lgu revenue & resources mobilisation tools
TRANSCRIPT
TABLE OF CONTENTS
CHAPTER 1. APPROACHES AND TOOLS IN RESOURCE MOBILIZATION 8-14
Dual Nature of LGUsResource Mobilization StrategiesWho Benefits and Who Pays Principle (with Figure)Service Delivery OptionsCriteria in Determining Service Delivery OptionsFive Steps for Effective LGU Revenue Generation and Resource Mobilization Strategy
A. Prepare the LGU Development Plan and Ensure an Efficient Local Tax Collection System
B. Determine Service Costs and StandardsC. Investigate Other Revenue Generation OptionsD. Investigate Resource Mobilization OpportunitiesE. Monitor, Evaluate and Review
Strategic Plan to Manage the Fiscal Gap (with Table)Distinct Classes of Potential Revenue SourcesLGU Resource Structure (with Table)Key Features of the Local Tax StructureCriteria of a Good Revenue StructureFundamental Principles in Local TaxationCentral Grants
A. Internal Revenue Allotment (IRA)IRA Allocation
B. Share from National WealthC. Special Shares of LGUs in National TaxesD. Other Components of LGU Assistance
LGU Impositions (with Table)
REAL PROPERTY TAX 15-26
Classification of Real PropertyStages in Real Property Tax Administration
A. Property Identification (with Table)B. Appraisal and AssessmentC. Records Conversion and Management (with unlabeled Table)D. Tax Collection and Enforcement
Approaches to Determine Property ValuesTypes of Real Property Impositions (with 2 Tables)
A. Basic RPTB. Special Education Fund TaxC. Idle Land Tax
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D. Special LevyExemptions from Paying of RPT/Land-Based TaxesOther Features of RPTRPT Formula (with Table) Dynamics of Real Property Taxation
A. Real Property Tax Collection Efficiency (CE) (with unlabeled box)B. Cost of Collection Ratio (CCR) (with unlabeled box)
Assessment Strategies (with Table)A. ReappraisalB. Explore Other Land-Based TaxesC. DecentralizeD. Land BankingE. ComputerizationF. Implement RPTAG. Improve Coordination Among Offices
Collection StrategiesA. Provide Legislative SupportB. Go After Delinquent TaxpayersC. Involve Barangay OfficialsD. Simplify Systems, Procedures, Forms for PaymentE. Educate and Inform TaxpayersF. Motivate Staff and Provide IncentivesG. Network with Other Offices/AgenciesH. Explore Cost Recovery Mechanisms (with Table)
Reform Agenda for LGUsProcedure for Enactment of Revenue OrdinancesLimitations on LGU's Taxing Powers
BUSINESS TAXES AND OTHER RELATED TAXES 26-41
Business and Other Related TaxesProvincial and City Impositions: Business-Related Taxes (with Table)
A. Tax on Business of Printing and PublicationB. Franchise TaxC. Tax on Sand, Gravel and Other Quarry ResourcesD. Amusement TaxE. Tax on Delivery Vans
Revenue Enhancement Measures for Business-Related TaxesA. Tax on Business of Printing and PublicationB. Franchise TaxC. Tax on Sand, Gravel and Other Quarry ResourcesD. Amusement TaxE. Tax on Delivery Vans
Other Local Taxes in Provinces and CitiesA. Tax on Transfer of Real Property
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B. Tax on ProfessionalsRevenue Enhancement Measures for Professional TaxesCity and Municipal Impositions: Business TaxBusiness Tax ComputationSurcharge and PenaltiesRate Structure (with Table)Rate Structure for New BusinessNeed for Proper ClassificationRevenue Enhancement Measures for Business Taxes
A. Counteract Under-Declaration of Gross Receipts/SalesB. Improved Tax Records ManagementC. Improved Internal ControlsD. Educate and Inform TaxpayersE. Enforce Collection Through Administrative ActionF. Strictly Enforce OrdinanceG. Improved LGU-Customer Relations
Other Local Taxes for Cities and Municipalities A. Community Tax on IndividualsB. Community Tax on Corporations
Revenue Enhancement Measures for Community TaxesOther Local Tax All LGUs May ImposeComputation of Sales Allocation Applying the Rule of Situs (with unlabeled Box)Codal Provisions to Enhance Revenue CollectionPresumptive Income Level Technique (with Box and Table)Civil Remedies for Collection of Revenues
NON TAX REVENUES: REGULATORY FEES AND SERVICE/USER CHARGES 41-47Coverage of LGU Impositions on Fees and ChargesRegulatory Fees (with Table) Other Regulatory FeesRestructuring Mayor's Permit Fees
A. Definition of Business Size (with unlabeled Table)B. Setting Permit Fees (with unlabeled Table) C. Sin Goods and ActivitiesD. Sanggunian-Determined Fixed RatesE. Acceleration ClauseF. Full RecoveryG. Elimination of Other FeesH. Administration and Delineation of ResponsibilitiesI. New Assessment
Service and User Charges (with Table)Setting Rates for ChargesCharges/Receipts from Local Economic Enterprises (LEEs) (with 2 Tables)Revenue Enhancement Measures for Fees and Charges from LEEs
A. Increasing Gross Revenues3
B. Price and Rate SettingC. Improving Collections Efficiency
LOANS AND OTHER FINANCING OPTIONS: PPP 48-57
Credit FinancingFinancing Schemes (with Table)Factors to Consider in Weighing Short-Term Over Term-FinancingPayment SchemesLimitations on LGU Debt ServicingLGU Credit Financing Options
A. Loans, Credits and Other Forms of IndebtednessB. Deferred Payment and Other Financial SchemesC. Inter-Local Government LoansD. Bonds and Other Long-Term Securities (with Table and Figure)E. Public-Private Sector Participation (PSP)
1. BOT Variants (with Table) BOT Approval Scheme (with unlabeled Table) Preparatory Work for BOT ArrangementsProject Development Facility
2. Service Contracts3. Management Contracts4. Lease or “Affermage”5. Concession Arrangements
Ensuring Contractor ComplianceCredit Finance ProgramRole of Government Financial Institutions (GFIs)Role of the Municipal Development Fund (MDF)LGU Credit Policy Framework (with Figure)
DEBT MANAGEMENT 57-62
Debt Management, General PrincipleOversight Framework for LGU Debt (with Table)Authorization Process for New Borrowings, General PrinciplesThe Cost of Debt, General PrinciplesFinancing RateThe Risks of Debt, General PrinciplesEvaluating Debt Proposals, General Principles
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CHAPTER 2. APPROACHES AND TOOLS IN PREPARING THE STATEMENT OF RECEIPT AND EXPENDITURES (SRE) 63-71
Accounting Policies Used in SRE PreparationA. Cash BasisB. Modified Accrual BasisC. Fund BalanceD. Chart of Accounts and Account Codes
SRE SystemSRE Reporting Framework (with 2 Figures) SRE Reports
A. Basic Financial StatementB. Supplemental Statements
1. Statement of Receipt Sources (SRS)2. Statement of Expenditures (SOE)3. Statement of Financial Operations of Economic Enterprises4. Statement of Indebtedness, Payments and Balances
C. Other Reports1. Quarterly Report on Real Property Tax Collections (QRRPTC) (with unlabeled Table)2. Quarterly Report on Collection of Business Taxes, Fees and Charges and Economic Enterprise (with unlabeled Table)
D. Other Records1. Record of Real Property Tax Collections2. Record of General Collections3. Record of Expenditures4. Record of Prior Year Accounts and Accounts Payable Payments5. Record of Debt Service
Additional Account/Sector ClassificationSRE Including Trust FundQuarterly Report on Real Property Assessments (QRRPA) and a Record ofReal Property Assessment by Property Classification (RRPA)
Deadline for Submission of ReportsCopy Distribution
CHAPTER 3. APPROACHES AND TOOLS IN CONDUCTING FINANCIAL ANALYSIS AND REVENUE FORECASTING 72-79
BLGF Fiscal Performance Indicators (with Table)Functions of Performance IndicatorsCurrent or Constant Values
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Single Case versus Comparative AnalysisStandardizing DataTrend AnalysisFinancial Capacity AnalysisAnalyzing LGU Income Trend and CompositionAnalyzing LGU Expenditure Trend and CompositionRevenue and Expenditure Projection and Forecasting Techniques
A. Average Annual Growth Rate (AAGR) MethodB. Linear Regression Technique
Linear Regression By HandFormulating Multi-Year Revenue EstimatesGuide Questions for Evaluating TargetsEstimating the Fiscal GapEstimating Prospective IRA Shares
Tables, Boxes and Figures
Tables1.1 Strategic Plan to Manage the Fiscal Gap1.2 LGU Resource Structure1.3 Comparative Summary of LGU Impositions1.4 Tax Map Preparation1.5 Summary of Land-Based Tools1.6 Distribution of Proceeds1.7 Sample Taxpayer's Index Card1.8 Strategies for Improving Assessment
and Collection of Land-Based Taxes 1.9 Business Related Taxes Allocated
To The Province and Cities1.10 Rates of Taxes by Business
Classification for Municipalities1.11 List of Possible PIL Indicators1.12 Common Regulatory Fees LGUs May Impose 1.13 Samples of Service and User Fees LGUs Collect1.14 Sample of Receipts/Charges from Economic Enterprises1.15 Analyzing the Financial
Performance of an Economic Enterprise1.16 Comparison Between Short Term and Term Financing1.17 Comparative Advantages of Bonds vs. Bank Loans1.18 BOT Variants and Their Primary Characteristics1.19 Oversight Framework for LGU Debt3.1. BLGF Performance Indicators
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Figure1. Municipal Bond Issuance Process2.1. SRE Reporting Framework2.2. Flowchart in the Preparation of Statement
of Receipts and Expenditures
Box1. Procedures in Applying the PIL Technique
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CHAPTER 1. APPROACHES AND TOOLS IN RESOURCE MOBILIZATION
Dual Nature of LGUs. Awareness of the dual nature of local governments leads to better understanding of resource mobilization opportunities. An LGU exercises its taxing and police powers as it imposes taxes and issues permits. On the other hand, in their proprietary and corporate capacity, LGUs can also establish and operate economic enterprises, charge for its services, and enter into contracts.
Resource Mobilization Strategies. There are various revenue mobilization strategies. They may carry different names but they normally revolve around the following: increasing available resources and expanding fund facilities by creating special capital funds, and earmarking budgetary appropriations to finance development projects.
•Expanding resource base by tapping potential partners from the private sector and international community;•Restructuring government budget in favor of poverty reduction programs. This involves giving priority to government expenditures across geographic, program or sectoral coverage to favor poverty-focused programs;•Increasing efficiency of technology and processes for resource management. The latter involves transparent fund management and efficient allocation and targeting;•Effective use of official development assistance by streamlining them for poverty reduction and economic development;•Expanding the tax base;•Exploring new revenue sources for LGUs, e.g., fees and charges in the use of natural resources;•Enhancing tax collection efforts;•Encouraging partnerships with people’s organizations;•Effective and efficient use of the countryside development fund or priority development assistance fund.
Who Benefits and Who Pays Principle. The issue for all LGUs reviewing their revenue generation and resource mobilization policies is determining who benefits from public goods and services and who should pay for these. The following diagram highlights the proportion of fees/charges versus general revenue funding. The more significant fees and charges are as a source of revenues, the more entrepreneurial the LGU. This also connotes that there exists several service delivery functions where the private sector could participate.
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Note: Line slopes are determined by the proportion of fees and charges levied versus the proportion sourced from general revenues (IRA) to fund the service.
Service Delivery Options. The way in which the LGU delivers services impacts on their revenue generation and resource mobilization choices. Service delivery options include the following:
1.Do nothing, leaving the provision of services to market forces (laissez faire);2.Regulate the activity, without directly providing the services (regulation);3.Contract out services to the private sector (outsourcing);4.Develop an in-house business to provide the service, or conduct as a joint venture in combination with other services or partners (business unit);5.Allow in-house teams to compete in the market place for the right to provide the service (competition); and6.Set up a public monopoly where no other organization is able to provide the service (LGU monopoly).
Criteria in Determining Service Delivery Options. Service delivery options can be sourced from a diverse range of revenue generation and resource mobilization strategies. Answers to the questions below will assist in deciding which revenue generation and resource mobilization strategy should be adopted. A 'yes' answer to the first three questions suggests that the service should be financed by IRA and other tax revenues, while affirmative answers to questions 4 to 7 imply that the LGU can just regulate the market. For services which are contestable, the LGU might establish a separate economic enterprise wholly or partly owned by the LGU.
1.Is there a statutory obligation?2.Is this deemed a core activity (required under the Code)?
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Individuals EXPENDITURE – WHO BENEFITS?
Community
From fees & charges
REVENUES – WHO PAYS?
Individuals
From general revenue sharing (IRA) and local property/ business taxes
Community
Slope for urban municipalitySlope for rural municipality
3.Do we have a community service obligation?4.Is the service contestable?5.Are there competitors in the market?6.Is there profit potential?7.Is there easy entry/exit to/from the market?8.Is there a community interest?9.Does the nature of the service suggest a particular provision?
Five Steps for Effective LGU Revenue Generation and Resource Mobilization Strategy
A. Prepare the LGU Development Plan and Ensure an Efficient Local Tax Collection System. This demands that the LGU has a clear idea of what it is trying to achieve for the community. A key question is “What is the LGU's governance strategy?” or specifically, “What are its vision, mission, goals and objective?”
B. Determine Service Costs and Standards. Determining the actual unit cost of service provision and the standard at which that service is provided enables the LGU to decide on the standard and the corresponding fees to charge for it. A key question is: “What is the unit cost of service deliver and the standard of service delivered?”
C. Investigate Other Revenue Generation Options. Once the LGU has determined the cost of service delivery, it is able to formulate its revenue generation policy and make long term forecasts about the sustainability of its services. This assists the LGU in presenting the business case to private investors about the likely returns on possible joint LGU-private sector initiatives. A key question is, “What opportunities exist for the LGU to levy fees and charges?”
D. Investigate Resource Mobilization Opportunities. This typically involves the LGU allowing private sector investors privileged, if not exclusive, access to resources which by nature has a locational advantage. Public-Private Partnership (PPP) should be actively pursued to enable LGUs to have access to sophisticated technology, cost effective design in construction and operation, and flexible financing, including the use of private capital. PPP could take the form of BOT, BOO, BLT, Joint Venture and other variants. A key question is: “What joint venture opportunities exist for the LGU to work with the private sector?”
E. Monitor, Evaluate and Review. Leading practice LGUs closely and periodically monitor their performance to ensure their goals are being achieved. This requires regularly searching for new ways of doing. A key question is, “What strategies are in place to monitor, evaluate and review service provision?”
Plan to Manage the Fiscal Strategic Gap1. The five steps above were outlined to assist LGUs determine revenue generation and resource mobilization policies that will enable them to manage the fiscal gap. A strategic plan can be mapped out using the matrix below:
1 Fiscal gap estimation is described in Appendix 3.3 .10
Table 1.1. Strategic Plan to Manage the Fiscal Gap
Steps Strategies to Implement Measures/ Indicators (to confirm success)
Accountable Official/s
Prepare the LGU Development Plan and Ensure an Efficient Local Tax Collection Determine Service Costs and StandardsInvesting Revenue Generating OptionsInvestigate Resource Mobilization OpportunitiesMonitor, Evaluate and Review
Distinct Classes of Potential Revenue Sources2. Resource mobilization tools are grouped into five distinct classes of potential revenue sources: (a) Land-Based tools-sources that rely on real property resources (land and improvements) of LGUs; (b) Community Activity-Based tools rely on the flow of economic activity within the territorial jurisdiction of the LGU; (c) Infrastructure-Based tools are based on the “user” or “beneficiary”-pay principle; that is, taxpayers pay for the use of or benefits derivable from public infrastructure. These tools are primarily cost recovery mechanisms for infrastructure projects, however, they can be converted to loan equivalents for purposes of raising credit finance for the projects; (d) Debt-Based tools are those that allow LGUs to secure debt finance for so-called “income-generating” projects and to make investments in financial instruments like securities, T-bills, and commercial papers; and (e) Revenue sharing tools are based on national government revenues shared with LGUs.
