Proposed Real Property Valuation andAssessment Reforms

Proposed Real Property Valuation andAssessment Reforms

Outline of the Presentation

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What is wrong with the current system?

Why do we the need the reform?

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II

III

IV

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II

III

IV

What policy reform is needed?

What are the benefits of the reform?

• Real property as major resource and potentially biggest source of own-revenues of local governments

• According to World Bank:

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

LGAF: Philippines was rated “B” on property valuation and taxation,which means that the country’s performance on the said thematic arearepresent the second best set of options that make progress towardsgood local land governance.

Background

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

LGAF: Philippines was rated “B” on property valuation and taxation,which means that the country’s performance on the said thematic arearepresent the second best set of options that make progress towardsgood local land governance.

Multiple, overlapping valuations

Outdated valuations used for governmental purposes, especially for nationaland local taxation; LGUs comingle valuation with taxation. Only 37% LGUs and60% RDOs have updated values.

Costs incurred, revenues foregone: overvaluation when government pays,undervaluation when government collects

No single agency responsible for ensuring that valuations are completed inaccordance with international standards

Absence of a comprehensive real property electronic database

I. What is wrong with the current system?

Multiple, overlapping valuations

Outdated valuations used for governmental purposes, especially for nationaland local taxation; LGUs comingle valuation with taxation. Only 37% LGUs and60% RDOs have updated values.

Costs incurred, revenues foregone: overvaluation when government pays,undervaluation when government collects

No single agency responsible for ensuring that valuations are completed inaccordance with international standards

Absence of a comprehensive real property electronic database

Multiple, Overlapping Valuations

23 NGAs doing/requiring valuations 1,715 local government unitsA property may have as many values as there are valuers/valuing agencies

Each agency using own systems & methodologies: Notable disparities noted in 19 sample cities*:Each agency using own systems & methodologies: Notable disparities noted in 19 sample cities*:

• wide disparities between the schedule of zonalvalues (SZV), schedule of market values (SMV),& private appraisers’ values

• varying values for the same piece of property• lack of confidence in the land valuation system

• SMV < SZV by 13% - 94%• SZV < Private Valuation by 5% - 930%• SMV < Private Valuation by 187% -

7,474%

*Based on a 2004 Comparative Study of Land Values in Selected 19 Cities & Municipalities. Huge variance have been noted in urban areas.

II. Why the Need for Reform?

Low tax intakeand underminesrevenuegeneration

GDP Growth in FY 2018: 6.1%Main contributors to the country’seconomic growth:

1. Manufacturing – 23.3%2. Trade Sector – 16.9%3. Real Estate, Renting & Business

Activities – 11.4%

Average (FYs 2014-2018)

29%RPT to Local

Sources

Average (FYs 2014-2018)

0.37%RPT to GDP

Low tax intakeand underminesrevenuegeneration

RPT CollectionEfficiency (in FY 2016)

All LGUs: 71%

Cities: 73%

Provinces &Municipalities: 68%

GDP Growth in FY 2018: 6.1%Main contributors to the country’seconomic growth:

1. Manufacturing – 23.3%2. Trade Sector – 16.9%3. Real Estate, Renting & Business

Activities – 11.4%

BSP: residential real estate prices rose by 4.4%percent year-on-year in Q3 2018

NG Real Property Transfer Tax Types:CGT, CWT, FWT, DST, DN, ES

FYs 2013 to 2016

71%RPT Collection

Efficiency

For FY 2016

NCR: 87%Highest RPT Collection

Efficiency

Average (FY 2014-2016)

0.23%Property Transfer

Taxes to GDP

For FY 2016

₱102.16BNG Real Property

Transfer Taxes

0.40%

0.50%

0.60%

All Provinces, Cities, and MunicipalitiesSource: DOF-BLGF

Real Property Tax to GDP RatioFY1972 - FY2017

0.00%

0.10%

0.20%

0.30%

0.40%

'72

'73

'74

'75

'76

'77

'78

'79

'80

'81

'82

'83

'84

'85

'86

'87

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'91

'92

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'96

'97

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10 '11

'12

'13

'14

'15

'16

'17

Enactment of the Local Government Code of 1991(RA 7160)

