Documente Academic
Documente Profesional
Documente Cultură
June 2007
DISCLAIMER
“The views expressed in this report are strictly those of the authors and do not necessarily reflect those of
the United States Agency for International Development (USAID) and the Ateneo de Manila University”.
Abstract
This brief surveys laws pertaining to the internal revenue allotment (IRA) scheme,
including the legal bases for deductions from the IRA by the Bureau of Internal Revenue
and Department of Budget and Management, National Government restrictions and
reductions of the IRA, and issues such as the Local Government Service Equalization
Fund, IRA lien and the monetization program.
A Study Of Legal Deductions On The Internal Revenue Allotment
For Local Government Units
By
Atty. Florecita P. Flores
Local Government Research and Consultancy Service)
The new Internal Revenue Allotment scheme has its roots in Article X (Local
Government) of the 1987 Philippine Constitution which provides for the fiscal autonomy of
local governments within the framework of local autonomy and accountability to the National
Government, hereunder quoted in part:
Prior to the enactment of Republic Act No.7160, otherwise known as The Local
Government Code of 1991 (to take effect in January 1, 1992), the laws 1 governing the
allocation and use of the Internal Revenue Allotment (IRA) to local governments, were:
• Presidential Decree No. 144 (1973) which revised the IRA sharing scheme.
Specifically, it provided that National internal revenue taxes not assigned to special
funds and accounts shall be transferred to LGUs computed on the basis of BIR
collections during the 3rd year prior to the current fiscal year. The 20% LGU share
is distributed as follows: First, the barangay share of 10% is computed and deducted
from the gross amount. Second, the remaining 90% of the 20% is divided as
follows: 25% to provinces, 30% to cities; and 45% to municipalities. The share of
1
Source: Handbook on Local Fiscal Administration, Local Government Center, College of Public
Administration, UP Diliman, Quezon City
2
• Presidential Decree No. 559 (1974) amended PD 144 and Barangays were specified
as co-recipients of the allotment. The effect is that up to FY 1976, the BIR
allotment was distributed as follows: 30% to provinces; 45% to municipalities; 25%
ti cities; and to barangays the amount of P56 million that previously been
earmarked for distribution to provinces, cities and municipalities. After FY 1976,
the allocation among LGUs was changed to the following: 25% to provinces; 40%
to municipalities; 25% to cities; and 10% to barangays. The share of barangays
were distributed as community development project grants with the distribution
administered by the President of the Philippines.
• Presidential Decree No. 231 (1977) was issued specifying that allocations for FY
1978 up to FY 1979 would be equal to those determined for 1977 under PD 144 as
amended by PD 937 and in accordance with the provisions of PDs 559 and 898.
The harsh effect of this provision is to hold constant the peso value of the allotment
and cause a drastic decline in its real distribution which PD 231 tried to correct by
further providing that beginning January 1981, the allotment shares shall be
determined on the basis of Sections 1, 2 and 3 of PD 144 as amended by PD559 and
898.
• Presidential Decree No. 1741 (1981) provided for an additional grant to LGUs
whose income declined in 1980 due to low crop prices. It further provided for an
allowance of year-to-year increases in allotment beyond the 25%-ceiling for 3rd, 4th,
5th, and 6th class-LGUs of up to 30%-, 35%-, 40%- and 45%- increase, respectively,
subject to adequate justification and recommendation by the Ministry of Local
Government and Community Development (now DILG) and the availability of
funds.
• Presidential Decree No. 1445, under Section 24 (3), stipulates that a maximum of
one-half of one percent (1/2 of 1% or .05%) of the Net General Fund collection
from national internal revenue taxes should be remitted to the National Treasury to
cover the cost of auditing services rendered (by COA) to local government units.
Pursuant to the foregoing, the Internal Revenue Allotment is based on the collection
from national internal revenue taxes which is computed by the Bureau of Internal Revenue
based on P. D. 144, as amended, i.e., “20% of the collections from national internal revenue
taxes not otherwise accruing to special funds and special accounts in the general fund.”.