LGU Resource Structure. LGU resources come from two basic sources: (a) internal funds are internally generated or come from regular income; and (b) external funds come from the LGU's share in national revenues and foreign or local borrowings and grants.
Table 1.2. LGU Resource Structure
Local/Internal Sources
Tax RevenuesReal Property TaxBusiness TaxOther Tax
External Sources
Aids and AllotmentsInternal Revenue Allotment (IRA)Share in National WealthShare in Tobacco Excise Tax
2 Appendix 2.6 identifies examples for each of these revenue sources .11
Non-Tax RevenuesRegulatory FeesService/User ChargesReceipts from Economic EnterprisesOther Receipts
GrantsDomesticForeign
National Aid
Loans, Borrowings, and TransfersLoansTransfersInter-local transfers
Key Features of the Local Tax Structure. LGUs can choose the taxes, fees and charges to impose, set tax rates within prescribed ranges, and adjust tax rates every 5 years at a maximum of 10 percent. Other options include the imposition of penalties and charges, and the provision of tax relief, discounts and incentives.
Criteria of a Good Revenue Structure. The following criteria should be considered when considering a new tax package: (a) revenue adequacy and elasticity; (b) administrative efficiency; (c) equity; (d) economic efficiency; and (e) political acceptability. The five criteria may not necessary turn out positive in all types of taxes. LGUs should set their priorities and begin assessing taxes that are more advantageous to implement.
Fundamental Principles in Local Taxation. The LGC provides the following fundamental principles that govern the exercise of the taxing and other revenue-raising powers of LGUs:
Taxation shall be uniform in each local government unit;Taxes, fees, charges and other impositions shall:
○be equitable and based as far as practicable on the taxpayer’s ability to pay;○be levied and collected only for public purposes;○not be unjust, excessive, oppressive, or confiscatory;○not be contrary to law, public policy, national economic policy, or in restraint of trade;
The collection of taxes, fees, and charges and other impositions cannot be left to any private person;The revenue collected shall be used solely for the benefit of, and be subject to disposition by, the local government unit levying the tax, fee, charge or other imposition unless otherwise provided; andEach local government unit shall, as far as practicable, evolve a progressive system of taxation.
Central Grants. The provision of grants involves the transfer of funds from the National Governments to the LGUs with the idea of getting the LGUs to use the transfers for augmentation of funds and not as an exclusive financing source. Following are central grants:
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A. Internal Revenue Allotment (IRA). This is the share of all LGUs in the national internal revenue taxes of the third year preceding. The LGU share is based on a predetermined formula, i.e., 40 percent of gross internal revenue collections, which can be reduced to 30 percent if an “unmanageable” public sector deficit is declared. Internal revenue collections pertain to income tax, excise taxes, capital gains tax and other taxes collected by the Bureau of Internal Revenue (BIR).
IRA Allocation3. The IRA is vertically and horizontally allocated to provinces, cities, municipalities and barangays. (a) Vertical allocation among the LGU levels has been fixed by the formula: 23% each for provinces and cities, 34% for municipalities and 20% for barangays. (b) Horizontal allocation for provinces, cities and municipalities is based on three factors with corresponding weights of 50% for population; 25% for land area; and 25% for equal sharing. For barangays, a distinction has to be made if it has 100 or more inhabitants. All barangays with 100 inhabitants get an automatic P80,000 each. The remaining balance shall be proportionately allocated to all barangays on the basis of 60% population and 40% equal sharing. It is mandatory for LGUs to commit 20 percent of its IRA to a development fund.
It is expected that the IRA will change over time due to factors which can positively or negatively affect it, e.g., economic conditions, austerity programs, population census and the creation and conversion of new LGUs. LGUs should also look at these factors for purposes of anticipating trends in IRA shares.
B. Share from National Wealth. As part of entitlement to a just share in the development and utilization of national wealth, LGUs are granted an additional share of 40 percent of the gross collections derived by the National Government on mining taxes, royalties, forestry and fishery charges, among others; its share in the co-production, joint venture or production sharing agreement in the utilization and development of the national wealth within their jurisdiction; and administrative charges on activities just enumerated. The revenues shall be shared by the provinces at 20 percent, component city or municipality at 45 percent and barangays at 35 percent. LGUs are further mandated to utilize at least 8 percent of the proceeds derived from the development and utilization of geothermal, hydrothermal and other energy sources to lower the cost of electricity in the LGU where such source is located.
C. Special Shares of LGUs in National Taxes. LGUs shall be entitled to the following: (a) 15 percent of the excise tobacco tax from locally manufactured Virginia-type cigarettes, with the following sub-allocation: 30%-provincial; 40%-cities and municipalities; and 30%-cities and municipalities in the congressional district of a beneficiary province in consultation with the congressional district of the province. Mandatory share is at least 50 percent for barangay economic development projects; (b) 2 percent from the gross income tax paid by business enterprises within the economic zones; and (c) incremental collection from VAT, referring to the LGU share from the resulting increase every year from VAT
3 Steps in estimating prospective IRA shares are outlined in Appendix 3.3 .13
collections in the amount of 50 percent of the 20 percent of excess collections.
D. Other Components of LGU Assistance. The Allocation to Local Government Units (ALGU) adds assistance in other forms. Most of them are project-specific which include the (a) Local Government Empowerment Fund which shall be used to implement devolved activities supportive of major national government priority programs and projects implemented in depressed LGUS; (b) Local Officials Insurance Premium Fund; (c) Municipal Development Fund (MDF) or a special loan and conduit facility for LGU development projects; (d) Subsidy to the Metropolitan Manila Development Authority; and (e) Local Government Stabilization and Equalization Fund (LGSEF).
LGU Impositions. Following is a comparative summary of LGU impositions on their constituents:
Table 1.3. Comparative Summary of LGU Impositions
TYPE DEFINITION REMARKS EXAMPLE
Taxes Impositions under the taxing power of LGUs for the purpose of raising revenues
Allocation among LGUs of taxing powers defined by law
Property taxes
Business taxes
Permit Fees Charges made by law or ordinance for the regulation or inspection of business activities
Based on cost regulation of the activity
Mayor’s permit fees
Large cattle registration fees
Service Fees Fees collected for services rendered or conveniences furnished by the LGU
Amount commensurate to such services
Sanitary inspection fee
Secretary’s fees
Charges Imposition for the operation of public enterprises
Full cost recovery as basis for amount of charge to be imposed
Market fees
Corral fees
Slaughter fees
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REAL PROPERTY TAX
Classification of Real Property. Assessment on real property is based on the following classifications: residential, agricultural, commercial, industrial, mineral, timberland, and special. The power to classify lands rests with the Local Sanggunian in accordance with the LGU's zoning ordinance.
Stages in Real Property Tax Administration. These four stages are interdependent such that the failure or deficiency in one stage affects the other and eventually the collection of RPT:
A. Property Identification. The process of preparing an inventory of all existing real property, whether taxable or exempt, located within the LGU. Indispensable to the accomplishment of this function is the preparation of tax maps for ready updating from changes in the field.
Table 1.4. Tax Map Preparation
Pre-field Operations
Step 1
Step 2
Step 3
Step 4
Step 5
Step 6
Step 7
Prepare the Base Maps from engineering-controlled survey maps or other sources
Prepare the Field Appraisal and Assessment Sheet (FAAS)
Gather, classify, and complete property records
Do pre-field tie-up
Organize and train Tax Mapping Teams
Prepare and submit work plans
Conduct final briefing of Tax Mapping Teams
Field Operations
Step 1
Step 2
Step 3
Do actual survey and parcellary sketching
Conduct field interviews with property owners
Make field tie-up and gather data
Post-field Operations
Step 1 Prepare and finalize Index Maps
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Step 2
Step 3
Step 4
Prepare and finalize Section and Tax Maps
Assign Property Index Numbers (PINS)
Prepare and finalize Tax Mapping Control Rolls (TMCRS)
B. Appraisal and Assessment. Appraisal is the process of determining the value of the property as of a specific date for a specific purpose. Assessment is the process of applying the assessment level (a percentage) to the appraised/market value to determine the assessed value or taxable value of the property. The assessment level is seen as a factor of equalization because the level varies according to “actual use” (e.g., commercial, industrial).
C.Records Conversion and Management. This stage entails the creation, filing, maintenance and disposition of records necessary to levy and collect real property tax. Records conversion translates the actual field conditions to the following records, most of which are completed in pre-printed forms:
RECORDS PURPOSEField Appraisal & Assessment (FAAS) Data capture formatTax Declaration (TD) Legal format & record of assessmentOwnership Record Form (ORF) Alphabetical ownership file as cross-reference
for the numeric fileAssessment Roll (AR) Bases for the preparation of the RPTOPReal Property Tax Order Payment (RPTOP) Notice to property owners to satisfy the due
process requirementJournal of Assessments (JAT) Audit trail & preparation of reports
D. Tax Collection and Enforcement. This last phase consists of billing and record updating, collection and recording, collection of delinquent taxes, redemption of real property after sale; and financial reporting.
Approaches to Determine Property Values. Assessors use three internationally accepted approaches to determine property values: (i) market value approach-allows adjustments of values to consider time of sale, neighborhood quality, distance to amenities, location and other factors directly affecting values; (ii) income capitalization approach-applied to income producing properties; after comparing investment rates of return of similar type and class, new income is capitalized based on existing market conditions to approximate the value of the property under study; and (iii) cost approach-applicable for the valuation of buildings and other improvement, summing up all costs to produce a replica; combining costs with the accrued depreciation results in the current value of the property.
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Types of Real Property Impositions. Following is a summary of land-based taxes with their distribution schedule and description below:
Table 1.5. Summary of Land-Based Tools
Tax Base Provincial Tax Rate City Tax Rate
Basic Tax on Real Property
Tax for SEF
Tax on Idle Land
Special Levy
Assessed Value
Assessed Value
Assessed Value
Assessed Value
Maximum of 1%
1%
Not to exceed 5%
Not to exceed 60% of actual cost of projects
and improvement
Maximum of 2%
1%
Not to exceed 5%
Not to exceed 60% of actual cost of projects
and improvement
Table 1.6. Distribution of Proceeds
PROVINCIAL SHARING
Basic RPT ProvinceMunicipalityBarangay
35%40%25%
SEF Provincial School BoardMunicipal School Board
50%50%
Idle Land Tax Province 100%
Special Levy Province 100%
CITY SHARING
Basic RPT CityBarangay
70%30%
SEF City School Board 100%
Idle Land Tax City 100%
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Special Levy City 100%
A. Basic RPT. The basic real property tax covers land, buildings, machineries and other improvement on land. Collection from this tax accrues to the all-purpose general fund of the LGU.
B. Special Education Fund Tax. The SEF is an additional levy indexed on the real property to support public education. The Local School Board determines the allocation of funds for various needs of public schools.
C. Idle Land Tax. This is an annual levy on the assessed value of real property which remains idle. Idle land tax is punitive. The relatively high tax rate is to discourage land acquisition for speculative purposes and hopefully stimulate a more efficient and rational utilization of land.
D. Special Levy. These are imposed on lands within an LGU's territorial jurisdiction which are specially benefited by public works projects or improvements funded by the LGU. Exemptions are those discussed below and the remainder of the land portions which have been donated to the LGUs. The imposition provides LGUs with the opportunity to recover the cost of infrastructure projects. Proceeds accrue to the general fund of the LGU.
Exemptions from Paying RPT/Land-Based Taxes. Exemption claims must be filed before the local assessor within 30 days from the date of declaration of the real property, with substantive proof. The LGC provides the following exemptions: (a) real property of the Republic of the Philippines or any of its political subdivisions (b) all lands, buildings and improvements actually, directly and exclusively used for religious, charitable, or educational purposes; (c) all machineries and equipment used by local water districts and GOCCs engaged in the supply/generation and distribution/transmission of water/electric power, and those used for pollution control and environmental protection; and (d) all property owned by duly registered cooperatives under RA 6938.
Other Features of RPT. (a) tax discounts must be legislated before it is granted; (b) tax incentives may be given: 10% discount for prompt payment and up to 20% for advance payment; and (c) penalty rate for delinquent accounts of 2% a month or a fraction thereof, up to a maximum of 36 months or 72%.
RPT Formula. The LGC-provided tax rates and assessment levels on land are the maximum rates and therefore could be adjusted downwards through legislation. However, the determination of the market value is purely a technical function:
Real Property Tax Due = (MV x AL x TR) +/- Penalty/Discountswhere:MV Market Value is the value determined by the Assessor in accordance
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with the schedule of values approved by SanggunianAL Assessment Level used as an intermediary ratio to equalize the tax
burden as prescribed by the SanggunianTR Tax Rate adopted by the SanggunianPenalty or Discount
These either serve as a disincentive or incentive implemented depending on the timeliness of the payment
Assessed Value: Market Value x Assessment LevelTherefore: RPT due = (Assessed Value x Tax Rate) +/- penalty/discount
Dynamics of Real Property Taxation. The assessment levels and tax rates are not fixed rates. The Sanggunian may exercise its legislative fiat by manipulating the assessment level and/or tax rates while allowing the market value to seek its level, i.e., reflect actual conditions and be insulated from politics.
A. Real Property Tax Collection Efficiency (CE). This is the ratio of tax collections to tax collectible, an indicator that measures LGU performance in collecting real property tax.
B. Cost of Collection Ratio (CCR). Indicates the amount spent for every peso collected from property tax and reflects LGU performance in administering real property tax. These data can help LGUs decide whether to add more resources to the administration of real property tax or cut back its support to maximize revenue potential from RPT.
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CE = Current Year Collection from Basic & SEF Current Year Collectible (Basic & SEF)
Assessment Strategies. Below are strategies for LGUs to improve assessment and derive huge economic and financial gains from their land resources.
A. Re-appraisal. A general revision of real property assessment should be conducted every three years to keep the tax roll and values updated.
B. Explore Other Land-Based Taxes. Explore the potentials of idle land tax and special levy which remain largely untapped by LGUs.
C. Decentralize. Decentralizing the assessment function and day-to-day operations from the province to the municipality can be a possibility with the province retaining macro services.
D. Land Banking. Bank or reserve land through an integrated land control and management policy. Investment in land development provides direct revenues to the LGU in terms of profits upon disposition, enhanced property value and higher property tax base.
E. Computerization. Slowly move towards computerization by integrating all tax records using the real property assessment and collection record as basis. This will reduce the cost of revising the assessment and tax collection records periodically.
F. Implement RPTA. The RPTA program encompasses support to improve tax mapping records, records conversion, tax collection and data computerization.
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CCR 1: CCR for the current year's tax
100% of Assessor's Office + 20% of Treas.Office expensesCurrent year's collection (basic tax)
CCR 2: CCR for current and preceding years' taxes
100% of Assessor's Office + 20% of Treas.Office expensesTotal collections (current & preceding years)+penalties+ SEF
CCR 3: CCR for Municipalities (which only share from RPT)
100% of Municipal Assessor's Office + 20% of Treas.Office expensesTotal Share of Municipalities from RPTa/
_____________a/ 40% of Basic Tax + 50% of SEF (assuming a basic tax rate of 1% and additional levy of 1% for SEF)
G. Improve Coordination Among Offices. (i) Require the Building Official to provide the Assessor's Office with a list of all occupancy permits quarterly for proper adjustments to land classification and assessment levels; (ii) Adopt BIR zoning valuation system for transfer taxes; and (iii) Require notaries public to send a copy of Deeds of Sale to local treasurer.
Collection Strategies. Following are strategies to minimize delinquent taxes and ensure improved revenue collections without resorting to administrative and judicial actions, which in some cases, likewise proved to be very effective measures.