RPT-to-GDP of Other Asian Countries

2.1% 2.1%2.2%

2.1%2.0% 2.0%

1.5%

2.0%

2.5%

0.6% 0.6% 0.6%0.7% 0.7% 0.7%

0.6% 0.6%0.5% 0.5% 0.5% 0.5%

0.4% 0.4% 0.4% 0.4% 0.4% 0.4%

0.0%

0.5%

1.0%

2009 2010 2011 2012 2013 2014

Japan Korea Malaysia Philippines

Share of Local Tax Revenue SourcesFY1972 - FY2017

0.5

0.6

0.7

0.8

All Provinces, Cities, and MunicipalitiesSource: DOF-BLGF, as of April 2018

Real Property Tax Business Tax

0

0.1

0.2

0.3

0.4

0.5

'72 '73 '74 '75 '76 '77 '78 '79 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Enactment of the Local Government Code of1991 (RA 7160)

Sample of Huge Disparities in Valuations

400,000.00

500,000.00

600,000.00

700,000.00

SMV: Php40,000/m2 (1996)

ZV: Php439,000 (CR)/m2 (2017)

MV: Php700,000/m2

SMV: Php29,000/m2 (1996)

ZV: Php320,000/m2 (2017)

MV: Php390,000/m2

Ayala Avenue,Makati City

18xLegaspi Village,

Makati City

13x-

100,000.00

200,000.00

300,000.00

400,000.00

MVSZV

SMV

Ayala Avenue Legaspi Village E. Rodriguez Ave Jr. – C5

SMV: Php29,000/m2 (1996)

ZV: Php320,000/m2 (2017)

MV: Php390,000/m2

SMV: Php35,000/m2 (2017)*

ZV: Php100,000 (CR)/m2 (2012)

MV: Php130,000/m2

Legaspi Village,Makati City

13xE. Rod., C5,

Quezon City

4xSales Listing gathered in the internet; value estimate on landbased on abstraction/extraction method.

*Under TRO (April 2017)

LGUsOnly 37% of LGUs have updated SMVsThere are 98 non-compliant cities* and 46 provinces as of March 2019.

How outdated are government valuations?

B I R 60% of RDOs with updated Zonal Valueswithin the last 3 years. 72 out of 120 RDOs are updated.

LGUs

*including the lone municipality in Metro Manila

Effects of Outdated Values

1 2 3Unrealized revenues and socio-economic benefits from delayed

projects

Conflicting land values result inright-of-way compensation

problems

Lengthy court litigations arisingfrom valuation disputes

1 2 3

4 5

Unrealized revenues and socio-economic benefits from delayed

projects

Conflicting land values result inright-of-way compensation

problems

Lengthy court litigations arisingfrom valuation disputes

Projects are delayed Cost overruns

• In the absence of a uniform and updated set of SMVs,implementing agencies of infrastructure projects, such as DOTRand DPWH, have no reliable benchmark to base their budget andinitial offer price on.

• Based on a study commissioned by the BLGF, there is a 73%probability that the disparity between the initial offer price andthe revalued price will cause a valuation-related delay in theROW acquisition.

• On the other hand, the residual probability of having valuation-related delays if the initial offer price matches the revalued priceis just 4.43%.

Right of Way compensation issues

• In the absence of a uniform and updated set of SMVs,implementing agencies of infrastructure projects, such as DOTRand DPWH, have no reliable benchmark to base their budget andinitial offer price on.

• Based on a study commissioned by the BLGF, there is a 73%probability that the disparity between the initial offer price andthe revalued price will cause a valuation-related delay in theROW acquisition.

• On the other hand, the residual probability of having valuation-related delays if the initial offer price matches the revalued priceis just 4.43%.