3
Balance 11,264,324,408.04
Less: 10% Bgy. Dev. Fund 1,126,432,408.04
10,137,891,672.38
The share of each Local Government is determined based on the following criteria:
Population 70%
Land Area 20%
Equal Sharing 10%
III, Republic Act No. 7160, the Local Government Code of 1991
As mandated under Section 6 of Article X of the 1987 Constitution, Republic Act No.
7160, the Local Government Code of 1991 contained under Title III (Shares of Local
Government Units in the Proceeds of National Taxes), Chapter 1 (Allotment of Internal
Revenue), the following provision:
2
Source: Bureau of Local Government Supervision (BLGS), Department of Local Government (DLG), 1990.
4
From the foregoing provision, it will be noted that the Code introduced significant
changes in the allotment system.
The share of each province, city and municipality is determined on the basis of the
following formula:
V. Deductions from the IRA by the Bureau of Internal Revenue (BIR) and
the Department of Budget and Management (DBM):
(a) Starting CY 1992, with the passage of the Local Government Code of 1991 (the
Code), local government units have been entitled to the internal revenue allotment as follows:
1992 - 30%
1993 - 35%
1994 onwards - 40%
3
Source:LDAP/USAID Report July 15, 1994
5
This percentage share is based on collections from the national internal revenue taxes
actually realized during the 3rd fiscal year preceding the current fiscal year as certified by the
Bureau of Internal Revenue:
Per the IRA Briefer of the Union of Local Authorities (ULAP) 4 “the IRA of LGUs has
been released intact from 1991 up to 1997, except for those amounts deducted by DBM/BIR
prior to the computation of the 40% IRA share of LGUs totaling P20,767B for the period 1992-
2001 and averaging about P2B per year for a 10-year period.”
The ULAP Briefer continues to state: “Beginning 1998, the IRA was subjected to
several impositions both by Congress and by the National Government totaling P62B; (e.g.
Unprogrammed Fund, LGSEF, IRA Discrepancies. Administrative Fiats, and others due to
DBM’s problems on cash flow/programming).”
(b) Article 378 of the Implementing Rules & Regulations (IRR) of the Code mandates
the BIR to certify the amount of internal revenue taxes actually realized during the appropriate
base year, and DBM is the agency that determines the share of local government units in the
form of internal revenue allotment that will be incorporated in the General Appropriations Act.
Except for years 1995 & 1996 where DBM & BIR have similar figures, for years 1992-
1994 DBM has higher figures while BIR had higher figures for the years 1997-1999.
For the eight year period from 1992-1999 BIR has certified a higher total IRA than that
of DBM with the former registering a total of P464.778B while the latter only P459.231B.
However, the higher BIR figure is still about P15B short of the total figure which would
implement the formula set in Sec. 284 of the Code. This can be attributed to the various
deductions included by BIR in its computation.
The conflicting figures is a result of what constitutes “basic income” as defined by the
Bureau of Internal Revenue 6 as basis of the computation of the internal revenue taxes to
which the local governments are entitled, to wit:
4
IRA BRIEFER, September 26, 2001, Union of Local Authorities of the Philippines
5
Source: A Study on the Legality of Deducting Certain Taxes and Special Levies Before Determining the IRA
Shares of the LGU by Atty. Raul G. Bito-on
6
__________________________________________________________________
___________Legal Basis of Bureau of Internal Revenue Deductions _________
2. PD 1448 as amended by/EO 120-A 7 Hotel Room Taxes given to Philippine Tourism
Authority and Philippine Convention and Visitors Corporation
.
3 PD 1445 Ordaining and Instituting A Government Auditing Code of the Philippines
Sec. 24(3) stipulates that a maximum of one-half of one percent (1/2 of 1%) of the Net
General Fund Collection from national internal revenue taxes shall be remitted to the
National Treasury to cover the cost of auditing services rendered by the Commission on
Audit to the local government units.
4. Republic Act 3051- Millers Tax given to the Sugar Regulatory Commission
5. Republic Act 6331 as amended by Republic Act 8407 but lapsed into law on November
23, 1997 without the Pre4sident’s signature pursuant to Sec. 27 ( i) Article VI of the
Constitution.