A. Provide Legislative Support. Pass the required legislative ordinances related to land-based taxes and support tax mobilization initiatives. Base the need and rate for idle land tax on real estate market conditions.
B. Go After Delinquent Taxpayers. Avail of administrative or judicial action; maintain a classified list of good and delinquent taxpayers; post list of delinquent taxpayers in public places; and prepare a tax index card for each taxpayer which should show the tax dues for each taxpayer for easy reference (refer to sample below) when this is reviewed each quarter to identify delinquent taxpayers that should be sent notices to.
C. Involve Barangay Officials. Institutionalize the practice of involving barangay officials in the distribution of tax bills.
D. Simplify Systems, Procedures, Forms for Payment. Simplify forms and cut down on number of signatories and processing time; set up and post for reference, a flowchart incorporating required documents and number of copies; and prepare an Annual Land-Based Revenue Mobilization Work Plan for integration in the Annual Revenue Plan of the LGU.
E. Educate and Inform Taxpayers. Set up a year-round collection drive through annual and quarterly issuance of notices which can be incorporated in a Tax Bill to be sent to taxpayers summarizing all taxes due; designing a single application form; intensive creative tax information and education drive through contests, door-to-door campaigns, airing jingles over radio, publishing in newspapers, etc; and through advance notice and bonded barangay collectors, conduct house-to-house collection campaigns particularly in far-off barangays.
F. Motivate Staff and Provide Incentives. In general, an incentive scheme should be set up; incentives to barangays may be given as a percentage of collections on top of the barangay share; sponsor barangay contests, exchange tax payments/receipts with raffle tickets; and train out-of-school youths to assist in tax mapping.
G. Network with Other Offices/Agencies. Tie-up with relevant offices (e.g., NBI, DTI, SSS, Mayor's Office, banks) to require RPT clearance before issuance of clearances, IDs, approval of business permits, transfer of real property ownership, or accepting property as collateral for loans.
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H. Explore Cost Recovery Mechanisms. Pricing of development permits and similar mechanisms to recover imputed cost impact of development of existing asset base.
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Table 1.7. Sample Taxpayer's Index Card
Ownership Record Form
Province/City: ________________ Municipality: ____________________Barangay: ________________Name of Owner: ________________ Address: ____________________Telephone No.: ________________Name ofAdministrator: ________________ Address: ____________________Telephone No.: ________________
PIN ARP NO.
PROPERTY LOCATION
AREA ASSESSED VALUE
DISPOSITION/ ACQUISITION TOTAL OF CURRENT ASSESSMENT
Transaction Code
Previous ARP Ref.
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Table 1.8. Strategies for Improving Assessment andCollection of Land-Based Taxes
LGU: ___________________________________
Revenue Enhancement Strategies
I.ASSESSMENT
PersonResponsible
AdministrativeCosts
ExpectedIncrementalRevenues
Revenue Enhancement Strategies
II.COLLECTIONS
PersonResponsible
AdministrativeCosts
ExpectedIncrementalRevenues
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Reform Agenda for LGUs4. Possible steps LGUs can take to improve local resource mobilization and delivery of services within the LGC framework:
•improving the collection of real property and business taxes;•increasing direct cost recovery through greater use of user fees to link payment with the provision of services and special levies on the real property tax for lands which have benefited from public works or improvements funded by the local government. Direct cost recovery would help break the vicious cycle of poor services, lack of additional funds, and further deterioration in services;•training key local staff through programs to enhance the technical capabilities of the local government staff in those areas where they will be taking on additional functions;•improving local planning procedures by developing basic information available to decision makers and better targeting of investments;•automating routine administration with greater use of computers.
Procedure for Enactment of Revenue Ordinances. The LGU should issue an appropriate ordinance to implement LGC provisions. The ordinance should define the subject covered by the impositions, rates of levy, frequency and procedure of collection, and the sanction in case of violations. Aside from establishing the legal basis, the approved ordinance gives authority to the local treasurers to start collecting revenues.
Following are the steps in enacting a valid ordinance: (1) Pre-publication and/or posting of proposal within ten days from date of filing, for three consecutive days in a newspaper of local circulation, or posted in four conspicuous places; (2) Written notices to interested or affected parties specifying the dates and venue of the public hearings, with attached copy of ordinance; (3) Public hearing which should have a ten-day lead from last day of publication or sending of written notices. LGUs should adequately prepare a package of responses and explanations to answer expected adverse comments. The Sanggunian is required to compile and document people's reactions including submissions which may serve as inputs to their decisions; (4) Once approved by the Sanggunian, the Ordinance shall be forwarded for signature by the LCE who shall, in case he decides to veto it, put his specific veto in writing and communicate this to the Sanggunian within fifteen days in case of a province and ten days in case of a municipality. The Sanggunian may override the veto by 2/3 votes; and (5) The LGU should publish the approved ordinance three consecutive times in a newspaper of local circulation within ten days after approval. Within three days after approval the Sanggunian Bayan/Panlungsod shall forward it to the Sangguniang Panlalawigan who shall act on the Ordinance within thirty days from receipt thereof. The Ordinance is deemed approved if no action is taken within said period.
Limitations on LGU's Taxing Powers. Local governments are prohibited from imposing the following taxes except as otherwise provided by the LGC: (a) income tax, except when levied on banks and other financial institutions; (b) documentary stamp tax; (c) taxes on
4 Supporting details for this agenda are enumerated in the Assessment Strategies and Collection Strategies described above.25
estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise provided in the Code; (d) customs duties, except wharfage on wharves constructed and maintained by the city; (e) goods passing through; (f) agricultural and aquatic products when sold by marginal farmers or fisherman; (g) enterprises certified by BOI as pioneer or non-pioneer for a period of six and four years, respectively, from the date of registration; (h) excise taxes on alcohol, tobacco, petroleum and miscellaneous products (e.g., fireworks, jewelry, perfume, etc.); (i) percentage of VAT on sales, barters or exchanges; (j) transportation contractors; (k) taxes on premiums by way of reinsurance or retrocession; (l) vehicle registration, except tricycles; (m) export products; (n) Countryside and Barangay Business Enterprises duly registered under RA 6810 and cooperatives duly registered under RA 6938 of the Cooperatives Code of the Philippines; and (o) National Government.
BUSINESS TAXES AND OTHER RELATED TAXES
Business and Other Related Taxes. As part of the taxing powers of LGUs, the LGC specifies a wide range of business and other related taxes that may be imposed.
Provincial and City Impositions: Business-Related Taxes. The following are business-related taxes exclusively granted to provinces and cities.
A. Tax on Business of Printing and Publication. This tax may be imposed on the business of printing and/or publication of books, calendars, posters, leaflets, handbills, certificates, receipts, pamphlets and other printed materials of similar nature.
B. Franchise Tax. A right or privilege, affected with public interest, conferred upon private persons or corporations, under such terms and conditions as the government and its political subdivisions may impose in the interest of public welfare, security and safety.
C. Tax on Sand, Gravel and Other Quarry Resources. The tax covers the extraction of ordinary stones, sand, gravel, earth and other quarry resources from public lands or beds of seas, lakes, rivers, streams, creeks and other public waters within the territorial jurisdiction of the LGU. Before extraction is allowed, a permit to quarry identifying the place and quantity of extraction, must be secured from the Provincial Governor.
D. Amusement Tax. A tax imposed on patrons of shows and entertainment activities. Exempted from payment are the holding of operas, dramas, recitals, printing and art exhibitions, flower shows, musical programs, literary and oratorical presentations, except pop rock and similar concerts.
E. Tax on Delivery Vans. The levy shall cover trucks, vans or any motor vehicles used by manufacturers, producers, wholesalers, dealers, or retailers within the province. The owners of these trucks shall be exempt from payment of the peddler's tax.
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Table 1.9. Business Related Taxes Allocated To The Province and Cities
Subject Tax Base Maximum Tax Rate Distribution of ProceedsProvinces Cities Provinces Cities
Business of Printing and Publications
-Gross Receipts based on preceding calendar year-Capital Investment for newly started business
50% of 1%
1/20 of 1%
75% of 1%
3/40 of 1%
100% 100%
Franchise -Gross Receipts based on preceding calendar year-Capital Investment for newly started business
50% of 1%
1/20 of 1%
75% of 1%
3/40 of 1%
100% 100%
Sand, Gravel & Other Quarry Resources
Fair Market Value of the extract at place of extract
10% 15% Prov.- 30%Mun.-30%Bgy.-40%
City-60%Bry.-40%
Amusement Places Paid Admission Fee 30% 30% Prov.-50%Mun.-50%
100%
Delivery Vans/ Trucks
Per Delivery Van and Truck
P500.00 P500.00 100% 100%
Revenue Enhancement Measures for Business-Related Taxes
A. Tax on Business of Printing and Publication. (a) Get periodic advisory from DepEd on the list of school texts and references; (b) Keep and maintain an updated listing of business and persons engaged in the printing or publication of books, cards, posters, leaflets, handbills, certificates, receipts, pamphlets and others of similar nature; and (c) Provide for accounting and bookkeeping guidelines.
B. Franchise Tax. (a) Require submission of sworn statements of gross sales/receipts; (b) Keep and maintain an updated list of businesses enjoying a franchise; (c ) Use the Presumptive Income Level (PIL) in assessing tax liabilities; and (d) Require mandatory reporting of receipts by territorial jurisdiction.
C. Tax on Sand, Gravel and Other Quarry Resources. (a) Promulgate rate and regulations on the taking, removal, and disposition of sand, gravel, and other quarry products; and (b) Closely monitor compliance with rules and regulations in close coordination with NGOs, POs and the public in general.
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D. Amusement Tax. (a) Assign as checkers in movie houses college students doing practicum or, as in the case of Olongapo City, disabled members of the community; (b) Use registered tickets; (c) Require centralized procurement/printing of tickets through the Local Treasurer; (d) Rotate checkers to avoid collusion with business operators; (e) Conduct surprise inspections; (f) Impose heavy penalties and closure for delinquencies; (g) Use the PIL approach to establish gross receipts from admission fees; and (h) Monitor trend per theater.
E. Tax on Delivery Vans. (a) In coordination with the local LTO, require tax clearance for registration/renewal or registration for deliver tucks and vans; (b) Require all deliveries to be covered by cash or charge invoice; and (c) Establish checkpoints with the assistance of barangay officials.
Other Local Taxes in Provinces and Cities
A. Tax on Transfer of Real Property. Tax imposed on the sale, donation, barter or any mode of transferring ownership or title of real property. The maximum rate is 50% of 1% of the total consideration in the acquisition of the property or fair market value based on the values enacted by the Sanggunian for property tax purpose, whichever is higher. Payment of the tax shall be within sixty days from the date of the execution of the deed or from the date of the property owner's death. Exemption is granted to the sale, transfer, or other disposition of real property pursuant to the Comprehensive Agrarian Reform Law. A revenue enhancement measure could be for LGUs to enforce the codal provision requiring the Registrar of Deeds and the notaries public to furnish the Assessor with all copies of contracts related to real property.
B. Tax on Professionals. The tax covers persons engaged in the practice of their professions requiring government examination, except when practiced exclusively as a government employee. This shall not exceed three hundred pesos (P300.00). Professional taxes shall be paid on or before January 31 in the province where the professional practices his profession or where he maintains his principal office. Payment of this tax entitles the professional to practice his profession in any part of the country.
Revenue Enhancement Measures for Professional Taxes. (a) Enact an ordinance imposing this tax; (b) Post notices in conspicuous places on who are liable to pay and the due dates; (c) Remind employers of business establishments in the area that professional taxes should be paid before employment and annually thereafter; (d) Monitor enforcement of the requirement for any person subject to pay the tax with the number of official receipts issued to him; (e) Obtain listing of members of professional association in the area for billing purposes; (f) Request through leagues and the Professional Regulatory Board to require proof of tax payment before registration or renewal of registration; and (g) Tap barangays as monitors for reporting list of residents engaged in professional practice.
City and Municipal Impositions: Business Tax. This is an annual tax specifically allocated to cities and municipalities imposed on the act of doing business within the LGU.
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This is based on gross sales or gross receipts of the preceding year. For old businesses, unless otherwise specified, business taxes shall accrue on the first day of January each year; for new businesses, these shall accrue on the first day of the next quarter following the effectivity of the ordinance imposing such levies. Business taxes may be paid within the first twenty days of January of each subsequent quarter, as the case may be. The Sanggunian may also extend the period of payment for a period not exceeding six (6) months for justifiable reasons or allow payment in four equal monthly installments.
Business Tax Computation. Step 1: Classify the business based on the business clusters provided in the LGC; Step 2: Determine the gross receipts based on the declaration by the owner; and Step 3: Locate the tax based on the schedule of graduated fixed rates if the gross receipts has a pre-determined bracket, or compute the tax due on the basis of standard tax formula: Tax due = tax base X tax rate +/- penalty/discounts.
Surcharge and Penalties. A surcharge not exceeding twenty five percent (25%) may be imposed on delinquent taxpayers. The LGU may also increase the tax liability through 2% per month or a fraction thereof, of penalty/interest on the unpaid amount for a maximum of 36 months equivalent to 72%.
Rate Structure. The rate is structured as a graduated fixed tax with each business classification falling under a tax schedule based on accumulated gross receipt. Each bracket in the tax schedule has an equivalent fixed tax amount. After reaching the highest level in the tax schedule, the tax becomes a percentage tax.
