Romulo R. ZipaganErlito R. Pardo

Norberto Malvar

for Local Government Academy

I = P x A x T• Where

• I = impact equals development

• P = population

• A = affluence, measured in terms of global GDP

• T = technology, measured in terms of no. of registered patents

In 1900:

• P = 1.8 billion

• A = USD 2 trillion

• T = 141,000 patents

In 1950:

• P = 2.5 billion

• A = USD 5.3 trillion

• T = 412,000 patents

In 2011P = 7 billionA = USD 55 trillionT = 1.9 million patents

By 2030, UN projected population to grow to 9 billion; in 2050, 10 billion.

The ADB’s Asian Development Outlook 2011 projected ...

• Global GDP of USD 148 trillion in 2050, more than 50% will be generated by economic power houses - China, India, Japan, South Korea, Malaysia, Thailand & Indonesia as the lead economies.

• Supported by high-income developed economies -Hongkong, Singapore, Taiwan, Macau & Brunei.

• Third group of support economies – called the Asian miracle – Armenia, Azerbaijan, Kazakhstan, Georgia, Cambodia & Vietnam.

• The last group of countries supporting the Asian growth are 30 low-to-modest-growth economies including the Philippines.

• GDP per capita in Asia in 2050 will rise USD38,600 compared with the projected global average of USD36,600.

• ADB identified 6 drivers of economic transformation in Asia:1. Technical progress2. Capital accumulation3. Demographics & labor force4. Emerging middle class5. Climate change, mitigation/adaptation &

competition for resources6. Communications revolution

Development results from disciplined

execution of a clear vision.

commitment

political will

good

governance

transparency sufficient

resourcesetc.

Development and its rewards are

not free…

Resources must be:

• -- located (sourced)

• -- allocated

• -- used

Resource mobilization is inherent to

the challenge of development!

Legal Framework of

LGU Resource Mobilization

Constitution

Local Government Code

Local Ordinance

Constitutional and

Legal Bases

Is a direct authority conferred to LGUs to create “own-source revenues” and to levy taxes, fees and charges

Is subject to such guidelines and limitations as the Congress may provide

Must be consistent with the basic policy on local autonomy

Provides that the taxes, fees and charges shall accrue exclusively to the local governments

This Constitutional Grant:

The power to tax and the power to

create sources of revenues may be

exercised by local governments, not by

mere delegation of authority by Congress,

but pursuant to the direct authority

conferred by the Constitution.

Supreme Court Decision on the

Exercise of LGU Taxation

The enabling law on the power of LGUs to

create sources of revenue is the Local

Government Code of 1991, which provides that:

“Each LGU shall exercise its power to

create its sources of revenue and to levy taxes,

fees and charges subject to the provisions

herein, consistent with the basic policy of local

autonomy. Such taxes shall accrue exclusively

to the LGUs.” (Section 129)

Statutory Authority

The power to impose a tax, fee or charge,or to generate revenue under the LocalGovernment Code (LGC) is exercised bythe Sanggunian of the LGU concernedthrough an appropriate ordinance.(Section 132)

LGUs exercise powers as a politicalsubdivision of the national Governmentand as a corporate entity representing theinhabitants of the territory. (Section 15)

Enabling Authority

In their political or governmental

nature, LGUs are endowed with taxing

powers and police powers. Thus, they

may levy taxes and impose regulatory

fees.

In their corporate nature, they possess

proprietary powers arising from their

existence as legal persons and not as

public agencies.

Enabling Authority ...

Philosophical

Framework

Two principles that provide a useful framework:

“Ability-to-Pay” Principle - Taxes are based on the

taxpayer’s ability-to-pay, as measured by the size of his

income or wealth.

“Benefits-Received” Principle” – Individuals should

contribute to the support of government in proportion to the

benefits they receive from public services.

The benef i t pr inc ip le is appl icable where

the benef ic iar ies can be c lear ly

ident i f ied .

The overarching philosophy in tax

systems is fairness.

Equity – In principle, the tax system ought to be fair in its relative treatment of different individuals. It involves some measure of ability-to-pay or amount of benefits received.

Certainty – This second canon specifies that taxpayers should know which taxes are imposed, the amount to pay, and the manner of payment.

Practical Criteria for Tax Systems: Smith’s Canons of Taxation

Convenience – Smith’s third canon takes into account the convenience of the place, time, and manner of payment.

Economy – Tax administration must not involve too much expense on the part of the government.

It also means that taxes must not be too high as to discourage investment nor too low as to permit dis-economies.

Smith’s Canons of Taxation (con’t)

Adequacy – A fifth canon added by later writers states that the tax system must provide the revenues needed by the government.