Republic Act 6332 as amended by Republic Act 7953 approved on March 30, 1995
entitled, An Act Granting the Philippine Racing Club Inc. a Franchise to Operate and
Maintain a Racetrack for Horse Racing in the Province of Rizal and Extending the said
Franchise By Twenty Five (25) years from Expiration of the Term.
6. Republic Act 6754 “An Act Providing For An Organic Act for the Autonomous Region in
Muslim Mindanao”
7. Republic Act 7171 “An Act to Promote the Development of the Farmers in the Virginia-
Tobacco Producing Provinces approved on January 09, 1992 in accordance with the
provision of RA 7171, the Secretary of Budget and Management shall retain annually, the
funds equivalent to fifteen per centum (15% ) of excise taxes on locally manufactured
6
Memorandum dated September 14,1943 of BIR Commissioner Liwayway Vinzons Chato
7
Could not find a copy of either PD1448 or EO 120-A
7
Virginia-type cigarettes. The Funds allotted shall be divided among the beneficiary
provinces pro rata according to the volume of Virginia tobacco production.
8. Republic Act 7156 - An Act Granting Incentives to Mini-Hydro Electric Power Developers
proved on September 12, 199€1
(1) Special Privilege tax rates – the tax payable by all grantees to develop
potential sites for hydroelectric power and to generate, transmit and sell electric
power shall be two percent (2%) of their gross receipts and shall be payable to
the Commissioner of Internal Revenue.
(3) Tax Credit on Domestic Capital Equipment – A tax credit equivalent to one
hundred percent (100%) of the value of the value-added tax and custom duties
that would have been paid on the machinery, equipment materials and parts had
these items been imported shall be given to anawardee-developer who
purchases machinery, equipment, materials And parts from a domestic
manufacturer.
(4) Special Realty Tax Rates on Equipment and Machinery - Any provision of
the Real Property Tax Code or any other law to the contrary notwithstanding,
realty and other taxes on civil works, equipment, machinery and other
improvement of a registered mini hydroelectric power developer shall not
exceed two and a half percent (2 .5%) of their original cost
(5) Value-Added Tax Exemption – Exemption from the ten percent (10%)
value-added tax on the gross receipts derived from the sale of electric power
whether wheeled through the NPC Grid or through existing electric utility lines;
(6) Income Tax Holiday- For seven (7) years from the start of commercial
operation, a registered mini-hydroelectric power developer shall be fully exempt
from income taxes levied by the National Government.
The total deductions from national internal revenue taxes before computation of the
IRA increased from P13B in 1994 to P17.76B in 1999.
____________________________________________________________________________
Legal Basis of DBM Deductions
1. Republic Act 7227 - An Act Accelerating the Conversion of Military Reservation into
Other Productive Uses and Creating the Bases Conversion & Development Authority
approved on March 13, 1992
Section 12 provides that no taxes, local and national shall be imposed within the Subic
Special Economic Zone. In lieu of paying taxes, three percent of the gross income
earned by all businesses and enterprises within the Subic Economic Zone, shall be
remitted to the national government, one percent (1%) each to the local government
units affected by the declaration of the4 zone in proportion to their population, area and
other factors.
2. Republic Act 7660- An Act Rationalizing Further the Structure and Administration of
the Documentary Stamp Tax, Amending Certain Provisions of the National Internal
Revenue Code approved December 23, 1993.
As provided for in Sec. 22 of the Act, the incremental revenues from the increase in the
documentary stamp taxes shall be set aside for the following:
(a) In 1994 and 1995, twenty-five percent (25%) shall accrue to the Unified Home-
Lending Program for mass-socialized housing program to be administered by
the National Housing Authority provided that not more than one percent (1%)
of the allocations shall be used for administrative expenses;
(b) In 1996, twenty-five percent (25%) to be utilized for the National Health
Insurance Program;
8
ibid (Bitoon Study)
9
(c) In 1994 and every thereafter, twenty-five (25%) shall accrue to a Special
Education Fund to be administered by the Department of Education, Culture
and Sports for the construction and repair of school facilities, training of
teachers, and procurement or production of instructional materials and teaching
aids.