Table 1.10. Rates of Taxes by Business Classification for Municipalities(Note: Cities are allowed to impose rates 50% higher than that allowed municipalities)
CLASSIFICATION AND TAX RATE AMOUNT
a)Manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers and compounders of liquors, distilled spirits, wines and any other articles of commerce of whatever kind or nature with gross sales or receipts for the preceding calendar year in the amount of:
Less than P10,000.00P10,000.00 or more but less than P15,000.00P15,000.00 or more but less than P20,000.00P20,000.00 or more but less than P30,000.00P30,000.00 or more but less than P40,000.00P40,000.00 or more but less than P50,000.00P50,000.00 or more but less than P75,000.00P75,000.00 or more but less than P100,000.00P100,000.00 or more but less than P150,000.00P150,000.00 or more but less than P200,000.00P200,000.00 or more but less than P300,000.00
P165.00P220.00P302.00P440.00P660.00P825.00
P1,320.00P1,650.00P2,200.00P2,750.00P3,850.00
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P300,000.00 or more but less than P500,000.00P500,000.00 or more but less than P750,000.00P750,000.00 or more but less than P1,000,000.00P1,000,000.00 or more but less than P2,000,000.00P2,000,000.00 or more but less than P3,000,000.00P3,000,000.00 or more but less than P4,000,000.00P4,000,000.00 or more but less than P5,000,000.00P5,000,000.00 or more but less than P6,500,000.00P6,500,000.00 or more
P5,500.00P1,320.00P8,000.00
P10,000.00P13,750.00P16,500.00P19,800.00P23,100.00P24,375.00
at a rate not exceeding thirty-seven and a half
percent (37.5%) of one percent (1%)
b)On wholesalers, distributors, or dealers in any article of commerce of whatever kind or nature with gross sales or receipts for the preceding calendar year in the amount of:
Less than P1,000.00P1,000.00 or more but less than P2,000.00P2,000.00 or more but less than P3,000.00P3,000.00 or more but less than P4,000.00P4,000.00 or more but less than P5,000.00P5,000.00 or more but less than P6,000.00P6,000.00 or more but less than P7,000.00P7,000.00 or more but less than P8,000.00P8,000.00 or more but less than P10,000.00P10,000.00 or more but less than P15,000.00P15,000.00 or more but less than P20,000.00P20,000.00 or more but less than P30,000.00P30,000.00 or more but less than P40,000.00P40,000.00 or more but less than P50,000.00P50,000.00 or more but less than P75,000.00P75,000.00 or more but less than P100,000.00P100,000.00 or more but less than P150,000.00P150,000.00 or more but less than P200,000.00P200,000.00 or more but less than P300,000.00P300,000.00 or more but less than P500,000.00P500,000.00 or more but less than P750,000.00P750,000.00 or more but less than P1,000,000.00P1,000,000.00 or more but less than P2,000,000.00P2,000,000.00 or more
P18.00P33.00P50.00P72.00
P100.00P121.00P143.00P165.00P187.00P220.00P275.00P330.00P440.00P660.00P990.00
P1,200.00P1,870.00P2,420.00P3,300.00P4,400.00P6,600.00P8,800.00
P10,000.00at a rate not exceeding fifty
percent (50%) of one percent (1%)
c)On exporters, manufacturers, millers, producers, wholesalers, distributors, dealers or retailers of essential commodities enumerated below:
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a)Rice and cornb)Wheat or cassava, flour, meat, dairy products, locally manufactured processed or preserved food, sugar, salt, and other agricultural, marine, and fresh water products, whether in their original state or notc)Cooking oil and cooking gasd)Laundry soap, detergents and medicinee)Agricultural implements, equipment, and post harvest facilities, fertilizers, pesticides, insecticides or other farm outputf)Poultry feeds, and other animal feedsg)School suppliesh)Cement
at a rate not exceeding one-half percent (1/2%) of the
prescribed rates under sections (a0 and (b) and (d)
of this table
a)On retailers with gross sales or receipts for the preceding calendar year in the amount of:
P400,000.00 or lessMore than P400,000.00
2%1%
b)On retailers and other independent contractors with gross sales or receipts for the preceding calendar year in the amount of:
Less than P5,000.00P5,000.00 or more but less than P10,000.00P10,000.00 or more but less than P15,000.00P15,000.00 or more but less than P20,000.00P20,000.00 or more but less than P30,000.00P30,000.00 or more but less than P40,000.00P40,000.00 or more but less than P50,000.00P50,000.00 or more but less than P75,000.00P75,000.00 or more but less than P100,000.00P100,000.00 or more but less than P150,000.00P150,000.00 or more but less than P200,000.00P200,000.00 or more but less than P250,000.00P250,000.00 or more but less than P300,000.00P300,000.00 or more but less than P400,000.00P400,000.00 or more but less than P500,000.00P500,000.00 or more but less than P750,000.00P750,000.00 or more but less than P1,000,000.00P1,000,000.00 or more but less than P2,000,000.00P2,000,000.00 or more
P27.50P61.60
P104.50P165.00P275.00P385.00P550.00P880.00
P1,320.00P1,980.00P2,640.00P3,630.00P4,620.00P6,160.00P8,250.00P9,250.00
P10,250.00P11,500.00
at a rate not exceeding fifty percent (50%) of one
percent (1%)
c)On banks and other financial institutions with gross receipts of the preceding calendar year derived from interest, commissions, and discounts from lending activities, income from financing, leasing, dividends, rentals on property and profit from exchange or
at a rate not exceeding fifty percent (50%) of one
percent (1%)
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sale of property, and insurance premium
d)On peddlers engaged in the sale of any merchandise of article or commerce
at a rate not exceeding fifty percent (50%) of one
percent (1%)
On any other business not otherwise specified in the preceding paragraphs which the Sanggunian may deem proper to tax: provided that on any business subject to the excise value-added or percentage under the National Internal Revenue Code, as amended, the rate shall not exceed 2% of gross sales or receipts of the preceding calendar year.
Rate Structure for New Business. New businesses have another tax base and rate structure. With capital investment of new businesses as base, the maximum rate for cities is 3/40 of 1 percent, while that for municipalities is 1/20 of 1 percent.
Need for Proper Classification. The most critical role of the evaluator is classifying business under a specified classification, as misclassification can mean excessive exaction for the taxpayer or forgone revenues for the government. Another challenge is sorting through business lines when an owner operates several establishments and several business lines.5
Revenue Enhancement Measures for Business Taxes
A. Counteract Under-Declaration of Gross Receipts/Sales. (a) Compare BIR gross sales date versus declared gross sales; (b) Local Treasurer examines books of accounts and pertinent records of businessmen; (c) Allow for fixed percentage increase over the taxpayer's prior year declaration; and (d) Use Presumptive Income Levels (PILs) in validating gross sales declared by the taxpayers.
B. Improved Tax Records Management. (a) Conduct business tax mapping and establish revenue data bank; (b) Conduct regular census and listing of taxpayers; and (c) Prepare business firms'/taxpayers' lists.
C. Improved Internal Controls. Install an internal control system (ICS) suited to the LGU's requirements and capabilities. This can evolve from either the COA Model or the LGC-UPCPA/LRM-NEDA Model.
D. Educate and Inform Taxpayers. Wage a continuing tax information and education campaign (TIEC) to overcome taxpayer resistance and make citizens more tax conscious. Direct campaign can come in many forms: flyers, leaflets, bulletin boards, media announcements, town criers, etc; indirectly, through popularity contests and school-organized activities such as poster or essay-writing contests.
5 Module IV of the Revised Resource Mobilization Manual, pp. 17-20, discusses examples of cases related to business classification for which the Department of Finance has rendered an opinion.
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E. Enforce Collection Through Administrative Action. Local Treasurers will need full support from local leadership to enforce collection of delinquencies through distraint of personal property and by levy upon real property.
F. Strictly Enforce Ordinance. Closure of business establishments, auction of delinquent real property, inspection of book of accounts and other punitive actions against evaders should be done regularly.
G. Improved LGU-Customer Relations. Taxpayers can be surveyed on their expectations in terms of administrative ease and processing time when they pay taxes. LGUs can also closely monitor and maintain cordial relationships with large taxpayers through “Thank You” cards.
Other Local Taxes for Cities and Municipalities
A. Community Tax on Individuals. Individuals cover inhabitants of the Philippines 18 years old and above who: (a) are regularly employed on a wage or salary bases for at least 30 consecutive working days; or (b) engaged in business or occupation; (c) owns real property with an aggregate assessed value of P1,000,000 or more, or (d) are required to file income tax return. Diplomatic and consular representatives and transient visitors (with less than three months stay) are exempted. Basic Community Tax is P5.00 plus P1.00 per P1,000.00 income from business, profession or property, but should not exceed P5,000.00. In case of husband and wife, the additional tax shall be based upon the total property owned by them and the gross earnings derived by them. This should be paid in the LGU where the individual's residence is located because payment in other LGUs does not extinguish this liability.
B. Community Tax on Corporations. A tax imposed on corporations, no matter how created or organized, whether domestic or resident foreign engaged in doing business in the Philippines, except those duly registered under R.A. 6180 and 6938 per DOF opinion on May 3, 1983. Basic Community tax is P500.00 plus additional P2.00 for every P5,000.00 worth of real property in the Philippines and P2.00 for every P5,000.00 of gross receipts or earnings. The community tax shall be paid only once in the LGU where the principal office is located.
Community taxes shall accrue on January 1st of each year and will become payable without penalty until February 28. Proceeds collected by the City or Municipal Treasurer shall entirely accrue to the city or municipality while proceeds collected by the Barangay Treasurer shall be shared by the city/municipality and barangay at 50 percent each.
Revenue Enhancement Measures for Community Taxes. (a) Require individuals or juridical persons to file a community tax payment certification; (b) Request proof of payment of Community Tax prior to transaction with LGU; (c) Deputize the Barangay Treasurer to collect the community tax payable by individual taxpayers in their respective jurisdiction; (d) Obtain from the Assessor a list of worth of real properties owned by juridical persons for purposes of assessing and collecting the additional tax based on assessed values of real
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property; (e) Require evidence of gross receipts or earnings derived from business during the preceding year by juridical persons for purposes of collecting additional tax; and (f) Request other government agencies (BIR, GSIS, SSS, LTO, etc.) to have clients show proof of payment of community tax before servicing them.
Other Local Tax All LGUs May Impose. The LGC provides that LGUs may impose other taxes on any other tax bases or subject not otherwise specifically enumerated in the Code or taxed under the provisions of the National Internal Revenue Code, provided that the taxes, fees or charges shall not be unjust, excessive, oppressive or contrary to national policy; the ordinance levying such taxes, fees and charges shall be subjected to a public hearing; and that the tax is not part of the common limitations which LGUs are prohibited to impose.
Computation of Sales Allocation Applying the Rule of Situs6. There are complex businesses which run nationwide operations. While key decisions are taken from the head or principal office, production, sales, shipment and other key activities may be scattered in different parts of the country. For purposes of giving LGUs their rightful share of the business tax, the rule of situs allocates the gross sale in accordance with the rule provided in Section 250 of the LGC.
Businesses involved: manufacturers, assemblers, repackers, brewers, distillers, rectifiers and compounders of liquor, distilled spirits and wines, millers, producers, wholesalers, distributors, dealers, contractors, banks and financial institutions and other businesses maintaining or operating branch or sales outlet making the sale or transaction.The tax shall accrue to the LGU where the branch is located.Situation 1
In areas where no such branch is located, the sales shall be recorded in the principal office. For purposes of business tax, the following allocation shall apply:•30% to the city or municipality where the principal office is located; and•70% to the city or municipality where the factory, project office or plantation is located.Situation 2In cases where plantation and factory exist and the two are located in different LGUs:•60% of the 70% share shall be allocated to the city or municipality where the factory is located; and•the remaining 40% of the 70% shall be allocated to the LGU where the plantation is located.Situation 3Where there are two or more factories or plantations, their respective allocations shall be prorated to the cities or municipalities where they are located on the basis of production during the period when such tax is due.
Codal Provisions to Enhance Revenue Collection. The LGC provides the following
6 Two cases with sample computations are provided on the application of the situs rule in Module IV of the Revised Resource Mobilization Manual, pp.31-33.
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opportunities:
LGUs may impose taxes on forest products and forest concessions;LGUs may now impose income tax on banks and other financial institutions. This is different from the business tax, which is a tax for the business of operating a bank or financial institution;LGUs may impose income taxes on non-bank intermediaries such as lending investors, pawnshops, stock brokers, etc.;LGUs may explore a more equitable distribution of the situs rule;Tax ceilings on the graduated fixed tax on business have been increased;LGUs are authorized to adjust tax rates but not oftener than once every five years provided such adjustment does not exceed 10 percent of the rate fixed therein;Tax exemption privileges of certain GOCCs have been withdrawn;Withdrawal of all tax exemptions or incentives except on local water districts, cooperatives, non-stock and non-profit hospitals and educational institutions;Increase in interest of unpaid taxes, fees and charges from 14% per annum to 2% per month up to 36 months;Examination of books of accounts once every tax period;Availability of BIR records to the Local Treasurer;The Local Treasurer may deputize the Barangay Treasurer in the collection of taxes, fees and charges;Stricter penalty on Treasurers for failure to issue and execute warrant of distraint or levy;Provision of local government's lien not only on property or rights subject of lien but also upon property used in business, occupation, practice of profession or calling, or expert privilege with respect to which the lien is imposed; and LGUs should explore interpretations of their taxing powers, such as in the following industries: agricultural and aquatic products, sugar centrals, transportation contractors, and vehicles that are taxable.
Presumptive Income Level (PIL) Technique. The PIL makes use of easily verifiable indicators as a means for determining gross sales for purposes of computing the tax due. Major considerations in identifying possible indicators are for these to be quantifiable, verifiable, common for the business and acceptable to both the LGU and taxpayers.
Civil Remedies for Collection of Revenues7. Either of these remedies or both may be pursued concurrently or simultaneously at the discretion of the Local Treasurer: (a) administrative action through distraint of goods, chattels or effects and other personal property of whatever character, including stocks and other securities, debts, credits, bank account, and interest in and rights to personal property and through levy upon real property and interest in or rights to real property; and (b) judicial action.
7 Annex D, Module IV of the Revised Resource Mobilization Course Book, pp.63-69 outlines the procedures and details using each of these remedies.
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Box 1. Procedures in Applying the PIL Technique
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Step 1. Identify a type of business in the locality or simply identify the business in your community where you have difficulty determining actual or realistic annual gross sales.
Step 2. Identify possible indicators which must be readily verifiable and realistic, for each type of business. (See list of possible PIL Indicators below).
Step 3. Categorize according to sale or operation. Group the businesses into categories that will help determine uniform minimum acceptable declaration for each group. The classification can be based on physical size of operations such as floor area, number of employees, level of operations, etc. For example, general goods establishment may be grouped according to the following:
General Goods StoreClass A Sari-sari storeClass B Mini-groceryClass C GroceryClass D Supermarket
Step 4. Prepare a presumptive assessment of average taxable income for each registered business type in the locality.
a)Provide for a realistic percentage of actual daily operations. For example, using number of table as indicator for a restaurant, provide a reasonable customer occupancy rate per table, e.g., 50% daily occupancy rate or 50% occupancy rate x 2 turnovers daily (e.g., lunch and dinner). A sample table is found under Step 5.
b)Determine the current cost of service/goods being provided. For example, assume that each customer would probably order a minimum of P50.00 worth of food, or that every table occupied would generate an average P150.00 in sales.
c)Identify how many days in a year the business is likely to be in operation. A restaurant is most likely to operate 6 days a week or 324 days in a year.
Step 5. Compute the estimated gross sales based on identified indicators.
a)Do a sample computation for actual business in the area.b)Compare the result of your PIL table with actual taxes paid for the preceding year.
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Actual tax payments made by majority of business taxpayers will most likely be below the PIL computation. Often, actual tax payments should have been at least 50 percent more using PIL.
Sample Presumptive Assessment Sample Minimum Annual Gross
SalesType of
BusinessIndicator Assessment Estimates
Apartment No. of units No of units x monthly rent
4 units x P3,000/unit x 12 months = P144,000
Coffee Shop No. of tables No. of tables x estimated sales per table x occupancy rate
10 tables x P150 x 50% x 324 days = P243,000
Movie House No. of seats No. of seats x admission rate x occupancy rate per screening x no. of screening
200 seats x P15.00 x 30% x 3 screenings x 360 days = P972,000
Step 6. Negotiate the taxable income with business taxpayers.
•Prior to institutionalizing the use of PIL technique, it would be advisable to hold a meeting with the business sector and agree on the indicators for their sectors and the assumptions to be used for the computation. Note that in the above computation, very low rates and assumptions are used, hence, actual gross sales should be a lot higher. It is left to the discretion of the LGU taxing authorities to determine the rates for computing the least acceptable gross sales.
•For ease in assessment, a Minimum Acceptable Gross Sales Declaration Table may be prepared based on business classification and scale of operation. Any business in a given category cannot pay a business tax lower than the pre-determined minimum amount of gross sales for the category. This of course does not mean that only the minimum amount needs to be paid.
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Sample Table of Minimum Gross SalesBusiness Minimum Gross Sales
Sari-sari storeMini-groceryGrocerySupermarket
P100,000.00P250,000.00P400,000.00P750,000.00
Step 7. Compare the result of Steps 5 and 6 with the taxpayers' sworn declaration and tax payment made.
It will be very hard for the business taxpayer to argue against the computations for determining the least acceptable gross sales and will most likely settle for the compromise business income rather than have his book of accounts examined.
Step 8. Levy the appropriate business tax on the compromise business income.
Failure or refusal of taxpayers to settle their tax payments can be ground for revocation or non-renewal of their business permit.
It is suggested that the base amount be regularly updated every three years and base data from businesses regularly monitored, keeping in mind price increases, possible expansion of operations, increase in floor space, additional machinery, etc. Passing a local ordinance adopting the use of the PIL technique in conjunction with other strategies is also recommended.
