand, is how the local government manages its resources. It
generally means the efficient and effective deployment of resources
for the achievement of the local government’s goals and objectives.
Section 137 states that the power to impose tax, fee or charge or
to generate under the Local Government Code shall be exercised by
the Sanggunian of the local government unit concerned through an
appropriate ordinance. The two activities work hand in hand so as to
ensure the sustainability of the local government through the funds
generated from its resources.

Local Sources of Revenue and External Sources of Revenue

Local taxes may be imposed, as the Constitution grants, to each

local government unit, the power to create its own sources of revenues
and to levy taxes, fees, and charges which shall accrue to the local
governments (Article X, Section 5). With respect to national taxes, local
Government units shall have a just share, as determined by law, in the
national taxes which shall be automatically released to them (Article X,
Section 6).
Local Sources of Revenue

Real Property Tax - Under the 1991 LGC, provinces may tax real
property at a basic rate that is not greater than 1 percent of its
assessed value while cities and Metro Manila (MM) municipalities may
impose a tax not greater than 2 percent.

Local Business Tax - Under the 1991 LGC, municipalities and cities may
levy and collect a tax on businesses on the basis of their gross
receipts/sales at rates prescribed according to a graduated schedule.

Other Taxes, Charges and Fess - Provinces are empowered to impose a

tax on the transfer of ownership of real property, on franchises, on the
business of printing or publication, on sand and gravel extraction, on
professionals, on amusement places and on delivery vans.

External Sources of Revenue

External Sources of Revenue refers to the funds used by the Local

Government Unit but not generated within its cope of jurisdiction. It
includes the Internal Revenue Allotment, Share of Local Governments
in National Wealth and Taxes paid by Government Owned and
Controlled Corporations utilizing the resources of the locality
Strengths and Weaknesses of Intergovernmental Grants such
as the Internal Revenue Allotment (IRA)

In 1991, the Local Government Code of the Philippines was

passed, paving the way for the most sweeping fiscal decentralization
reform in the country. Its vision is to create financially stable and self-
reliant communities that would make efficient partners in the
attainment of national goals. Thus the local governments are granted
“the power to create their own source of revenue and levy taxes, fees
and charges” (Section 18).

At the same time, local governments were given a generous,

largely unconditional grant, in the nature of the Internal Revenue
Allotment (IRA). It is 40% of the total internal revenue taxes collected
three years before the current year (Section 284). It is huge by any
standard, and is estimated at close to P 300 Billion in 2010 alone.

One of the unwanted consequences of the IRA funding

mechanism is that local governments have become more dependent
over time. During the last three years (2008-2010), IRA shares of total
receipt for municipalities are 76.5%, 78.7%, and 78.6% respectively.
For provinces, the corresponding ratios are 73.6%, 79.7% and 74.5%
respectively.

For cities, having more sources of income, their dependency

ratio is relatively lower, but it is increasing in trend. In 2008, the ration
of IRA shares to total receipts was 43.3%; it rose to 46.2% in 2009, and
is estimated to increase to 49.6% in 2010.

One of the weaknesses of IRA is that its Allocation to

Government Units is based only on population, land area, and equal
sharing (Section 285). It does not include revenue-raising effort, thus
creating an adverse incentive.

Another is that it stipulates that no less than twenty percent

(20%) of the local government’s internal revenue allotment should be
appropriated for development projects (Section 287). Instead of
spending the amount for hard infrastructure (communal irrigation, local
roads, water projects, school buildings, etc.), more often than not, it is
frittered away for some low-priority projects such as beautification of
the plaza, construction of new municipal hall or extravagant town
gatherings, and so on.

The assurance of funds fro the national government resulted to

poor local revenue administration. The real property tax collection
efficiency of provinces and cities is on the decline. Scared of political
backlash, some politicians prefer to rely on the IRA rather than raise
local taxes. Some examples would be the failure to exercise the
authority of local government units to revise real property assessment
every three years or revise local tax codes.

One of the strengths of the IRA though is that it is safeguarded

from any lien or holdback that may be imposed by the National
Government. It cannot also diminish the share of local government
under the existing laws. The only limitation in the full disbursement of
the IRA to the Local Government Units is the provision that when the
National Government incurs unsustainable budget deficit, that an
adjustment to the IRA may be made by the President of the Philippines,
upon recommendation and consultation with the Secretaries of
Finance, Budget and Management, Interior and Local Government, and
with the presiding officers of both Houses of Congress. The adjustment,
however, should not result in the IRA being less than 30% of the
national internal revenue collections of the third fiscal year preceding
the current fiscal year.

Therefore, it is up to the local officials to spend the given

resources wisely on projects that will ensure progress in their locality,
and enable them to attain their fullest development, thus fulfill the
vision of the Local Government Code to create self-reliant and dynamic
communities.