Improving Fiscal and Land Governance Through Property Valuation and Taxation Reforms

in the Philippines

JOSE ARNOLD M. TANDeputy Executive Director for OperationsBureau of Local Government FinanceDepartment of Finance, Philippines

Workshop on Land Records Management and Information Systems:Community of Learning Exchange

Bangkok, Thailand, June 12-14, 2017

Outline of Presentation

• Background• LAMP as a Solution • Innovations and Interventions• Benefits and Lessons Learned• Paradigm Shifts and Present Initiatives

Real property as major resource and potentially biggest source of local income

WB: 50% to 75% of the national wealth contained in real properties

Huge foregone revenues: overvaluation when government pays, undervaluation when government collects

BIR zonal values, as basis for national real property-related taxes, also below market value

Background

23 national government agencies; 1,712 local government units doing valuations

Each agency using own systems & methodologies: i. wide disparities between the zonal values (ZV), schedule

of market values (SMV), & private appraisers’ values ii. varying values for the same piece of propertyiii. lack of confidence in the land valuation system

Notable disparities noted in 19 sample cities:i. SMV < ZV by 13% - 94% ii. ZV < Private Valuation by 5%-930%iii. SMV < Private Valuation by 187% -7,474%

Background

Agency Purpose Basis/Methodology

Bureau of Internal Revenue (BIR) National Taxation

Zonal ValuationCommittee: Gross Selling Price or SMV as basis + appraiser’s

opinion + BIR-RDO

Local Government Units (LGUs) Real Property Taxation, Acquisition, Disposal

Schedule of Market ValuesMass Appraisal using Sales,

Income Capitalization, Cost Approaches

Bureau of Local Govt. Finance (BLGF) RPT Administration Technical Assistance only

Land Management Bureau (LMB)Acquisition, Disposal, & Rentals of Public Lands

DENR Committee: Market, Cost, Income ApproachesLand Management Service (LMS)

Forest Management Bureau (FMB) Actual FOB Market Price;

Dept. of Agrarian Reform (DAR)Bureau of Land Acquisition &Dist. BLAD)

Acquisition & Distribution of Land for Agrarian Reform

Land Conversion

Just compensation procedures; Market Approach

Department of Agriculture (DA)

Department of Public Works & Highways (DPWH)

Expropriation/Acquisition of Land for Right-of-way &

Expansion or Condemnation Proceedings

RA 8974, Market Value, Replacement Cost Method

Background

National Government Agencies Performing Valuation Functions

Agency Purpose Basis/Methodology

Department of Public Works & Highways (DPWH)

Expropriation/Acquisition of Land for Right-of-way &

Expansion or Condemnation Proceedings

RA 8974, Market Value, Replacement Cost Method

Board of Investments (BOI)Project Feasibility Studies for Industrial Estates & Export

Processing Zones

Market, Cost, Reproduction Cost, Income Cap.

ApproachesBureau of Trade Regulation & Consumer Protection (BTRCP)

Regulation & licensing of private appraisers

Prescribes USPAP/IVS for use by private appraisers

Land Registration Authority (LRA) Real Property Litigation & Garnishment Proceedings, Registration & Extraction of

FeesRegistry of Deeds (RD)

Commission on Audit (COA) Government Real Property Transactions

Similar to Private Appraisers; Land Rating Grid Method

National Power Corporation (NPC) Expropriation/Right-of-way Acquisition/Rentals

RA 8974, Just Compensation, Market Value,

Replacement Cost

Land Bank of the Philippines (LBP) Mortgage Lending / Securitization

EO 405, DAR AO No. 5, Deeds of Sale, Sales

Offering, Private AppraisersDevt. Bank of the Philippines (DBP)

National Government Agencies Performing Valuation Functions

Background

Agency Purpose Basis/Methodology

National Housing Authority (NHA)Acquisition, Disposition,

& Mortgage Lending

Market Data/Economic Rent

Cost & Market Approaches on (1) Rawland, (2) House (3)

Preliminary Appraisals

Nat’l Home Mortgage Finance Corp. (NHMFC)Home Guaranty Corporation (HGC)

Home Development Mutual Fund (HDMF) Mortgage LendingMarket Data or Sales

Comparison, Unit-In-Place, Cost Approaches

Social Security System (SSS) Mortgage Lending Market Date Approach w/ Value Adjustments

Govt. Service Insurance System (GSIS) Mortgage LendingCollateral Valuation, Sales, Reproduction Cost, Income

Capitalization, Private

Philippine Reclamation Authority (PRA) Property Development or Disposal

Valuation contracted out to private appraisers

National Housing Authority (NHA) Acquisition, Disposition, & Mortgage Lending Market Data/Economic Rent

National Government Agencies Performing Valuation Functions

Background

Tax RateLocal Governments: Real Property Tax (RPT)

Basic RPT Max of 1% for ProvincesMax of 2% for Cities/Municipality in Manila

Special Education Fund (SEF) Fixed 1%

Tax on Transfer of Real Property Ownership Max of 50% of 1% (optional)

Special Levy Fixed 1% (optional)

Idle Land Tax Max of 5% (optional)

National GovernmentCapital Gains Tax Fixed 6%

Documentary Stamp Tax Php15.00 + Php15.00 for every Php1,000 value in consideration

Estate TaxBased on schedule

Donor’s Tax

Value Added Tax 12%; graduated base on schedule

Background

Land Based Taxes

LAMP1 2001-2003Conduct of policy studies & reform proposals.