Table 1.11. List of Possible PIL Indicators
Type / Nature Possible IndicatorsApartment Lessor Number of doorsBanana Producer Number of hectaresBakeshop Average number of fastest item sold as a
percentage of totalBakery Number of ovensBalut Making Number of ovensBanana Producer Number of hectaresBarber Shop Number of chairs
Number of barbersBeauty Parlor Number of seats
Number of beauticiansBowling Alley Number of lanesButchers (Individual) Slaughterhouse records
Average number of heads soldBuy and Sell Truckloads per weekCable T.V. Number of subscribersCanteen in the factory Number of workersCatering Service Average number of receptions serviceChicken Retailers Average number of chicken soldCoconut Wires Number of distilleriesConstruction Supply Number of cement bags sold per day as a
percentage of gross salesFloor spaceNumber of employeesEstimated inventory turnover
Dental Clinic Estimated no. of patientsDress Shop/Tailoring Number of sewing machinesDrug Stores Estimated sales from fastest moving items as a
percentage of total salesGasoline Dealers Estimated taxable items sold for non-petroleum
products only, e.g., batteries, tires, etc.Estimated sales from service rendered (repair, change oil, etc.)
Grocery Store Inventory turnoverNumber of employeesFloor space
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Factory Number of production machinesFinancial Institutions Financial StatementsFish Dealer Average number of boxes of fish soldFishpond (bangus) Number of hectares
Number of fish pensFuneral Parlor Number of deaths recorded with the Local Civil
RegistrarNumber of reception rooms
Garments Factory Number of employeesNumber of sewing machines
General Merchandise Average daily salesNumber of employeesFloor spaceInventory turnover
Grains dealer Average number of sacks sold per itemHardware Estimated daily sales of top 5 moving items (e.g.,
cement, plywood, etc.) as a percentage of total sales
Hotel Number of roomsLease of commercial units Number of units
Floor areaLine Production Number of tons harvestedMedical Clinic Estimated number of patientsOil Mill Number of millsOnion Trader Number of truckload per weekPoultry Number of chicken coopsPawnshops Number of employeesPiggery Number of pensPlanters (Vegetables, fruits, etc.) Number of hectaresReal estate lessor Lease contract termsResort Number of cottages/roomsRestaurant Number of tables
Floor areaNumber of employees
Resorts Number of swimming poolsNumber of cottages
Rice and Corn retailer Estimated no. of sacks soldRice Mill Milling capacity
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Saltbeds Number of saltbedsSari-sari store Estimated sales from fastest moving items
Inventory turnoverFloor area
Supermarket Number of check-out lans/cash registersInventory turnoverFloor areaNumber of employees
Telephone company Number of subscribersTextile mills Number of machineriesVehicle rental Number of vehicle unitsVideo shop Number of racks
Floor spaceWelding shop Number of welders
NON TAX REVENUES: REGULATORY FEES AND SERVICE/USER CHARGES
Coverage of LGU Impositions on Fees and Charges. (a) Municipalities - fees and charges on business and occupation and on the practice of any profession or calling (except on professionals reserved to the province); (b) Cities - fees and charges that the province and the municipalities are authorized to impose or collect; and (c) Cities and Municipalities – fees for sealing and licensing of weights and measures, and for the grant of fishery privileges over municipal waters.
Regulatory Fees. A charge fixed by law or ordinance for the regulation or inspection of a business or activity; an exaction in the exercise of the LGU's police power for the general welfare of the people and is intended to cover the cost of regulation, inspection and surveillance. Even if the revenue side of the fees is secondary, the LGUs must see to it that resultant costs, e.g., costs of issuing the permit or license plus inspection costs, are fully recovered.
Table 1.12. Common Regulatory Fees LGUs May Impose
IMPOSITION BASESBusiness permit Cost of issuing permit and regulating the activity or
privilege, and size and type of businessBuilding permit Cost of issuing the permit and surveillance based on the
National Building CodePlumbing permit Cost of issuing the permit and inspection based on the
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National Building CodeElectrical permit Cost of issuing the permit and inspection based on the
National Building CodeOccupancy permit Cost of issuing the permit and inspectionMechanical permit Cost of issuing the permit and inspection based on the
National Building CodeDemolition permit Cost of issuing the permit and inspection Dog license fees Cost of issuingRegistration fees on fishing boats, tricycles and caretelas or calesas
Cost of issuing the permit and inspection, and type of conveyance
Holding benefits permit Cost of issuing the permit and surveillancePolice clearance Cost of issuing and purpose for securing clearanceImpact fees and exactions Cost of issuing permit and inspection and negotiated or
formula-based payments made by the developer to cover “damages” to the existing system of infrastructure or provide facilities at private expense
Development permit Cost of issuing the permit, surveillance, type of activity based on cost-benefit analysis (i.e., benefit conferred on the developer which cannot be reflected in the typical charge incurred for permit issuance
Large cattle registration and transfer fees
Cost of registration, inspection, and type of cattle
Excavation fees Cost of issuing the permit and type and area to be excavated and surveillance based on length of time of excavation
Permit for cockfighting Cost of issuing the permit, inspection and type of cockfights held
Permit fee for cockpit owners, operators, licensees and other cockpit personnel
Cost of issuing the permit and surveillance based on type of personnel
Permit fee on film-making Cost of issuing the permit, surveillance, and type of film and number of film-making days
Permit fee on parades Cost of issuing permit and surveillancePermit fee for agricultural machinery and equipment
Cost of issuing permit and type of machinery and equipment
Permit fee for zoning and locational clearance
Cost of issuing based on HLURB guidelines
Permit on occupation/calling Cost of issuing permit based on category of occupation
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not requiring government examination
or calling
Occupation fee for mining claims
Cost of issuing based on hectare coverage and type of mining claim
Other Regulatory Fees8. (a) Fees for licensing of weights and measures; (b) fishery rentals, fees and charges; (c) public utility charges; (d) toll fees and charges; and (e) Mayor's permit fees on business.
Restructuring Mayor's Permit Fees. Since permit fees are impositions under the police power of municipal corporations, they must be just, reasonable and not confiscatory.
A. Definition of Business Size. For purposes of the mayor's permit fee, the following Philippine definition of business size may be adopted.
Classification SizeManufacturers/Importers/Producers Micro Industry
Cottage IndustriesSmall Scale IndustriesLarge Scale Industries
Banks Rural BanksThrift/Savings BanksDevelopment BanksCommercial/Industrial BanksUniversal Banks
Other Financial Institutions SmallMedium Large
Contractors/Service Establishments Micro IndustryCottage IndustriesSmall Scale IndustriesMedium Scale IndustriesLarge Scale Industries
Wholesalers, Retailers, Dealers or Distributors
Micro IndustryCottage IndustriesSmall Scale IndustriesMedium Scale IndustriesLarge Scale Industries
Other Business Micro IndustryCottage IndustriesSmall Scale IndustriesMedium Scale Industries
8 These fees are described in detail on pp. 5-10, Module V of the Revised Resource Mobilization Course book.
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Large Scale Industries
B. Setting Permit Fees. The permit fee shall be based either on capital investment or number of workers whichever will yield higher fees.
Scale Capitalization Assets Employment SizeMicro Industry P150,000 and below No specific numberCottage Industry Above P150,000 – P1.5 million Less than 10 workersSmall Scale Industry P1.5 million – P15 million 10 – 99 employeesMedium Scale Industry P15 million – P60 million 100 – 199 employeesLarge Scale Industry Above P60 million 200 or more employees
C. Sin Goods and Activities. The “social dimension” involved makes it justifiable to fix higher rates of permit fees in the following class of business: retail dealers of foreign and domestic liquors and manufactured tobacco, retailers of distilled spirits and fermented liquors, tobacco dealers, amusement places, and etc.
D. Sanggunian-Determined Fixed Rates. This applies to mayor's permit fees on (a) retailers; (b) banks and other financial institutions; (c) operators of public utility vehicles; (d) peddlers; and (e) other businesses not specifically mentioned.
E. Acceleration Clause. This may be included as a provision, e.g., providing that fees shall be automaticallyincreased annually by a certain percentage.
F. Full Recovery. Permit fees should reflect full cost recovery.
G. Elimination of Other Fees. Elimination of fees that are better enforced at the barangay level or fees in the tax ordinance that the LGU has no intention of enforcing. It may be prudent for the LGU to concentrate its efforts on collecting taxes, fees and charges with the highest yield.
H. Administration and Delineation of Responsibilities. (1) Improving administration through clear administrative provisions on revocation of permits, for instance; (2) Extensive use of subsidiary ledgers for recording of fees and charges in the accounting records that shows disaggregation of revenues by sources corresponding to the itemization in the revenue code or tax ordinance; (3) Performing responsibilities and maintaining accountabilities as mandated, e.g., LCE to focus on granting permits and licenses while the Treasurer does the assessment and collection of fees and charges; and (4) Review and processing application for permits, revenue collection and records maintenance should be assigned to competent and regular personnel.
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I. New Assessment. Provide for developmental fees that promote the LGU's environmental and conservation concerns, e.g., higher fees for golf links and forest conservation fees, etc.
Service and User Charges. These are impositions for services rendered by the LGU which directly benefit certain individuals. Failure to pass the cost in full to readily-determinable beneficiaries implies it is being subsidized, to the detriment of other services. In the delivery of services by a public officer, charges are justified to cover the cost and therefore ensure continuance of the performance of such services.
Setting Rates for Charges. The LGUs may adopt any or a combination of the following forms of service and user charges: (a) fixed rates for each kind of business activity; (b) a schedule of graduated fixed rates for each kind of business activity; (c) similar business or activities are grouped and assigned a fixed rate; and (d) a schedule of permit fees for each type of business based on number of employees, floor space, etc.
Table 1.13. Sample of Service and User Fees LGUs Collect
Type of Fee Base of ImpositionSecretary's fees Cost of issuance based on type of records
and no. of copies neededLocal Civil Registry fees Cost of issuance based on type of records
and no. of copies neededPermit fee for inspection and certification of subdivision
Cost of issuance, inspection and surveillance based on HLURB guide
Police clearance fee Cost of issuance and purpose for clearanceDog vaccination fee Cost of issuance and vaccinationFees on impounding of stray animals Cost of impounding and feeding based on
size of animalInspection fee on machineries and equipment
Cost of inspection based on type and capacity of machinery/engine
Hospital fees Full-cost recovery based on cost of type of medical treatment availed
Tuition fees Full-cost recoveryGarbage collection fees Full-cost recovery based on cost of type of
establishment and volume of garbageMedical and physical examination fees Full-cost recoveryParking fees Full-cost recovery based on type of vehicle
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Charges/Receipts from Local Economic Enterprises (LEEs). The operation and maintenance of economic enterprises is an exercise of the proprietary functions of local governments. Traditionally, these undertakings were viewed as part of the LGU's responsibility although these may incur losses. However, with the LGC's permission to allow private sector participation, LGUs are now looking at economic enterprises from the investment perspective.
Table 1.14. Sample of Receipts/Charges from Economic Enterprises
Charges Base of ImpositionMarket charges Full cost recovery based on type of merchandise and
size of stall occupiedFishery rentals Full cost recovery based on size of area leased and
type of lease such as corrals, oyster culture beds, or gathering of bangus fry or other species for a period not exceeding 5 years
Hospitals Full cost recovery based on type of room, service required, etc.
Ferry rentals Full cost recovery operation based on type and size of cargo
Wharfage fees Full cost recovery based on areas used and type of sea conveyance
Waterworks system Full cost recovery based use and volume of consumption
Educational institution Full cost recovery based on level and type of courseRental of cemeteries Full cost recovery based on type of niche and length of
rental periodSlaughterhouse and corral charges
Full cost recovery based on type and size of animal
Revenue Enhancement Measures for Fees and Charges from LEEs. Increasing the productivity of local economic enterprises requires taking steps to ensure a positive financial position (i.e., a profit) by keeping operating costs low while implementing measures to increase collections of fees and charges.
A. Increasing Gross Revenues. This can be achieved by (a) increasing fees and charges (as low rental fees and under-pricing have been cited as major concerns); (b) improving collection efficiency; (c) collecting delinquencies; and (d) eliminating spillage/leakage by stalling an effective internal control system.
B. Price and Rate Setting. Factors that influence pricing: (a) cost recovery considerations - e.g., factor in capital cost, operating costs, hidden costs, inflation; (b)
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physical infrastructure - location of the enterprise and condition of structures and amenities; (c) demand/need – utilization rate or the demand for facilities/services and social benefits-perceptions on the “good” to society that the economic enterprise offers; (d) commercial aspects – opportunities, profitability, nature and volume of business conducted; and (e) political considerations – acceptability and political will.
C. Improving Collections Efficiency. Elements to consider: (a) presence of a well-crafted ordinance, good revenue records management and committed human infrastructure; (b) setting of realistic collection targets; (c) keeping physical infrastructure in good state; (d) paying attention to legal aspects; and (e) specific aspects such as keeping tab of delinquent payers (or stallholders).
Table 1.15. Analyzing the Financial Performance of an Economic Enterprise
Step 1 Select an economic enterprise, one where it is possible to match expenses against receipts, e.g., public market
Step 2 Enter here income from the enterprise P _____________Step 3 Enter here expenditures for PS and MOOE. Do not
include those for CO _____________Step 4 Enter here expenditures for PS and MOOE rendered for
the enterprise which were charged against the budget of other offices, if there are any _____________
Step 5 Factor in capital costs. Enter either the annual amortization if the enterprise is funded from loan/s or borrowing/s. If funded from other sources, e.g., local appropriations, grants or aids, compute for depreciation as follows: Cost of asset less estimated scrap or residual value, divided by useful life in years of the asset, equals annual capital cost _____________
Step 6 Enter as negative entries expenses charged against the operating income of the enterprise, but which are not related to or rendered from the enterprise _____________
Step 7 Add figures entered in Steps 3, 4, and 5, and from the sum deduct the figure in Step 6 _____________
Step 8 Get the difference between figures entered in Step 2 and Step 7
P ___________ _____________
If income exceeds expenditures, the enterprise is considered a profit center or a profitable undertaking. Otherwise, the enterprise is a cost center and therefore is not a revenue-generating enterprise
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LOANS AND OTHER FINANCING OPTIONS: PPP
Credit Financing. Credit Financing is a mechanism for acquiring adequate capital from alternative sources at the best possible terms for the borrower.
Financing Schemes. The basic difference among financing schemes is the repayment term or maturity period: (a) short-term financing schemes have repayment periods of less than one year; these could be secured credit which require a collateral backing, or unsecured or clean credit which do not require a collateral; (b) medium-term financing schemes have maturity periods of more than one year but less than five years; and (c) long-term financing are those with maturity periods of 5 years or more. Both items b and c are also referred to as term financing. Bonds, lease financing, and other securities are usually designed to be medium-term and long-term financing instruments.
Table 1.16. Comparison Between Short Term and Term Financing
TYPE ADVANTAGES DISADVANTAGES
CREDIT LINE •ideal for back-up reserve / reserve for opening costs
•interest is not paid unless funds are used
•short-term
•much documentation
SHORT-TERM FINANCING
•easier to obtain since less risky from the point of view of the creditor when appraising LGU
•often less costly since cost of short-term borrowing are lower than costs of long-term debt when rolled-over
•LGUs will not be saddled with interest payments on debts over periods of time when funds are not needed
•offers flexibility to borrower; once settled, the borrower may elect other sources of credit
•good source for seasonal and temporary fund requirements
•matures more frequently, which may put an LGU in a tight financial position to cover debt payments as scheduled
•uncertainty in interest costs of refinancing
•refinancing may be difficult to obtain if payment record of LGU for the previous loan is unsatisfactory
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MEDIUM-AND LONG-TERM
•all things equal, less risky for LGUs since the chances of defaulting on principal and interest payments are reduced
•the LGU borrower is stuck with the terms of the long-term loan for a longer period
•higher cost of financing, more expensive for the LGU
•pay interest on debt over periods of time when the funds are not needed
Factors to Consider in Weighing Short-Term Over Term-Financing. Considerations in selecting the type of financing term: (a) nature of financing need-use of short-term debt to finance short-term or seasonal variations in current assets and long term debts to finance acquisition of fixed assets; (b) 20% debt servicing limit provided under the LGC; and (c) trade off between risk and profitability determined by maturity schedule of debt and interest costs.
