PHILIPPINES: An Introduction to Tax

Philippines: Tax  

Updates on real property valuation and assessment reform 

Striving to recover from the devastating effects of the COVID-19 pandemic, the Philippine government formulated a comprehensive long-term plan and strategy to address the drastic revenue loss, stunted economic growth, joblessness and poor overall quality of life of Filipinos, both in the business sector and from a consumer perspective. Said financial package recognises that the failing financial health of the government cannot be attributed solely to the deadly virus that paralysed the worldwide economy: the inefficient collection of taxes partly caused by the administrative red tape and bureaucratic delays is equally at fault. Thus, in order to stay competitive in the global market, the Philippine government has been working overtime to identify lingering bottlenecks and grassroot issues, and is seeking to pass the necessary legislation and implementing issuances, targeted at easing the burden of doing business, encouraging public spending and stimulating the economy.

Every individual and juridical entity earning income in the Philippines faces persistent challenges in how to be a compliant taxpayer and avoid hefty penalties imposable by the tax authorities. While the Philippines has only two primary tax laws – namely, the National Internal Revenue Code of 1997 and its amendments (“Tax Code”) for national taxes and the Local Government Code of 1991 (LGC) – the discretion bestowed on government agencies such as the Bureau of Internal Revenue (BIR) (for national taxes) and local government unit (for local taxes) to implement such tax laws has caused the issuance of a number of rules, regulations and ordinances, which brings confusion and often results in unintended tax violations. Therefore, the Philippine Congress has to enact certain control measures to limit the unbridled and arguably arbitrary discretion of the implementing agencies to ensure uniform compliance from all taxpayers.

Long-standing real property valuation issues  

To increase revenue generation and facilitate tax collection, the Philippine Congress, with the support of the government’s economic managers, seeks to remedy one of the pressing issues in the Philippine real estate sector: the differing market values of real properties for purposes of taxation, which has confused businessmen and consumers alike. The issue originates from the Tax Code authorising the Commissioner of Internal Revenue to determine the fair market value of real properties based on Philippine valuation standards (PVS), while the LGC simultaneously authorised the provincial, city or municipal assessor to come up with another valuation involving the same real property. Due to the lack of applicable standards binding on all government agencies for the appraisal of real property, conflicting land values became prevalent, resulting in inconsistencies which, in some cases, have led to actual financial consequences for real estate stakeholders.

Based on a 2004 comparative study of land values in selected cities, it was noted that the value assessed by the local assessor pursuant to its mandate under the LGC is less than 13% to 94% of the zonal value determined by the BIR, and between 187% and 7,474% lower than the market value computed by private appraisers. Despite being mandated by the Tax Code and the LGC, available data also show that 46 out of 120 Revenue District Offices of the BIR and 137 out of the 227 local government units failed to update their valuation schedules for the last three years. To address these issues, proper legal reforms are proposed to be introduced to adopt standardised criteria to determine the true market value of real properties and to authorise, centralise and streamline the assessment functions to a single government agency to produce a nationwide list of market values that can be used by various government agencies and considered reliable as benchmarks by registered owners for private transactions such as sale, rent and mortgage.

Real Property Valuation and Assessment Reform (RPVAR) Bill  

With the House of Representatives approving its version of the RPVAR Bill in December 2022, Senate Bill No 2386 is currently pending in the Senate. The RPVAR Bill is part of Package 3 of the Comprehensive Tax Reform Programme of former President Duterte’s administration to develop an equitable, just and efficient real property valuation system. The RPVAR Bill is also one of the priority legislative measures of now President Ferdinand Marcos, Jr., as announced in his first State of the Nation Address.

Currently, the RPVAR Bill holds four key amendments:

- the institution of the Bureau of Local Government Finance to develop, adopt and maintain the PVS and review and ensure that the schedule of market values (SMVs) prepared by the assessors is consistent with the PVS;

- the mandatory use of the approved SMVs for comparing with the actual gross selling price to compute any internal revenue tax and local transfer taxes; for computing the local taxes, fees and charges; or for determining the appraised values of all government agencies;

- the creation of an up-to-date electronic database of sale, exchange, lease, mortgage, donation, transfer and all other real property transactions and declarations nationwide; of the cost of construction or renovation of buildings and other structure; and of prices of plant, machinery and equipment; and 

- the automation of real property tax administration operations of all provinces, cities and municipalities.

Considering that the BIR is mandated to follow the approved SMVs, the RPVAR Bill will effectively amend the pertinent provisions of the Tax Code and the LGC, which refer to the valuations of the BIR and local assessors as the proper tax base. The RPVAR Bill further requires the provincial assessors, the municipal assessors and the city assessors to update their respective SMVs within two years from the law coming into effect. Thereafter, consistent with the Tax Code and the LGC, the SMVs shall be updated no sooner than three years. Administrative and criminal penalties are imposable against public officials and private individuals found in violation of the RPVAR Bill.

The RPVAR Bill is a welcome piece of legislation that will maximise government collection, facilitate private transactions, expedite the development of government projects, and settle longstanding disputes on land valuation. However, shifting to the taxpayers’ perspective, considering the huge disparity between the existing assessed values and the valuations of the private appraisers, Congress cannot discount oppositions from taxpayers who will be mainly affected by the ensuing drastic increase in real property taxes.

While the RPVAR Bill is not equipped with dispute resolution mechanisms for contested valuations, to ensure the private sector’s participation in the creation of SMVs, it requires two mandatory public consultations before SMVs are submitted for approval and allots seats for newly created committees that play important roles in the overall implementation. For instance, the central consultative committee that shall handle matters pertaining to the setting and adoption of internationally accepted valuation standards and other related concerns must have one representative from the private appraisal sector. Similarly, the regional consultative committees that shall be responsible for developments in the local real property market and the concerns of taxpayers, civil society and other stakeholders, among others, shall be composed of representatives from the private appraisal sector, the real estate sector, bankers’ associations, regional chapters of the league of cities and regional chapters of the league of provinces.

The RPVAR Bill is a long-awaited development for both the public and private sectors as it removes certain discretion previously given to the BIR and local government units, leading to a unified, streamlined and simplified real property valuation scheme in the Philippines. Once the RPVAR Bill is implemented and fully operational, investors and the public can take advantage of well-crafted SMVs, with added assurance that they have passed the government-sanctioned standards of property appraisal. With a reliable real property appraisal system, property owners can maximise the commercial benefits of their properties and easily negotiate with third parties in matters involving valuation.