Another characteristic of a good tax system is enforceability. Where voluntary compliance is the rule, mechanisms for verifying declarations of gross income or receipts must exist.

Smith’s Canons of Taxation (con’t)

Criteria for Developing Local Tax Policy

BENEFITS COSTS

• Revenue adequacy and elasticity – desirable to concentrate on cost-effective taxes

• Equity

• Economic efficiency

• Administrative feasibility

• Political acceptability

Revenue adequacy:

revenue potentials of a tax

Therefore: Concentrate on taxes that are cost effective

-- revenues far outweigh cost of collection Avoid wide range of taxes which include non-

productive taxes-- subsidized collection costs -- diffused administrative effort-- strain patience of public -- misleading viability impressions

Tax elasticity: growth in tax revenues

keep pace w/ growth in tax base, population,

inflation, etc

Why need for the sensitivity analysis?

to avoid deficits - local budgetary requirements grow due to population growth and inflation

Dimensions of elasticity:

appropriate tax structure

(e.g. sales tax : ad valorem vs. unit basis)

how easily LGUs exploit growth

(e.g. real property tax on ad valorem rate)

Equity: perceived fairness in

treatment of individuals

Equity questions:

Who should pay more taxes?“ability to pay principle” vs. “benefit principle”

Who bears the tax burden?consumer vs. producer

Is the tax progressive, proportionate, or regressive?

How susceptible is tax to evasion?

Economic efficiency: measure of tax’s

effects on economic decisions of people

Ideally, tax should be non-distortionary or neutral

-- there is nothing person can do to alter tax liability

-- levied on non-alterable characteristic like age or sex

-- rates too small to create impact on economic decisions

Administrative feasibility: cost effectiveness of tax

• Costs in administering tax system:

-- direct costs

-- indirect costs

• Costs affected by:

-- kinds of records necessary

-- complexity of tax structure

-- nature of tax

Political Acceptability . . .no tax is popular!

Political will is crucial

Factors affecting political sensitivity:

-- visibility of tax

-- discretionary decisions

-- social values and culture

The bottomline is to establish a strong connection between taxes collected and services provided

Every tax is composed of a base and of a rate structure. The base is the object that is taxed. The base may be taxed at a flat rate, such as a percentage of value or a fixed amount per physical unit, or with a more elaborate rate structure, e.g., a progressive tax.

Tax Base: Shifting and Incidence

The incidence of a tax does not always fall onthe person on whom it is levied. Under someconditions the tax is shifted to someone else.For example, the impact of a sales tax is on theseller, who later transfers or shifts the burden tothe customer, who pays the purchase price. Inthis case, it is the consumer who ultimatelybears the burden or incidence of the tax.

These revenue sources have

different purposes:

Taxes – enforced contributions made for purposes of revenue generation and redistribution

Fees – imposed collections as a system of recovery for delivery of service by a public officer; purpose is regulation and service delivery

Charges – pecuniary liability as rents against persons or property

Local governments derive income from “external sources”, as distinguished from “own-source” or “local sources”:

1. Shares in the Proceeds of National Taxes

a. Share in National Internal Revenue Taxes (IRA)

b. Share in the proceeds from the development and utilization of national wealth

2. Credit Financing

- Loans, credits, and other forms of indebtedness

- Deferred payment and other financial schemes

- Bonds and other long-term financial schemes

- Inter-Local government loans, grants and subsidies

e. - Loans from funds secured by the national government from foreign sources

f. - Financing, construction, maintenance, operation and management of infrastructure projects by the private sector

3. Grants, Aids and Transfers

LOCAL SOURCES

Tax RevenueBusiness Taxes

Real Property TaxesOther Local Taxes

Non-Tax RevenueRegulatory Fees

Service/User ChargesReceipts from Econ. Enterprises

Toll FeesOther Receipts

Revenue

Receipts

Income

EXTERNAL SOURCES

Shares from National TaxesInternal Revenue Allotment

Share in the National WealthExtraordinary Receipts/Grants, Aids

DomesticForeign

Loans and BorrowingsDomesticForeign

Bond FlotationInter-Local Transfers

Receipts Income

Internal• Taxes• Fees • Charges• Others

Local Resource Structure

External• Internal Revenue Allotment• Share from National Wealth• Direct Share From National

Taxes• Grants and Aids• Borrowings• Public-Private Partnership

Limitations and

Fundamental Principles

Constitutional Limitations

The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation. (Section 28(1), Article VI, 1987 Constitution)

The rule of uniformity is merely a geographical and not intrinsic uniformity.

Limitations and Fundamental Principles on the

Power of LGUs to Create Sources of Revenue

and to Levy Taxes, Fees and Charges

A tax is equitable if it conforms closely to the standards of equity in the distribution of the burden.