Payment Schemes. Several ways by which LGUs can pay their debts: (a) pay or amortize loans, including all interests incurred, partly from the income of projects or services from the regular income of the LGU; (b) appropriate regularly in the annual budget the amounts necessary for debt servicing until all loans and interest have been fully paid; and (c) creation of a sinking fund for the repayment of bond issues. The LGC also allows LGUs to maintain trust funds which can only be used for a specific purpose, and likewise maintain special accounts in the general funds for “loans, interest, bond issues and other contributions” for specific purposes.
Limitations on LGU Debt Servicing. While there is no specific amount or limit on the level of LGU borrowing, the LGC specifically provides that the amount of debt servicing shall not exceed twenty percent of the regular income of the LGU. LGUs will have to carefully select the credit mix to use in financing their projects to ensure that debt servicing for the year will not exceed this limit.
LGU Credit Financing Options9
A. Loans, Credits and Other Forms of Indebtedness. Loans refer to a debt (normally cash in nature) for a specific period, repaid with interest usually by regular periodic payments. The principal is the amount borrowed and the interest is the charge for the use of capital over a specified period.
Key features of Codal provisions: (a) sources of loans include GFIs, domestic private banks and other private financing institutions, other LGUs, agencies with specific lending programs for LGUs (e.g., Municipal Development Fund administered by DOF); (b) terms and
9 A different classification is found in Appendix 2.5 .49
conditions as may be agreed upon by the LGU and the lender; (c) no requisite evaluation and recommendation by the Secretary of Finance; (d) shortened loan approval process; and (e) LGUs encouraged to package viable projects and be proactive in accessing funds from the financial system.
Usual requirements for availment: (a) no past due obligations and other adverse findings on credit standing; (b) statement of the purpose of the loan; (c) approved local development plan and public investment program; (d) endorsement of Local Sanggunian through a resolution; (e) LGU to contribute at least 10%-30% of total project cost; (f) professional managers to make up project management team; (g) project viability with loan capable to repaid within approved loan tenor; (h) loan 100% covered by collateral; (i) loan term should not be longer than tenure of local officials who contracted the loan; (j) a longer repayment period not exceeding 5 years may be granted if an irrevocable commitment to pay could be legally configured; (k) affidavit from LGU that it has no other applications with other creditors for the same purpose and that it will not contract loans for the project without knowledge and written consent of the concerned bank; (l) certification from the Local Treasurer acknowledging the loan and that it will be officially entered in the LGU's books as contractual obligation; and (m) COA-audited financial statements for the past two consecutive years.
B. Deferred Payment and Other Financial Schemes. LGUs are authorized to enter into lease contract arrangements with suppliers with the option to purchase later on, in acquiring property, plant machinery, equipment, etc. This arrangement allows the LGU tax exemption privileges for the importation of heavy equipment or machinery which shall be used in civil works and other infrastructure projects, as well as garbage and fire trucks and similar equipment.
C. Inter-Local Government Loans. LGUs may obtain loans, grants and subsidies from other LGUs, up to the extent of the surplus funds of the latter provided the loan is approved by a majority of the lending LGU's Sanggunian. Further, LGUs may jointly or severally contract loans, credits and other forms of indebtedness for mutually-beneficial purposes upon approval of their respective Sanggunian.
D. Bonds and Other Long-Term Securities. A local bond is an instrument-bearing obligation by the LGU, the bond issuer, to finance project operating and/or capital cost. Bond flotation requires a good sense of fiscal prudence and financial innovativeness. Ideally, project funded by bonds should be able to pay for themselves, or be self-liquidating. LGU projects for possible financing by bonds include: power plants, waterworks, toll bridges/roads, prier, reclamation project, sports complex, irrigation, telephone system, commercial building, housing project, bus terminal and park.
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Table 1.17. Comparative Advantages of Bonds vs. Bank Loans
BONDS BANK LOANSAccessible to wider capital market
Open to community investment (bigger amounts)
Longer repayments period
More flexible repayment scheme
Lower interest rates, pricing based on margins over T-bills
Sinking fund arrangement, interest earning
More widely established and developed credit standing in the financial market
Whenever possible, interest rates can be fixed
Allows members of the community to involve themselves in, and at the same time, earn from the project
Currently limited to government financial institutions
Pure bank assets
Shorter maturities
Dictated by banking arrangement / term loans
Pricing is based on transfer pool rates of banks
Amortized loan repayment
Limited to credit standing in the banking sector
Floating interest rate
No community participation and earning
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Figure 1. Municipal Bond Issuance Process10
I.Certification of debt service capacity
I.Project identification and feasibility study preparation
I.Authority to issue bonds and feature of the bond
I.Guarantee
I.Approval by government agencies
I.Bond offering
I.Debt servicing and payment of principal
10 According to the Resource Mobilization Course book, a Municipal Bond Manual is available free of charge to LGUs from the FINEX Committee at tel no. (02) 811-4397. Details of each step are also provided in pp.14-18 of the Course book Module VIII. Loans and Other Financing Options: Public and Private Partnership.
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•Certification by BLGF-DOF of debt service capacity
•Project ID, evaluation, and feasibility study
•Sanggunian ordinance approving the project, and authorizing issuance of bonds and engaging services of underwriting team
•Designing features of the bond
•Sanggunian ordinance approving final bond terms and appropriating funds
•Bangko Sentral ng Pilipinas approval
•Preparation of official statement, primer, and bond documents
•Debt servicing and payment of principal to bondholders
•Selection and appointment of underwriting team
•Sanggunian Panlalawigan Resolution approving bond issuance by component city or municipality
•Municipal bond offering and issuance
•Securing guarantee for bond
E. Public-Private Sector Participation (PSP). PSP is a contractual agreement entered into by local or national bodies to authorize a private sector entity to finance, construct, operate and maintain a facility and in the process, charge user fees or receive compensation from the government. The risks are allocated between the LGU and the private sector proponent, through a security package (i.e., limited guarantees).
1. BOT Variants. The choice of PSP mode may vary from any of these nine variants (and other modes subject to the President's approval) authorized under the Build-Operate-Transfer (BOT) Law or joint venture agreement allowed under the LGC and the BOT Law. The main difference between the schemes concerns ownership and its implications on project risk, determined by the transfer aspect (i.e., the “T”, if any) of the project. Whoever owns the project (private or government) should bear most of the project's risk. Criteria for implementability of BOT-Type arrangement include profitability or the generation of a competitive rate of return and a guaranteed revenue stream that will enable the project to pay for itself over a period of time.
Table 1.18. BOT Variants and Their Primary Characteristics
BOT VARIANTS ROLE OF PRIVATE PROPONENT ROLE OF GOVERNMENT
Build-and-Transfer (BT)
Finances and constructs the facility
Turns over ownership of facility to government after project implementation
Acquires ownership of facility after construction
Compensates proponent at agreed amortization schedule
Build-Lease-Transfer (BLT)
Finances and constructs the facility
Turns over ownership of facility to government after completion of lease period
Compensates proponent for lease of facility at agreed term and schedule
Acquires ownership of facility after lease period
Build-Operate-Transfer (BOT)
Undertaken construction, financing, operation and maintenance of facility for a fixed term
Collects toll, fees, rentals, and other charges to recover investments plus profits
Turns over ownership of facility after BOT terms to contracting government authority
Provides franchise and regulates activities of BOT contractor
Acquires ownership of facility at the end of BOT term
May opt to share in the profits of the BOT proponent
Build- Transfer-Operate (BTO)
Finances and constructs facility on a turn-key basis (assumes cost Assumes ownership of facility
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overrun, delay specified performance tasks)
Transfer title of facility to implementing agency after commissioning
after commissioning
Allows private proponent to get compensation for proponent’s investment costs and reasonable return and operating charges
Contract-Add-Operate (CAO)
Adds to existing facility which the proponent is renting and operates expanded project for an agreed franchise period
Collect rental payment from private proponent under agreed terms and schedule. Re-acquires control over rented property/facility at the end of the lease term normally including improvements thereon
Develop-Operate-and-Transfer (DOT)
Has the right to develop adjoining property (ies) of an infrastructure to enjoy external benefits that the primary investment creates (e.g., higher property values or commercial development rights)
May opt to share in the financial benefits of the investment
Re-acquires ownership of properties turned over to investor after concession period
Rehabilitate-Operate-and-Transfer (ROT)
Takes over operation and maintenance of existing facility for a franchise period and/or imports existing facility for refurbishing, erecting ad cost consuming/maintaining it within the LGU
Transfer ownership of facility or equipment to government after franchise period
Provides franchise to ROT company
May opt to share in profits of the ROT company
Re-acquires ownership of facility or equipment after franchise to operate
Rehabilitate-Own-Operate (ROO)
Takes over existing facility to refurbish/operate with no time limit imposed on ownership. Can continue to operate the facility in perpetuity as long as there is no franchise violation
Turns over existing facility to ROO proponent and provides franchise to operate
May opt to share in profits of the ROO company
BOT Approval Scheme. The identified list of projects will have to be approved by different bodies depending on the project cost. Further, Local Sanggunian approval is
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required for projects before bidding, and contracts prepared before issuance of notice of award.
NATIONAL PROJECTSP300 million and above NEDA Board through the Investment Coordination
Committee (ICC)Below P300 million NEDA-ICC
LOCAL PROJECTSP20 million and below Municipal Development CouncilP20 million – P50 million Provincial Development CouncilUp to P50 million City Development CouncilP50 million – P200 million Regional Development CouncilAbove P200 million NEDA-ICC
Preparatory Work for BOT Arrangements. The LGU should adopt a “customer” mindset in determining project preparations for a BOT-type of project which it plans to bid out. The key question is, “What does the private sector need to bid for this project?”. Instead of a feasibility study, the LGU can make a detailed market demand study to project the amount of revenue the project can generate and determine the financial support the LGU needs to provide, then prepare the bidding documents. If the LGU conducts the feasibility study and even the detailed engineering study, and then calls for proposals based on these, the pre-qualified contractor shall no longer submit a feasibility study. However, the bidder is solely responsible for the validity and soundness of the inputs of LGU-conducted studies. LGUs may accept unsolicited proposals or use public bidding to foster transparency.
Project Development Facility. This is a loan facility that supports project preparation and packaging for PSP/BOT Implementation. It can be tapped by LGUs for the preparation of pre-investment studies, tender documents and draft agreements; and includes provisions for technical assistance in the tendering process, bid evaluation, negotiation and start-up assistance after award. LGUs availing of the PDF must agree to publicly tender their proposed projects. It also requires the winning bidders to reimburse the cost of the PDF loan.
2. Service Contracts. A service contract is entered into by an LGU with a private entity for the purpose of securing assistance for the performance of special task(s). The contract is generally short-term (1-2 years) and the responsibility for fixed investment and working capital remains with the government entity. The contractor is assured a fixed fee from the LGU budget or from project revenues. The scheme provides a venue for tapping private sector expertise in the performance of particular technical tasks.
3. Management Contracts. This contract goes beyond service contracts because the LGU transfers the entire management, including operation and maintenance of the
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facility to the private proponent. The contract may have a duration of 3 to 5 years. Fixed investments are borne by the LGU, and the working capital often by the private proponent. To encourage efficiency, the LGU can pay the proponent a combination of fixed fee and a success fee, the latter being performance-based. The fee may come from the LGU budget or from project revenues.
4. Lease or “Affermage”. In a lease arrangement, a private firm leases the assets of an LGU for a fixed lease payment and takes responsibility for operating, maintaining, and managing the asset. The private entity assumes the commercial risks of the operation and effectively buys the rights to the income stream of an asset. Lease contracts are generally long-term, usually 8-15 years. Lease arrangements are appropriate for projects with wide latitude for improving efficiency. Ownership of the assets and improvements made generally accrue to the LGU at the end of the lease.
5. Concession Arrangements. A concession is a contract where a private sector proponent is allowed to manage, operate, maintain, and introduce, investments on assets of the contracting government entity. As such, it can also be classified as a BOT variant. The concession contract sets out the performance targets, mechanisms for tariff adjustments, schedule of concession fees, income sharing, etc. Responsibility of financing new investments is with the private sector and commercial risks are borne by the concessionaire. Concessions generally involve large projects and long-term contracts typically lasting 10-20 years. Any improvements or additional assets brought in by the proponent revert to the government when the contract ends.
Ensuring Contractor Compliance. The LGU may include any or all of the following provisions in the contract to insure compliance: (a) confiscation by the LGU of the performance bond of the contractor in case of contract rescission due to contractor's fault; (b) liquidated damages on the contractor for failure to complete the project within stipulated period; (c) incentive bonus to the contractor for completing the project earlier than stipulated; and (d) nullification of the contractor's franchise for failure to perform according to minimum design and standards prescribed in the contract.
Credit Finance Program. The LGU leadership should explore the feasibility of adopting a Credit Finance Program which assures (a) a reasonable expectation that local electorate support exists and can be developed, (b) that any revenue-producing project funded through borrowings will have a sound internal rate of return and a reasonable cash flow; (c) arrangements are in place for sustaining repayments financially and legally (even by succeeding administrations) until all obligations are met; and (d) loss of jurisdiction over properties through collateralization/ conversion of LGU assets is minimal and carefully planned.
Role of Government Financial Institutions (GFIs). GFIs assist local governments by: (a) lending to creditworthy LGUs that cannot yet tap private capital; (b) developing co-financing arrangements or project referral schemes with commercial banks; and (c) providing limited technical assistance in financial and project management.
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Role of the Municipal Development Fund (MDF). The MDF (a) targets its financing to less creditworthy LGUs11 and to social/environment projects; (b) links its funding to technical assistance to improve LGU capacity and creditworthiness for graduation to other sources of credit; and (c) promotes more direct access of LGUs to ODA sources.
LGU Credit Policy Framework. Classifies LGUs according to creditworthiness on the one hand, and projects, on whether they are revenue-generating or are social/environmental projects.
Creditworthy LGUs
Marginally or Non-Creditworthy LGUs
The first quadrant shows revenue-generating projects of creditworthy LGUs that can be funded mostly from private sources of capital. The second quadrant shows marginally or non-creditworthy LGUs with revenue-generating projects which could source funding from BOT arrangements, GFI loans and limited MDF loans with technical assistance (TA). TA grants can help improve creditworthiness through the development of project management capability. In the third quadrant, creditworthy LGUs undertaking social/environmental projects whose returns are low or are long in coming could be allowed to tap long-term, lower-cost ODA funds through GFIs or MDF. In the fourth quadrant, the marginally or non-creditworthy LGUs with social or environmental projects could be assisted with matching grants through MDF.
DEBT MANAGEMENT
Debt Management, General Principle. LGUs should try to minimize borrowing cost, subject to an acceptable degree of risk. An LGU accessing low cost funding sources faces higher risks in meeting borrower eligibility guidelines, more stringent loan/credit evaluation procedures undertaken by the fund source, and more volatility in debt service. Higher cost lending alternatives, on the other hand, have higher tolerance for risk because of the wide
11 Less creditworthy LGUs are those not qualified to obtain GFI loans nor have viable BOT projects.57
Revenue Generating Projects
IIIGFI loansMDF loans
limitedMDF grants
IBOT projects
bondscommercial loans
GFI loans
IV
MDF grantsand TA
IIBOT arrangements
GFI loanslimited MDF
grants, loans and TA
Social/ Environmental Projects
spreads or income they expect to earn from a lending transaction.
Oversight Framework for LGU Debt. Several agencies have to be consulted depending on the financial product being sought and the stage in the credit financing cycle.