LAMP1 Extension 2004

LAMP1 Transition 2005

DENR – Department of Environment and Natural ResourcesLRA – Land Registration AuthorityDOF– Department of Finance BLGF – Bureau of Local Government Finance NTRC – National Tax Research Center

Land Administration and Management Project

Improved

Land & Fiscal

Governance

Standardized, harmonized approaches

Depoliticized valuation; make

taxation equitable

Support the widening of

property tax base

Enhanced capacity thru professional

development, and educationComputerization

& information management

Integrated Approach

Key Interventions and Innovations

Policy and Legal Framework• Professionalization of appraisal practice: Real Estate Service Act

of 2009• Administrative issuances as sustainability

measures: Executive Order No. 833, Valuation Reform Act bill, inter-agency circulars

Tools and Systems• Philippine Valuation Standards based on

IVS, Mass Appraisal Guidebook with appropriate training programs

• Prototype information systems: Valuation Database and Information System (VDIS) and electronic Field Appraisal and Assessment Sheet (eFAAS)

• Tax policy research and studies

Capacity Development Piloted implementation of reforms in cities of Naga, Iloilo, Mandaue

Formal land valuation and management courses offered by UP Open University Continuing professional development

courses Diploma, master’s programs

Trainings on PVS, Basic Course on MassAppraisal, tax policy studies

Information drives, roadshows, caravans, legislative briefings

Broader support to selected LGUs through Innovation Support Fund, grants, LGU-led rollout, replication of reforms

Key Interventions and Innovations

Benefits and Lessons Learned

Perpetuating faulty, weak valuation system, neglect of mandate is bad governance: effects are systemic and complex -- incorrect valuation only leads to greater inequity in sharing the tax burden

Valuation and taxation reforms vital for effective decentralization to make LGUs economically viable

Revaluation as a means towards better governance, better public finance, better services for people, transparency

Win public support thru ‘champions’ (requires political will), participatory communication, transparent agenda

Naga Case: Benefits from valuation reforms outweigh political costs

Convergence/collective commitment & cooperation; broad-based multi-stakeholders & whole-of-government support

Conclusions

The quest for good land and fiscal governance is a continuing endeavor and a long process. Positive initial results of reform processes have to be strengthened.

Valuation and taxation issues are land and fiscal governance issues and are development issues that need to be dealt with. The LAM reforms offer opportunity for improving fiscal governance without creating new taxes or increasing the rates of existing ones.

Reforms need to go on, but requires from government more effort, time, resources. Subsequent programs and initiatives are needed in order to sustain the LAM efforts and to keep the momentum in the land sector moving and the wave of reforms unhampered.

Paradigm Shift and Present Initiatives

62 of 80 Provinces Use Outdated Basis for Collecting Real Property Tax

5 in every 8 of them have property tax contributing only less than 5% to their annual regular income

An Updated Schedule of Market Value Leads to More Revenues from Real Property Tax

More Revenue Means More Social Services

Paradigm Shift and Present Initiatives

Tax Watch and Infomercial

Provinces Forego up to Php 9.4 Billion in Real Property TaxDue to outdated Schedule of Market Values (SMV) and Low Collection Efficiency

Php 9.4 Billion can Fund

700 markets 979 Km of Roads 2,738 Day Care Centers

9,580 Classrooms

Pay Your Real Property Tax.Make your Local Government Accountable

Sustainable Local Finance Begins with Correct Valuation and Efficient Tax Collection

Paradigm Shift and Present Initiatives

Tax Watch and Infomercial

The Cities of Lamitan, Malabon, Navotas and Tanauan are outdated by 19 years

An Updated Schedule of Market Value Leads to More Revenues from Real Property Tax

More Revenue Means More Social Services

4 in every 5 Cities Use Outdated Basis for Collecting Real Property Tax

Paradigm Shift and Present Initiatives

Tax Watch and Infomercial

Cities Miss up Php 20.3 Billion in Real Property TaxesWhen they use outdated Schedule of Market Values and not aggressive in tax collection

Php 20.3 Billion can Fund

298 SanitaryLandfills

451 TransportTerminals

1,015 SatelliteHealth Centers

2,929 Low-costResettlement Houses

Pay Your Real Property Tax.Make your Local Government Accountable

Sustainable Local Finance Begins with Correct Valuation and Efficient Tax Collection

Paradigm Shift and Present Initiatives

Tax Watch and Infomercial

Paradigm Shift and Present Initiatives

• Aims to develop and adopt international standards for use by government and private sector

• Will adopt a single valuation base: Schedule of Market Values (SMV) as basis for local and national taxes, and as reference for other purposes such as for lease, expropriation/ROW, socialized housing, etc.

• Seeks to depoliticize and recentralize the approval of SMVs from the Sanggunian to the Secretary of Finance (upon review by BLGF and BIR); updating of SMV every 3-5 years

• Support the professionalization of the valuation practice (Real Estate Service Act or RA 9646)

• Estimated annual incremental revenues for LGUs: Php8.03B

Real Property Valuation Bill Salient Features

Tax Rate

Maximum Rate

Basic Tax

1% - Province/ Municipality2% - City

SEF

1% - Province/City

Assessment Level of Land

Maximum Level

Residential = 20%Agricultural = 40%Commercial = 50%Industrial = 50%Mineral = 50%

Valuation

Preparation of Schedule of Market Value

Appraisal and Assessment of Real Property

Real Property Tax Administration

PoliticalTechnical

Paradigm Shift and Present Initiatives

Key Policy Actions of the Real Property Valuation Bill

THANK YOU!

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