Improving Fiscal and Land Governance Through Property Valuation and Taxation Reforms in the Philippines Workshop on Land Records Management and Information Systems: Community of Learning Exchange Bangkok, Thailand, June 12-14, 2017 JOSE ARNOLD M. TAN Deputy Executive Director for Operations Bureau of Local Government Finance Department of Finance, Philippines

Outline of Presentation Background LAMP as a Solution Innovations and Interventions Benefits and Lessons Learned Paradigm Shifts and Present Initiatives

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

Each agency using own systems & methodologies: Background 23 national government agencies; 1,712 local government units doing valuations Each agency using own systems & methodologies: wide disparities between the zonal values (ZV), schedule of market values (SMV), & private appraisers’ values varying values for the same piece of property lack of confidence in the land valuation system Notable disparities noted in 19 sample cities: SMV < ZV by 13% - 94% ZV < Private Valuation by 5%-930% SMV < Private Valuation by 187% -7,474%

National Government Agencies Performing Valuation Functions Background National Government Agencies Performing Valuation Functions Agency Purpose Basis/Methodology Bureau of Internal Revenue (BIR) National Taxation Zonal Valuation Committee: Gross Selling Price or SMV as basis + appraiser’s opinion + BIR-RDO Local Government Units (LGUs) Real Property Taxation, Acquisition, Disposal Schedule of Market Values Mass 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 Approaches Land 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

National Government Agencies Performing Valuation Functions 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. Approaches Bureau 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 Fees Registry 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 Appraisers Devt. Bank of the Philippines (DBP)

National Government Agencies Performing Valuation Functions Background National Government Agencies Performing Valuation Functions 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 Lending Market Data or Sales Comparison, Unit-In-Place, Cost Approaches Social Security System (SSS) Market Date Approach w/ Value Adjustments Govt. Service Insurance System (GSIS) Collateral Valuation, Sales, Reproduction Cost, Income Capitalization, Private Philippine Reclamation Authority (PRA) Property Development or Disposal Valuation contracted out to private appraisers

Local Governments: Real Property Tax (RPT) Background Land Based Taxes Tax Rate Local Governments: Real Property Tax (RPT) Basic RPT Max of 1% for Provinces Max 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 Government Capital Gains Tax Fixed 6% Documentary Stamp Tax Php15.00 + Php15.00 for every Php1,000 value in consideration Estate Tax Based on schedule Donor’s Tax Value Added Tax 12%; graduated base on schedule

Land Administration and Management Project LAMP1 2001-2003 Conduct of policy studies & reform proposals. LAMP1 Extension 2004 LAMP1 Transition 2005 LAMP2 2006-2010 Implementation of recommendations & learnings under LAMP1 DENR – Department of Environment and Natural Resources LRA – Land Registration Authority DOF– Department of Finance BLGF – Bureau of Local Government Finance NTRC – National Tax Research Center

Improved Land & Fiscal Governance Integrated Approach 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 education Computerization & information management

Policy and Legal Framework 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

Piloted implementation of reforms in cities of Naga, Iloilo, Mandaue Key Interventions and Innovations 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 Mass Appraisal, 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

Naga Case: Benefits from valuation reforms outweigh political costs 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 Paradigm Shift and Present Initiatives Tax Watch and Infomercial 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

Provinces Forego up to Php 9.4 Billion in Real Property Tax Paradigm Shift and Present Initiatives Tax Watch and Infomercial Provinces Forego up to Php 9.4 Billion in Real Property Tax Due to outdated Schedule of Market Values (SMV) and Low Collection Efficiency Php 9.4 Billion can Fund 979 Km of Roads 700 markets 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

More Revenue Means More Social Services Paradigm Shift and Present Initiatives Tax Watch and Infomercial 4 in every 5 Cities Use Outdated Basis for Collecting Real Property Tax 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

Cities Miss up Php 20.3 Billion in Real Property Taxes Paradigm Shift and Present Initiatives Tax Watch and Infomercial Cities Miss up Php 20.3 Billion in Real Property Taxes When they use outdated Schedule of Market Values and not aggressive in tax collection Php 20.3 Billion can Fund 298 Sanitary Landfills 451 Transport Terminals 1,015 Satellite Health Centers 2,929 Low-cost Resettlement Houses Pay Your Real Property Tax. Make your Local Government Accountable Sustainable Local Finance Begins with Correct Valuation and Efficient Tax Collection

Real Property Valuation Bill Salient Features Paradigm Shift and Present Initiatives Real Property Valuation Bill Salient Features 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 Tax Administration Paradigm Shift and Present Initiatives Key Policy Actions of the Real Property Valuation Bill Real Property Tax Administration Valuation Preparation of Schedule of Market Value Appraisal and Assessment of Real Property Assessment Level of Land Maximum Level Residential = 20% Agricultural = 40% Commercial = 50% Industrial = 50% Mineral = 50% Tax Rate Maximum Rate Basic Tax 1% - Province/ Municipality 2% - City SEF 1% - Province/City Technical Political

Visit us at www.blgf.gov.ph THANK YOU! Visit us at www.blgf.gov.ph