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Table 1.19. Oversight Framework for LGU Debt
Agency/Institution Oversight Function BasisFOR LOANS AND ALL TYPES OF INDEBTEDNESS
A Internal1
2
3
4
5
Sanggunian
Finance Committee
Treasurer
Accountant
Budget Officer
•Approval and enactment of ordinances resolutions authorizing the LCE to contract loans and issue bonds and other forms of indebtedness•Recommend borrowings which may be needed to support the budget•Recommend borrowings which may be needed to support the budget as a member of the Finance Committee•Take custody and exercise proper management of funds of the LGU and take charge of all disbursement of funds entrusted•Prepares journals and analysis of obligations and maintain and keep all related records and reports•Recommend borrowings which may be needed to support the budget as a member of the Finance Committee
LGC Sections 447 (2) (iii); 458 (2) (iii)
LGC Section 316 (b)
LGC Section 316 (b)
LGC Section 470 (d) (2); LGC Section 470 (d) (3)LGC Section 474 (b) (12)
LGC Section 316 (b)
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B.
2
3
4
External
Bureau of Local Government Finance – Department of Finance (BLGF-DOF)
Local Government Unit Guarantee Corporation (LGUGC)
Commission on Audit (COA)
Toll Regulatory Board, Department of Public Works & Highways
•Issuance of LGU Certificate of Borrowing and Debt Service Capacity prior to securing loans to any form of credit financing•Report of Aggregate LGU Debt Level as part of the notes to the Treasurer’s Quarterly Report
•Monitors exposure and financial position of LGUs that have outstanding debts guaranteed by the corporation
•Authorizes the examination, audit and settlement of debts
•Value for Money or Operations Audit and Annual Audit of Liabilities
•Grants authority to operate toll facilities and terms of conditions thereof
•DOF Local Finance Circular No I-2000, January 19, 2000
•Treasurer’s Manual
•Government Auditing Code of the Philippines (PD 1445)•Volume 1, Book1, Chapter 2, Section 8 of the Government Accounting and Auditing Manual
•Toll Operation Decree (P.D. 1112)
ADDITIONAL FOR BOND FLOTATIONS1
2
3
Department of Finance
Bangko Sentral ng Pilipinas
National Economic & Development Authority
•Approval of the Secretary of Finance for bond issues bearing the guarantee of the NG
•Monetary Board opinion on impact of the probable effects of the proposed borrowing within the Philippines on monetary aggregates, price level and balance of payments required for LGU bond issuances•Guidelines for bond flotations without national Government guarantee•Rules and regulations for the issuance, placement, sale servicing, redemption and retirement of bonds with the full guarantee of the National Government
•Investment Coordination Committee (ICC) approves projects costing up to P300 million; NEDA Board approval
•Article 397, LGC-IRR
•Section 123, Article III, The BSP Charter (R.A. 7653)
•Circular No. 41, Series of 1994•Circular No. 44, Series of 1994
•Section 4, The Philippine BOT Law
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4
5
6
7
8
(NEDA)
LGU Development Council
Board of Investments
Coordinating Council for the Philippine Assistance Program
President of the Philippines
Department of Interior and Local Government (DILG)
required for projects costing more than P300 million
•Requires confirmation of priority projects with projects costing in accordance with the following:
a)Up to P20 million: Municipal Development Councilb)P20 to P50 million: Provincial Development Councilc)Up to P50 million: City Development Councild)P50 to P200 million: Regional Development Council or Metro Manila Development Councile)Above P200 million: ICC of NEDA
•Grants incentives as provided under the Omnibus Investment Code (E.O. 226), upon registration of the project
•Coordinates and monitors projects implemented under the BOT Law
•Approves build-own-and-operate schemes endorsed by NEDA-ICC
•Handles appeals of bidders disqualified by the LGU
(R.A. 7718)
•Section 4, The Philippine BOT Law (R.A. 7718)
•Section 12, The Philippine BOT Law (R.A. 7718)•Section 14, The Philippine BOT Law (R.A. 7718) and Rule 14, Section 14.1 of the BOT IRR
•Rule 2, Section 2.10 of the BOT IRR
•Rule 9, Section 9.1 of the BOT IRR
Authorization Process for New Borrowings, General Principles. (a) The LCE is authorized to borrow in the name of the LGU for all forms of borrowing; (b) All forms of borrowing require Sanggunian Approval; and (c) Institutions supervised by the Bangko Sentral ng Pilipinas (BSP) are required to obtain a Debt Service Certification from the BLGF before each new borrowing is made.
The Cost of Debt, General Principles. Interest paid is usually not the only cost to borrowing money hence there should be an attempt to include all costs in a year when analyzing the cost of borrowing. This is called the financing rate or the all-in cost. Some costs include the amortization of discount (e.g., discounts on securities lead to an interest charge), losses on foreign currency conversion, change in market value (e.g., when repaying
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a loan early or repurchasing a bond), hidden fees and charges associated with borrowing (e.g., arrangement fees or commitment fees), and administration costs (e.g., rating agency fees, legal fees and SEC fees).
Financing Rate. Analogous to the internal rate of return (IRR), this represents the true cost of borrowing, including all expected costs and fees; sometimes referred to as the all-in cost of borrowing. The basic methodology in calculating the financing rate is as follows: (1) Forecast all cash flows associated with the borrowing (principal, interest, and fees). Treat cash inflow as positive, cash outflow as negative; (2) Calculate the value of the above cash flows using a single discount rate; (3) Adjust the discount rate iteratively until the total of the present values of all cash flows (i.e., the net present value) is zero; and (4) The discount rate that makes the NPV of the borrowing equal to zero is the financing rate.
The Risks of Debt, General Principles. (a) Borrowing creates many additional risks to the borrower, cost is not the only concern; (b) Attempt to identify all the risks of a borrowing and think about how these risks would impact the LGU; (c) Do not borrow if the risks are not acceptable. Following are possible sources of risks: interest rate risk (as interest rates are variable), currency risk (if loan is foreign-denominated), operational risk (e.g., legal risk or fraud risk), reputation risk (higher borrowing costs for poor reputation of making late payments) and refinancing risk (refinancing existing loans at disadvantageous rates).
Evaluating Debt Proposals, General Principles. (a) Choose borrowings that offer the best mix between low cost and low risk; and (b) Compare borrowing proposals using a common base as closely as possible.
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CHAPTER 2. APPROACHES AND TOOLS IN PREPARING THE STATEMENT OF RECEIPT AND EXPENDITURES (SRE)
Accounting Policies Used in SRE Preparation
A. Cash Basis. Using this method in SRE reporting, all revenues shall be recognized when received while expenses shall be recognized when paid.
B. Modified Accrual Basis. All expenses shall be recognized when incurred while revenues shall be recognized when earned except for transactions when accrual basis is impractical (e.g., market fees) or when other methods may be required by law.
C. Fund Balance. The ending fund balance of the SRE report based on cash basis shall be reconciled with the ending balance of the New Government Accounting System (NGAS) cash flow statement. On the other hand, the current operating income and expenditures portion of the year-end SRE report based on modified accrual basis shall be reconciled with the NGAS statement of Income and Expenses, while the ending fund balance shall represent the calculated fund balance.
D. Chart of Accounts and Account Codes. New accounting titles and account codes were added and shall be adopted in the preparation of SRE report in order to conform with the NGAS account classification.
SRE System. The SRE System was primarily established to provide the BLGF with sufficient detailed financial information in order to monitor the LGUs' financial performance in terms of receipts and expenditures and to cater to the various needs of the users of the report. The system was developed as an online operation with the following functions, among others: generate derived values and calculate automatically from different entry forms so that the user only needs to input raw SRE data, readily search, view and compare historical SRE information, and provide real-time database read access on the BLGF client-server network.
SRE Reporting Framework. The framework shows the graphical relationships of the various prescribed reports.
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Figure 2.1. SRE Reporting Framework
Basic Financial Statement
Supplemental Reports
Other Quarterly Reports
Supporting Records
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SRE
SRS SFOEE SOE
QRRPTCQRCBTFCEE
Record of Real Property Tax Collections
Record of Expenditures
Record of General
Collections
Record of Prior Years Accounts
Payable
Record of Debt Service
Figure 2.2. Flowchart in the Preparation of Statement of Receipts and Expenditures
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SRE Reports12. The Local Treasure is responsible for the preparation of reports and records. The description of each report is immediately shown below the list.
I. Cash Basis (Quarterly Basis)
1.Supplemental Statementsa. Statement of Receipt Sources;b. Statement of Expenditures;c. Statement of Financial Operations of Economic Enterprises; and d. Statement of Indebtedness, Payments and Balances.
2.Other Reportsa. Quarterly Report on Real Property Tax Collections;b. Quarterly Report on Real Property Tax Collections;
3.Recordsa. Record of Real Property Tax Collections;b. Record of General Collections;c. Record of Expenditures;d. Record of Prior Year Accounts Payable Payments; ande. Record of Debt Service.
II. Modified Accrual Basis (Year-End Report)
Supplemental Statementsa. Statement of Receipt Sources;b. Statement of Expenditures;c. Statement of Financial Operations of Economic Enterprises; and d. Statement of Indebtedness, Payments and Balances.
A. Basic Financial Statement. The Statement of Receipts and Expenditures (SRE) is the basic financial report prescribed by the BLGF to monitor the LGUs' financial performance. It captures the fiscal capacity, level of borrowings and credit worthiness of the LGUs. The SRE is divided into three major segments: (a) current operating segment identical to COA's Statement of Income and Expenses which shows the operating income from local and external sources and operating expenses; (b) non-operating receipts and expenditures equivalent to investing and financing activities in COA's cash flow statement that include receipts from sale of assets, investment, loan proceeds and expenditure; and (c) fund balance segments showing the details of cash balance. The ending fund balance for the cash basis SRE is the same as the ending cash balance of COA's cash flow statement, while the ending fund balance for the modified accrual basis SRE is considered as the calculated ending fund balance.
12 The forms for each report as well as the guidelines in accomplishing them are shown as exhibits and annexes in the draft manual of the Statement of Receipts and Expenditures: Systems, Concepts, Input Preparation and Reporting.
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B. Supplemental Statements. These shall serve as supporting documents in the preparation of the SRE.
1. Statement of Receipt Sources (SRS). This statement reports the detailed income items reported in the SRE prepared in both cash basis and modified accrual accounting basis. For the SRE Report prepared on cash basis, the source of data for SRS shall be the record of general collections and the record of real property collections. For the SRE Report prepared on modified accrual basis, the source of data shall be the pre-closing trial balance from the Accounting Office.
2. Statement of Expenditures (SOE). The Statement of Expenditures prepared on cash basis presents the various expenses during the period which are grouped into (a) personal services, (b) maintenance and other operating expenses, (c) financial expenses, and (d) capital outlay, and are further classified by sector and by function. The unliquidated cash advances are also included. On the other hand, sources of SOE prepared on modified accrual basis will come from the Summary of Expenditures per Responsibility Center (office/function). It excludes depreciation expense and other cash expense. Alternatively SOE on modified accrual basis can be prepared by adding the Current Year Accounts Payable available from the Accounting Office, to the SOE on cash basis.
3. Statement of Financial Operations of Economic Enterprises. This statement measures the performance of the economic enterprise of the LGU. Data can be obtained from the record of general collection and expenditures and the total should tally with the SRS and SOE. The SFOEE can also be prepared by the officer-in-charge of the economic enterprise.
4. Statement of Indebtedness, Payments and Balances. This statement shows information at a glance of the LGUs outstanding indebtedness from various sources, including the terms and conditions of the borrowings, loan repayments, and the unpaid balances.
C. Other Reports. In addition to the above reports, the Treasurer is also required to submit the following quarterly reports.
1.Quarterly Report on Real Property Tax Collections (QRRPTC). Summarizes the cumulative total of RPT collections during the period per real property classification and the disposition of the real property tax collected. There are different levels of report for the preparation of the QRRPTC. However, the consolidated reports are automatically generated in the SRE System.
Title of the Report Prepared by Certified byQuarterly Report on RPT Collections
Treasury Staff Provincial/City/ Municipal Treasurer
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Consolidated Provincial Quarterly Report on RPT Collections
Provincial Treasurer Regional Director
Consolidated Regional Quarterly Report on RPT Collections
BLGF Regional Office BLGF Regional Director
2. Quarterly Report on Collection of Business Taxes, Fees and Charges and Economic Enterprise. Summarizes the cumulative quarterly total of collections from business taxes, fees and charges and receipts from economic enterprises for the purpose of income target setting and evaluation of collection efficiency. The consolidated provincial and regional quarterly reports are automatically generated in the SRE system.
Title of the Report Prepared by Certified byQuarterly Report on Collection of Business Tax, Fees and Charges, & Economic Enterprises
Treasury Staff Provincial/City/ Municipal Treasurer
Consolidated Provincial Quarterly Report on Collection of Business Tax, Fees and Charges, & Economic Enterprises
Treasury Staff Provincial Treasurer
Consolidated Regional Quarterly Report on Collection of Business Tax, Fees and Charges, & Economic Enterprises
BLGF Regional Office BLGF Regional Director
D. Other Records. The Treasurer needs to maintain the records of the following reports to serve as supporting documents:
1. Record of Real Property Tax Collections. This accounts for all real property tax collections received based on Official Receipts issued. This record should be maintained for each property classification and should be updated daily. The entries shall be based on the Official Receipts issued by the Treasury Office and the duly approved Journal of Entry Vouchers (JEVs) from the Accounting Office for un-receipted receipts directly deposited to the bank.
2. Record of General Collections. This records all collections received, except Real Property Taxes based on Official Receipts issued on a daily basis. It includes income/revenues and receipts collected by the LGUs, net of share of barangay or municipal in case of provinces, or barangay or province share in case of municipalities. The entry bases are the same as those used for the Record on RPT Collections.
3. Record of Expenditures. This record lists the details of cash expenditures of the LGU per office/function.
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4. Record of Prior Year Accounts and Accounts Payable Payments. This record lists all payment of prior year's payables made during the period which includes accounts payable due to BIR, GSIS, PAG-IBIG, PhilHealth and other payables.
5. Record of Debt Service. Lists all loan amortizations made during the period.
Additional Account/Sector Classification. In cases when an income or receipt collected by the LGU becomes material in nature but is not included in the SRS, the LGU needs to notify the BLGF Central Office to effect the addition of the item for control purposes. The same should be done for any additional category of office/sector in the SOE report.
SRE Including Trust Fund. Another format of the SRE report that includes Trust Fund receipts and expenditures should be prepared (system-generated). Receipts from trust funds are another source of LGU funds, however these could not be appropriated because these are given/transferred by donors/funders for specific purposes. A separate SRS and SOE will also be prepared for the Trust Fund. Individual record of receipts and expenses for each kind of trust fund shall be maintained by the Treasury Office.
Quarterly Report on Real Property Assessments (QRRPA) and a Record of Real Property Assessment by Property Classification (RRPA). The RRPA is to be maintained by the LGU Assessor's Office as the source document for the preparation of QRRPA. RRPA is not part of the SRE report but is used by the Treasurer primarily as basis for forecasting the real property tax (RPT) collections and to evaluate RPT collection efficiency.
Deadline for Submission of Reports. The Local Treasurer who shall be responsible for ensuring the completeness and accuracy of the reports shall submit these through encoding in the web-based SRE system, emailing a soft copy (excel or flat file), or providing a hard copy of the duly accomplished supplemental statements together with the quarterly reports, to the Province (for municipalities) and to the BLGF Regional Office for validation, verification and analysis on or before the following deadline dates:
Cash Basis Report for the first three quarterly reports – on or before the 10th day of the month following the end of the quarter; and for the year-end report – on or before February 28 after the end of the calendar year.
Modified Accrual Basis Report for the year-end – on or before March 31 after the end of the calendar year.
Copy Distribution. All quarterly and year-end reports required for submission shall be prepared by the municipal LGUs in three copies for distribution to the BLGF Regional Office, Provincial Office and the Municipal Treasury Office. For the provincial and city LGU, only two copies shall be prepared for the BLGF Regional Office and the Provincial/City Treasury Office.