There are two generally accepted principles in apportioning the burden: (a) the ability-to-pay principle; and (b) the benefits-received principle.

A progressive tax is one where the tax rate increases as the tax base increases.

The tax is proportional where the tax rate remains the same, whether or not the base increases or decreases.

The tax is regressive where the tax rate decreases as the tax base increases.

Due process of law and equal protection of laws

Due process requires that the tax is enforced according to regular methods or prescribed procedures and that it is applicable alike to all citizens or to all of a class.

Other Constitutional Limitations or

Restrictions:

Non-impairment of the obligation of contracts

The phrase “obligation of contracts” refers to the duty which requires parties to perform their undertaking or agreement according to its terms and content.

In this context, a license, charter or franchise is also a contract.

Limitations ...

Exemption of charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable, or educational purposes.

Limitations ...

Levy must be for a public purpose

A “public purpose” has for its objective the promotion of ... .... the greatest welfare, prosperity and contentment of all inhabitants or residents of a given political division, as for example, a State. (Black’s Law Dictionary)

Limitations ...

Fundamental

Principles

Taxation shall be uniform in each local government unit;

Taxes, fees, charges and other imposition 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;

Fundamental Principles of Taxation

The collection of local 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 other otherwise provided, and

Each local government shall, as far as practicable, evolve a progressive system of taxation.

Fundamental Principles ...

The exercise of the taxing powers of LGUs shall not extend to the levy of the following:

Impositions allocated to the National Government- Income tax

- Documentary stamp tax

- Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa

- Customs duties, registration fees of vessels and wharfage on wharves, tonnage dues and other kinds of customs fees, charges and dues except on wharves constructed by the LGU concerned

Common Limitations on the Taxing Power of LGUs

- Excise taxes on articles enumerated under the National Internal Revenue Code, as amended, and taxes, fees or charges on petroleum products;

Under Philippine law, “excise taxes” are in the nature of indirect taxes on particular commodities, and may be imposed in the form of either a specific tax or ad valorem tax

Common Limitations ...

− Percentage or value-added tax (VAT) on sales, barters or exchanges of goods or services except as provided in the Code

− Taxes on gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except on the operation and franchising of tricycles

− Taxes on premiums paid by way of reinsurance or retrocession

− Taxes, fees or charges for the registration of motor vehicles and the issuance of all kinds of licenses or permits for the driving thereof, except tricycles

Common Limitations ...

Impositions that are in restraint of trade

• Taxes, fees and charges and other impositions upon goods carried into or out of, or passing through, the jurisdictions of LGUs in the guise of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees or charges in any form whatsoever upon such goods or merchandise

Impositions on marginal farmers or fishermen

• Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers and fishermen

Impositions on other sectors granted exemption by special laws

• Taxes on business enterprises certified by the Board of Investments as pioneer or non-pioneer for a period of six (6) and four (4) years, respectively, from the date of registration.

Taxes, fees or charges on Philippine products actually exported.

[The privilege of engaging in the business of exporting is taxable under Section 143(c) of the Code at one-half (1/2) of the rates prescribed under subsections (a), (b) and (d)]

Impositions on other sectors granted exemption by special laws (con’t)

Impositions on other sectors granted exemption by special laws (con’t)

• Taxes, fees or charges on Countryside and Barangay Business Enterprises registered under R.A. 6810

• Taxes, fees or charges on cooperatives registered under R.A. 6938, otherwise known as the “Cooperative Code of the Philippines”.

Other Limitations

• Taxes, fees or charges of any kind on the National Government, its agencies, and LGUs

[Section 133 of the Local Government Code of 1991]

1. Republic Act No. 9178, The Barangay Micro Business Enterprise Act of 2002 – Under this law, LGUs are encouraged to reduce the amount of local taxes, fees and charges on BMBEs or totally exempt them from these impositions.

2. Republic Act No. 9520, amending the Cooperative Code of the Philippines

Related Laws

Duly registered cooperatives under the Code which do not transact any business with non-members or the general public shall not be subject to taxes and fees under the internal revenue laws and other tax laws.

The salient provisions of the amendatory Act relevant to LGUs:

Cooperatives transacting business withboth members and non-members shall notbe subject to tax on transactions withmembers.

Cooperatives dealing with non-memberswith accumulated reserves and undividednet savings of not more than Php10million shall be exempt from all national,city, provincial, municipal or barangaytaxes of whatever name and nature.

All cooperatives, regardless of the amountof accumulated reserves and undividednet savings shall be exempt from thepayment of local taxes and taxes ontransactions with banks and insurancecompanies