(d) In 1994 and every year thereafter, fifty percent (50%) shall accrue to a Special
Infrastructure Fund for the construction and repair of roads, bridges, dams and
irrigation, seaports and hydroelectric and other indigenous power projects for
depressed provinces as declared by the President on the basis of equity.
Sec. 282 provides that in addition to the internal revenue allotment, fifty percent
(50%) of the national taxes collected in excess of the increase in collections for the
immediately preceding year shall be distributed as follows: (a) Twenty percent (20%)
shall accrue to the city or municipality where such taxes are collected in accordance
with Sec. 150 of RA 7160 and (b) Eighty percent (80%) shall accrue to the National
Government.
Further, under Republic Act 7160, LGUs share in the utilization and development of
national wealth which shall be allotted among entitled provinces, cities, municipalities and
barangays in accordance with the formula prescribed under Sec. 292 , RA 7160 as follows:
Where the natural resources are located in two (2) or more provinces, or in two (2) or
more component cities or in two (2) or more barangays, their share shall be computed
on the basis of:
The proceeds from the utilization and development of national wealth shall be directly
remitted by the national government to the provincial, city, Municipal Treasurer
concerned within five (5) days after the end of each quarter
There were also National Government restrictions on the IRA due to unfunded
mandates:
The legality of the following administrative fiats to reduce the Internal Revenue
Allotment was questioned 9 ::
(1) Under Administrative Order 372 (1997) 10% of the IRA was withheld in 1998;
(2) P9 Billion of the regular IRA of LGUs was not released for CY 2000
(3) Unreleased portions of the National wealth and LGU’s special shares from the
ECOZONEs, VAT and others
(4) Impositions on the release of the 20% Development Fund (EO 189; EO 190 and EO
250)
The Supreme Court ruled in Pimentel vs. Aguirre (GR L-132988) “The Constitution
vests the President with the power of supervision, not control, over LGUs …x x x… . He may
not withhold or alter any authority or power given them by the law. Thus, the withholding of a
portion of internal revenue allotments legally due them cannot be directed by administrative
fiats”.
Executive Order No. 48 dated December 7, 1998 of then President Joseph Estrada
established a Program for Devolution Adjustment and Equalization “to facilitate the process of
enhancing the capabilities of LGUs in the discharge of the functions and services devolved to
9
IRA BRIEFER September 26, 2001, Union of Local Authorities of the Philippines
11
them by the National Government Agencies concerned pursuant to the Local Government
Code.” Later, under Republic Act No. 8745, the program was renamed as the Local
Government Service Equalization Fund (LGSEF) and its allocation and distribution became a
contentious issue.
It would be more accurate to refer to the facts as stated in the case of “The Province of
Batangas, represented by its Governor, Hermilando I. Mandanas, petitioner, vs. Hon. Alberto
G. Romulo, Executive Secretary and Chairman of the Oversight Committee on Devolution;
Hon. Emilia Boncodin, Secretary, Department of Budget and Management; Hon. Jose D. Lina,
Jr., Secretary, Department of Interior and Local Government, respondents. (GR No. 152774,
May 27, 2004)
To quote the salient features in the Supreme Court decision on the handling of the
LGSEF Fund from 1999 to 2001:
¾ “The LGSEF in the GAA of 1999: In RA 8745, otherwise known as the GAA
of 1999, the amount of P96,780,000.00 was allotted as the share of the LGUs in the internal
revenue taxes. Provided, that the amount of FIVE BILLION shall be earmarked by the LGSEF
for the funding requirements of projects and activities arising from the full and efficient
implementation of devolved functions and services of LGUs; Provided further, that said
amount shall be released to the LGUs subject to the implementing rules and regulations
including such mechanisms and guidelines for equitable allocations and distribution prescribed
by the Oversight Committee
Under OCD Resolutions proposed by then Executive Secretary Ronaldo Zamora and
approved by then President Estrada in 1999, the allocation of the P5 Million LGSEF in
accordance with the OCD implementing rules and regulations was as follows:
i) the 1st tranche (P2Billion) shall be allocated in accordance with the codal formula
sharing scheme
ii) the 2nd tranche (P2Billion) shall be allocated in accordance with a modified CODEF
formula using the cost of devolution (CODEF) sharing scheme
iii) the remaining (P1Billion) shall be earmarked to support Local Affirmative Action
Projects and other priority initiatives such as food security, poverty alleviation rural
electrification and peace and order, among others.