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CHAPTER 3. APPROACHES AND TOOLS IN CONDUCTING FINANCIAL ANALYSIS AND REVENUE FORECASTING
BLGF Fiscal Performance Indicators. There are at present nineteen (19) indicators grouped as revenue indicators, expenditure indicators and debt and investment capacity indicators.
Table 3.1. BLGF Performance Indicators
No. Indicator Formula Definition Benchmark Concern Addressed•Revenue Indicators – of those that reflect LGU revenue generation capacity, these are indicators, which show the existence of an appropriate revenue level, revenue growth potential, revenue stability, and the extent of local government control over the local revenues.A.1 Revenue Potential1 Revenue
LevelTotal Revenues Total Revenues
as compared to average value for the LGU income class to which the LGU belongs
LGU revenue > LGU income class
Used as evidence for the availability of an appropriate revenue level
2 Revenue Growth
(Total Revenuesyr1 -Total Revenues yr0 ) ------------------------- x 100Total Revenues Yr0
Revenue growth or trend in revenue across time
The average annual % increase in LGU revenues > Annual inflation rate13 + Annual population rate14
Used as evidence of the sustainability of an appropriate revenue level
A.2 Revenue Stability and Reliability3 Locally-
Sourced Revenue per capita
Locally-Sourced Revenue---------------------------------- Population
Amount of revenues under LGU control on a per capita basis
Per capita locally sourced > average for the LGU income to which the LGU belongs
This is used as evidence of the degree of tax effort exerted by the LGU
4 Growth in Locally-Sourced Revenue per capita
Locally-Sourced Revenue per capita yr1 – Total Revenue per capita yr0
-------------------------- x 100Total Revenueper capita yr0
Growth in the amount of revenues under LGU control on a per capita basis
Growth in locally sourced revenues per capita > average for the LGU income to which the LGU belongs
Used as evidence of the degree of improvement of the tax effort exerted by the LGU
5 % Locally Sourced to Total LGU Revenue15
Locally-Sourced Revenues-------------------------- x 100Total Revenues
The share of the revenues that are under LGU control and results from economic activity
% share of locally sourced revenue to total LGU revenue > average share for the LGU income
Used as evidence of reliability of an appropriate revenue level
13 Calculated as the average annual increase in the Gross Regional Domestic Product (GRDP) Implicit Price Index (1985=100) for the region in which the LGU belongs, as published by the National Statistical Coordination Board (NSCB)
14 Annual compound growth rate of the LGU population calculated from the formula Pn = Po(1+r)t where Pt=population at year n, Po = base year of population, t number of years elapsed between base year and year n, and r is the annual growth rate. The appropriate population levels may be taken from the National Statistics Office (NSO)
15 Locally Sourced Revenues include income from business and other local taxes, real property taxes, economic enterprises, fees and charges. This does not include IRA, LGU share in national wealth, loans, credits, bond proceeds, tobacco excise taxes, etc.
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class to which the LGU belongs
6 % Regular Revenues to Total Revenue16
Regular Revenues-------------------------- x 100Total Revenues
% Regular Revenues to Total Revenue
The share of recurring revenue to total LGU revenue > average share for the LGU income class to which the LGU belongs
Used as evidence of predictability of an appropriate revenue level
A.3 Revenue Mobilization Efficiency7 Cost of
CollectionTotal Collection Cost-------------------------- x 100Total Revenues
•For real property tax:
Total RPT Collection Cost to Total RPT
Real Property Tax Collection Cost-------------------------- x100Total Real PropertyTax Collected
The cost of collecting a peso of RPT
RPTCC > average for the LGU income class to which the LGU belongs
This reflects the cost effect effectiveness of the local revenue generation efforts of LGU. The cost of collecting real, property taxes – the major local revenue source of Philippine LGUs – can be considered highly indicative of the cost effectiveness of the local revenue efforts of an LGU
•For all other revenues:
Tax Revenue Collection Cost to Total Revenues Collected (TRCC)
All Other Revenues Collection Cost-------------------------- x100Total All OtherRevenues
The cost of collecting a peso of revenue
TRCC > average for the LGU income class to which the LGU belongs
This reflects the cost effect effectiveness of the local revenue generation efforts of an LGU. The cost of collecting taxes can be considered highly indicative of the cost effectiveness of the local revenue efforts of an LGU
8 Real Property Tax Accomplishment Rate
Actual RPTCollection-------------------------- x100Targeted RPTCollections
% of current RPT collected within the year to the total RPT due for the year as estimated from the assessed value of taxable real properties17
RPTAR > 100% Used as evidence of the collection efficiency of the LGU
•Expenditure Indicators – define the degree of flexibility that an LGU has to allocate resources for different purposes. The expenditure indicators distinguish between rigid or compulsory expenditures that cannot be avoided by the LGU and discretionary expenditures.9 Total
Expenditures Total Expenditures--------------------------
Average amount spent by the LGU
Per capita total LGU expenditure >
This is indicative of the amount of services
16 Regular Revenues = Locally Sourced Revenues + IRA17 The real property tax is the major source of local revenues for most Philippine LGUs and also mirrors the local economy as the real
property tax base (the value of existing properties) reflects the status of the local economy, especially in urban areas. As such, the collection efficiency for the real property tax largely mirrors the overall collection efficiency of the LGU. Many LGUs require a certificate of full payment of RPT before issuance of a new or renewed business permit.
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per capita Population per constituent average for the income class to which the LGU belongs
extended by the LGU to its constituent as a per capita basis
10 Personnel Services Expenditure Ratio (PSER)
Personnel ServicesExpenditures-------------------------- x100Total Expenditures
The ratio of LGU expenditures for personal services to total expenditures
PSER < 45% for 1st
to 3rd class LGUs and 55% to 4th or lower class LGUs and should exhibit a decreasing trend
Regarded as the most rigid expenditure category for an LGU
11 Debt ServiceExpenditure Ratio (DSER)
Debt ServicePayments-------------------------- x100Total Expenditures
The ratio of LGU expenditures to debt service18 to total expenditures
DSER < average for the LGU income class to which the LGU belongs and should be decreasing
Debt service is regarded as an equally rigid expenditure category for an LGU
12 SocialExpenditure Ratio (SER)
Social ServicesExpenditure-------------------------- x100Total Expenditures
The ratio of LGU social expenditures to total expenditures
SER > average for the LGU income class to which the LGU belongs and should be increasing
The level of LGU social expenditures has a high degree of relationship with poverty alleviation and improvement in the human development index
13 EconomicExpenditure Ratio (EER)
Econ ServicesExpenditure-------------------------- x100Total Expenditures
The ratio of LGU economic expenditures to total expenditures
EER > average for the LGU income class to which the LGU belongs and should be increasing
The level of LGU economic expenditures also has a high degree of relationship with poverty alleviation and improvement in the human development index
•Debt and Investment Capacity Indicators – define the extent to which the LGU considers the importance of capital expenditures and local governance capacity to attract long-term financing for investment.14 Debt Service
Ratio (DSR)Debt ServicePayments-------------------------- x100Regular Revenues
The ratio of LGU expenditures for debt service to total LGU annual regular income
DSR < 20% of annual regular income and ratio should at least be stable if not decreasing across time
This indicator defines the extent to which a local government could engage in additional debt, taking into account the debt limits provided by law. These limits give decision autonomy to local governments as long as the expenditures related with the debt servicer remain within prudent acceptable limits
15 Gross Operating Surplus to Debt Service Ratio (GOSDSR)
Gross Operating Surplus (Deficit)-------------------------- Debt ServicePayments
The ratio of LGU operating surplus to debt service
GOSDSR > average for the LGU income class to which the LGU belongs and should be increasing
The gross operating result represents the main and essential source that could be mobilized by the LGU in order to finance the public service
18 Debt Service = Interest+ Loan Amortization
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infrastructure investments or the servicing of loans contracted for these purposes
16 Debt to Net Asset Ratio (DAR)
Total Debts-------------------------- x100Total Assets - Depreciation
The ratio of an LGU’s debt to its depreciated asset base
DAR should be < 1 indicating that an LGU has a sufficient asset base to back up its debt
This reflects the value of risk of lenders to an LGU in case of a default
17 Capital Investments to Total LGU Revenue Ratio (CTTRR)
Capital Investments-------------------------- x100Total Revenues
The % share of capital investments to total LGU revenues
CTTRR > average for the LGU income class to which the LGU belongs and should be stable if not increasing
Measures the extent to which the LGU considers the importance of capital expenditures
18 Net Operating Surplus to Total LGU Revenue Ratio (NOSTRR)
Net Operating Surplus (Deficit)-------------------------- x100Total Revenues
The ratio of LGU net operating surplus to total LGU revenues
NOSTRR > average for the LGU income class to which the LGU belongs and should be increasing on case of operating surplus and decreasing in case of operating deficit
This indicator shows the ability of local governments to be sure their budget will be balanced
19 Uncommitted Cash Balance to Expenditure Ratio (UCBTER)
Uncommitted Cash Balance-------------------------- x100Total Expenditures
The calculated figure reflects the uncommitted portion of government equity in the LGAS. This is roughly equivalent to sort of an annual financial reserve
UCBTER > average for the LGU income class to which the LGU belongs and should be increasing
Few LGUs explicitly provide for a financial reserve, and the nearest equivalent will be the uncommitted or free cash balance of LGUs. This indicator shows the ability of local governments to ensure their budget will be balanced even in the face of financial uncertainties
Functions of Performance Indicators. Carefully selected indicators, accurately calibrated, regularly updated and presented in easily understood formats provide information that promote good governance as they aid in (a) strategic planning and forecasting; (b) performance accounting and benchmarking; and serve as valuable inputs for (c) an early warning system; (d) quality management; and (e) a well-planned incentive system.
Current or Constant Values. Financial data may be presented in current or constant values. Constant values include an adjustment for inflation to represent the actual purchasing power of money “deflated” to some past base year.
Single Case versus Comparative Analysis. Single case analysis represents year-to-year changes in income and expenditures of a single government unit and shows the variable's trend over time. Comparative analysis entails comparing the performance of an LGU with other similarly-situated LGUs.
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Standardizing Data. Comparative analysis requires standardizing group data using per capita measures or common size statements. Per capita is derived by dividing raw data by population, while common size figures are generated by converting raw data into percentages.
Trend Analysis. Trend analysis examines the composition and growth trends of group data over time. It is useful in comparing data from one LGU with data from a group of LGUs. The simplest technique is the moving average method which uses the average of several years' data to plot the values on a graph. For example, in a two-year moving average calculation, we take the average for CY 2001 and 2002 and plot that number, then we next plot the moving average for CY 2002 and 2003 and plot that number, and so on.
Financial Capacity Analysis. [Please also refer to description in Appendix 2.5]
Analyzing LGU Income Trend and Composition. [Please also refer to description in Appendix 4.1]
Analyzing LGU Expenditure Trend and Composition. [Please also refer to description in Appendix 4.1]
Revenue and Expenditure Projection and Forecasting Techniques
A. Average Annual Growth Rate (AAGR) Method. Uses the average growth for a specified number of years to grow the latest year's figure in order to come up with projected income or expenditure for the next year.
AAGR= (Income or Expenditure for Latest Year lessIncome or Expenditure for Earliest Year) x 100 __________________________________________(Total Income or Expenditure From Earliest to Latest Year less Income or Expenditure for Latest Year)
Projected Income or Expenditure for Next Year = Income or Expenditure for Latest Year x [1+(AAGR/100)]
B. Linear Regression Technique. This technique is used to establish trend lines underlying observed revenue and expenditure collections over several years' period. The regression technique analyzes the relationship between observed values of X and Y over a period and then calculates the mathematical relationship of the two variables which may be used to predict the value of Y. Following is the described mathematical relationship: Y=Constant+(Coefficient)*X, where for this purpose, X is the year and Y, is the amount of revenues collected.
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Linear Regression By Hand. Linear regression coefficients and constants may be calculated by use of a computer program, a programmable calculator, both with built-in functions for the purpose, or by hand calculation. To determine a regression line by hand, a table must first be constructed:
Column 1: Years over which the time series is plotted with the first year indicated as Number “1”; this column is called the “X” values.
Column 2: Shows the recorded data for the variable for which a trend line will be developed, e.g., revenue collections; this column is termed “Y” values.
Column 3: Value of X minus the average of all X valuesColumn 4: Value of Y minus the average of all Y valuesColumn 5: Square of Column 3Column 6: Square of Column 5Column 7: Column 2 times Column 3
The regression equation is then calculated as : Predicted Y = a + b times X, where “b” is the coefficient derived as the sum of Column 7 divided by the sum of Column 5; and “a” is the constant computed as the average of all Y's (Column 2) minus “b” times the average of all X's (Column 1). The predicted Y is calculated every year given the relevant X value for each year. When plotted on the graph, the predicted Y values will produce a straight line showing the underlying trend in revenues.
Formulating Multi-Year Revenue Estimates. [Please refer to description in Appendix 4.1]
Guide Questions for Evaluating Targets. [Please refer to description in Appendix 4.1]
Estimating the Fiscal Gap. (1) Determining AIP items that found their way into the budget document; (2) Considering as gap AIP items that were not funded in the budget; (3) Culling from the LDIP/PDIP and ELA the priority projects and activities of the LGU; and (4) the estimated gap is the sum of items 1 and 2.
Estimating Prospective IRA Shares. LGUs can easily estimate their prospective IRA shares using the following steps:
Step 1 Get the total IRA allocation from GAA or BIR Certification
Step 2Compute for the total share of provinces, cities, municipalities or barangaysTOTAL IRA x 23% (Province) = IRA Share of ProvinceTOTAL IRA x 23% (Cities) = IRA Share of CitiesTOTAL IRA x 23% (Municipalities) = IRA Share of MunicipalitiesTOTAL IRA x 23% (Barangays) = IRA Share of Barangays
Step 3 (a) For the share of individual province, city, or municipality, compute for the
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allocation per factor
Example for the province:23% Share of the Province x 50% (Population) = Allocable Share (Pop.)23% Share of the Province x 50% (Land Area) = Allocable Share (L.A.)23% Share of the Province x 50% (Equal Sharing) = Allocable Share (E.S.)
(b) Then compute for the proportionate share of the province with respect to total of all provinces
Step 4Add the shares of the province from all the three factors. The summation represents the total IRA of the subject province.
This process can be utilized to determine the IRA shares of cities and municipalities.
For the barangays, Step 3 shall be changed as shown below:
Step 3 (a) Determine the number of barangays with 100 inhabitants and multiply it by P80,000.
(Number of barangay with 100 inhabitants) x (P80,000) = Share of Barangays with 100 inhabitants
(b) Deduct the result from the 20% IRA shares of the barangays to get the remaining allocable share
(c) Distribute the remaining allocable share to the two factors
Allocable Share for Population = Remaining Allocable Share x 60%Allocable Share for Equal Sharing = Remaining Allocable Share x 40%
(d) Determine the additional share of individual barangays by getting their proportionate allocation in relation to all barangays based on population shown and equal sharing.
Population Factor:
Population of Subject Barangay x 100% x Allocable Share Population of All Barangays for Population
Equal Share Factor:
1 x 100% x Allocable Share Population of All Barangays for Equal Sharing
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Step 4Add P80,000 (if the barangay has 100 inhabitants) with the results of (a), (b) and (c) of Step 3.
Newly created barangays such as those created after the effectivity of the Code will not be subject to the IRA computation above because their funds shall be taken from the IRA of their money barangay.
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Sources
Budget Operations Manual for Local Government Units (An Updated Version of the June 2005 Edition), April 2008
Harmonization of Local Planning, Investment Programming, Revenue Administration, Budgeting and Expenditure Management, Joint Memorandum Circular (JMC) No. 001, Series of 2007 (JMC)
Manual for Statement of Receipts & Expenditures System
Provincial Development & Physical Framework Plan, Volume 3. Guidelines on Investment Programming and Revenue Generation
Seminar Workshop on Resource Mobilization Course Book