From a sample of 9 road projects and 1 rail project, atleast 7.9 billion pesos lost due to delay in ROW.

Amounts in million pesos LRT 1 South (Cavite)Extension

Road projects in Regions 1,6, 8, and 9

Project value 64,915.4 1,326.9

Civil works budget(2015-2017)

15,756.8 NA

14

Civil works budget(2015-2017)Total financial loss using averageannual CWPI

944.3 87.8

Total economic loss usingforegone economic benefit

78,547.7 1,314.6

Total financial and economicloss

79,492.0 1,402.4

Total financial and economicloss due to ROW (10%)

7,949.2 140.2

Based on data from the Department of Transportation and Department of Public Works and Highways

• No sanction for non-compliance in the regularupdating of SMVs and zonal values

• LGUs fail to update and revise the SMV as basis forreal property taxation despite statutoryrequirement: unpopular, political backlash, technicalcapacity, cost-issues, etc.

Why are values for government purposes outdated?

• No sanction for non-compliance in the regularupdating of SMVs and zonal values

• LGUs fail to update and revise the SMV as basis forreal property taxation despite statutoryrequirement: unpopular, political backlash, technicalcapacity, cost-issues, etc.

Adopt international standards, rationalize the process

Establish single valuation base for taxation, benchmark for otherpurposes

Insulate valuation from undue politicization; LGUs shall continue toregulate tax rates and assessment levels.

Support LGUs in fulfilling their functions while improving the oversightfunction of the NG;

Establish comprehensive database to support valuation function

III. What Policy Reform Is Needed?

Adopt international standards, rationalize the process

Establish single valuation base for taxation, benchmark for otherpurposes

Insulate valuation from undue politicization; LGUs shall continue toregulate tax rates and assessment levels.

Support LGUs in fulfilling their functions while improving the oversightfunction of the NG;

Establish comprehensive database to support valuation function

Separate Valuation from Taxation

TECHNICAL FUNCTION P O L I T I C A L F U N C T I O N⇔

VALUATION ASSESSMENTLEVEL

TAX RATE BUDGET

Maximum Levels

•Residential = 20%

•Agricultural = 40%

•Commercial = 50%

•Industrial = 50%

•Mineral = 50%

Basic Tax

Maximum Levels

•1% - Provinces/

Municipalities

•2% - Cities

1% SEF

ANNUAL

Common Misconceptions

The increase in real property tax is strictlyvalue driven

The increase in the SMV automaticallyleads to a proportionate increase in theRPT

IV. Benefits of the Reforms

1 2 3 4Single Valuation Base Uniform Standards Comprehensive Database Increased Revenues

1

5

2

6

3

7

4

8

Single Valuation Base

Improve Local Autonomy

Uniform Standards

Higher Investor Confidence

Comprehensive Database

Guaranteed Benefit ofEducation Sector

Increased Revenues

Reduced Government Costs

Salient Points of the Reform

• Uses of SMVs

• Preparation and Approval of SMVs

• Regular Updating of SMVs

• Setting Assessment Levels and TaxRates

• Publication

• Development of Real PropertyInformation System

• Budgetary Requirements for SMVUpdating

• Appointment/Qualifications ofAssessors

• The Real Property Valuation Service(RPVS)

• Creation of Central and RegionalConsultative Committee

• Mandatory constitution of LBAA

• Penal provisions

2020

• Uses of SMVs

• Preparation and Approval of SMVs

• Regular Updating of SMVs

• Setting Assessment Levels and TaxRates

• Publication

• Development of Real PropertyInformation System

• Budgetary Requirements for SMVUpdating

• Appointment/Qualifications ofAssessors

• The Real Property Valuation Service(RPVS)

• Creation of Central and RegionalConsultative Committee

• Mandatory constitution of LBAA

• Penal provisions

PROPOSEDREAL PROPERTY VALUATION AND

ASSESSMENT REFORMS

Thank you!

PROPOSEDREAL PROPERTY VALUATION AND

ASSESSMENT REFORMS

Thank you!