Real Estate Taxes
Taxwise or Otherwise — By Toni Rose L. Capistrano
[Excerpted full text for full awareness of the Bukidnon People.]
The complexities of realty taxes
As the new year is just unfolding, and people are still reeling from the pinch of high spending and incessant merrymaking, the painful reality of tax obligations comes to fore. Annual registration, license fees, mayor’s permit and local business taxes will have to be settled this month.
One major requirement is the payment of the real property tax (RPT) which is considered a national tax even though it is being collected by the local government units (LGU) under the Local Government Code (LGC) of 1991 (Benguet Corporation vs. Central Board of Assessment Appeals, GR No. 100959 dated June 29, 1992).
The RPT is an annual ad valorem tax on land, buildings, machineries and other improvements affixed to real properties located within the LGU’s jurisdiction. It is computed by multiplying the RPT rates with a fixed proportion of the value of the property referred to as the assessed value. There is also the Special Education Fund (SEF) of 1% to be collected in addition to the basic RPT which also accrues on the first day of January of each year.
However, these realty taxes can be paid in four equal installments at the end of each calendar quarter. Paying them ahead of the deadlines would entitle the taxpayers to a substantial discount ranging from 10%-20% of the tax dues. Additional realty taxes that may be imposed by the LGUs also include the special levy on lands improved by public works and government infrastructure projects and idle land tax which is collected on a case-to-case basis. Among the complex issues surrounding the payment of the RPT is the valuation of real properties and the determination of the amount of RPT liabilities. Under the present law, the Schedule of Market Values (SMV) of real properties is determined by the city or municipal assessors at least once every three years and submitted to the local legislative council for approval. An ordinance is then passed by the local legistlative council embodying the approved SMV.
The fair market value (FMV) is a vital tool in determining the SMVs. Based on the FMV criterion, appraisals of real property must be based on the current fair market value prevailing in the localities where the properties are found. A certain percentage of the FMV is then taken as basis to determine the assessment levels, i.e., the taxable value, of the real properties. The assessment levels range from 20%-50% of the FMV of the properties depending on their classification, i.e., whether they are agricultural, commercial, industrial or residential. Improvements on land (e.g., houses or buildings) are also assessed separately with different assessment levels from those used for the land.
The RPT rate is then multiplied by the appropriate assessment level to arrive at the RPT due. The RPT rate varies among the different LGUs, but the maximum ceilings prescribed by law shall be 2% in the case of cities and municipalities within Metro Manila, and 1% in case of provinces.
Real property taxation in the Philippines follows the self-declaration system, whereby owners of real property or their duly authorized representatives are required to file with the local assessor a sworn statement declaring the current and FMV of all their real properties. If the sworn declaration is not complied with, the local assessors shall be authorized to make the FMV declaration and assess the property.
A World Bank (WB) study indicated that land is the country’s most important resource and biggest financial asset where around 50% to 75% of our national wealth is contained. Thus, real property is the largest potential source of contribution to our national income for funding the country’s economic and social development projects. However, such potential has not been fully tapped and revenue from real property contributes only a meager 6.6% to the gross national product or GNP. This has been attributed to our present chaotic, ineffective and inequitable real property valuation system which, based on a five-year study conducted by the Land Administration and Management Project of the Department of Finance (DoF), is due to the following factors:
• existence of multiple valuation systems and standards in the Philippines where at least 23 national government agencies and 1,712 LGUs perform valuation functions for their own purposes, e.g., national taxation (Bureau of Internal Revenue or BIR ), real property taxation (LGUs), land conversion (Department of Agrarian Reform), registration and extraction of fees (Land Registration Authority, Register of Deeds);
• wide variations or disparities in the valuation of the same property by the different government agencies. A 2004 comparative study conducted by the DoF showed that the SMV of LGUs are lower by 13%-94% than the Zonal Values of the BIR, and the Zonal Values of the BIR are lower by 5%-930% than valuations made by private appraisers, and the SMVs are 187%-7,474% less vis-a-vis the valuation of private appraisers. Such wide disparities have led to confusion and susceptibility to corruption.
• rampant undervaluation of real property for tax purposes and conversely, overvaluation for expropriation and other cases where the government pays;
• more and more LGUs fail to comply with the regular revision of the SMVs, as mandated by the LGC. Such practice has adversely affected LGUs’ revenue generating capacity as they became more dependent on their respective Internal Revenue Allotment (IRA), thus, retarding their growth as self-reliant and self-sustaining communities.
• absence of a complete, current and reliable database of real property transactions.
As a response to these problems, the Senate committees on Finance, on Ways and Means, and on Local Government had approved Senate Bill No. 3519, or the proposed Real Property Valuation Reform Act, aimed at promoting, developing and maintaining a just, equitable and nationally consistent real property valuation based on internationally accepted standards, concepts and practices. The bill awaits plenary approval on second reading.
Under the proposed bill, a specific set of Philippine Valuation Standards based on international valuation standards will be adopted to govern real property valuation in the country and a single real property valuation base will be followed by all government agencies for valuing/appraising real property and for assessment of all real-property related taxes. To accomplish this objective, a National Valuation Authority, which is a highly technical agency under the DoF, will be formed and will have the sole and primary responsibility of valuing and appraising all real properties in the Philippines. Pending the passage and approval of the bill, Malacañang issued Executive Order No 833 dated Oct. 13, 2009, creating a Property Valuation Office under the DoF which will in the interim, sustain and institute real property valuation reforms in the country.
Adoption of a uniform standard of real property valuation will eradicate the confusion created by different valuation systems. With property valuation having become highly politicized, as the SMVs and Assessment Levels are being legislated by local legislative councils, Senate Bill 3519 appears to be a laudable proposition. Thus, it is expected that real property transactions and calculation of real-property related taxes would be simpler and more straightforward.
However, from the taxpayer’s perspective, whether the actual effect of Senate Bill 3519 is beneficial is not yet known as this will depend on the reasonableness of the valuation of the NVA. We can only hope that the uniform valuation system will be based on internationally accepted valuation standards but nonetheless taking into account specific local conditions and factors.
I believe the adoption of a fair, balanced and uniform standard of real property valuation will result in a more equitable, rational imposition of real property taxes, as confusion behind the collection of said taxes will be minimized and the confidence in the government’s realty appraisal can be restored.
(The author is a consultant at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PricewaterhouseCoopers global network. Feedback is welcome. Readers may send feedback via e-mail to email@example.com.).