Further, under another OCD, the LGUs were required to identify the projects eligible
for funding by the P1 Billion pf the LGSEF.
12
¾ “The LGSEF in the GAA of 2000: Under RA 8760, otherwise known as the
GAA of 2000, the amount of P111,778,000,000 was allotted as the share of the LGUs in the
internal revenue taxes. As in the GAA of 1999, the GAA of 2000 contained a proviso
earmarking P5 Billion of the IRA for the LGSEF.
OCD in Resolution No. 2000-023 adopted the following allocation governing the P5
Billion LGSEF for 2000:
i) P 3.5 Billion of the CY2000 LGSEF shall be allocated to and shared by
the four levels of LGUs using the following percentage-sharing formula:
Further, the P3.0 Billion of the CY 2001 LGSEF is to be allocated according to the
modified codal formula and released to the four levels of LGUs, as follows:
That the P1.9 billion earmarked for priority projects shall be distributed according to
the following criteria: for projects of the 4th, 5th, and 6th class of LGUs or projects in
consonance with the President’s State of the Nation (SONA) commitments
Finally, the remaining P100 million LGSEF capability building fund shall be
distributed in accordance with the recommendation of the Leagues of Provinces, Cities,
Municipalities and Barangays, and approved by the OCD.”
Upon receipt of a copy of the above resolution, Gov. Mandanas wrote to the individual
members of the Oversight Committee seeking the reconsideration of Resolution No. OCD-
2002-001. He also wrote to President Macapagal-Arroyo urging her to disapprove said
resolution as it violates the Constitution of the Local Government Code of 1991.
The Petition:
Hence, the case brought by Gov. Mandanas to the Supreme Court praying that the
Court should declare as unconstitutional and void the assailed provisos relating to the LGSEF
in the GAAs of 1999, 2000 and 2001 and the assailed OCD resolutions (Resolutions Nos.
OCD-99-003, OCD-99-005, OCD-2000- 023, OCD-2001-029 and OCD-2002-001) issued by
the Oversight Committee pursuant thereto; that the Court direct the respondents to rectify the
unlawful and illegal distribution and releases of the LGSEF for the aforementioned years and
release the same in accordance with the sharing formula under Section 285 of the Local
Government Code of 1991. Finally, that the Court declare that the entire IRA should be
released automatically without further action by the LGUs as required by the Constitution and
the Local Government Code.
The Decision:
The salient features of the decision of the Supreme Court are:
the entire process involving the distribution and release of the LGSEF is
constitutionally impermissible;
Sec. 284 of the Local Government Code provides that, beginning the third year
of its effectivity, the LGUs’ share in the national internal revenue taxes shall be
40% which is fixed and may not be reduced except “in the event the national
government incurs an unmanageable public sector deficit” and only upon
compliance with stringent requirements set forth in the same section;
As of 2001, ULAP, 10 concerned about the pending IRA releases (Lien or Holdback)
made an appeal to the President to (1) release the P6.5 Billion balance of the regular IRA, and
(2) convene the OCD so that the P5 Billion LGSEF will be approved and released to the LGUs
based on a codal formula and not on a project-based arrangement
Also according to ULAP, the total P34,25 Billion pending release is broken down, as
follows:
P 17.50 Billion Unprogrammed funds for CY 2000 and 2001
10.00 Billion IRA Discrepancy for CY 2001 (at P131 B down to P121B)
6.75 Billion Regular IRA for CY 2000 (3/4 of the P9B shortfall – Dec., 2000
Under Section 286.of the Code: Automatic Release of Shares “(a) The share of each
LGU shall be released, without need of any further action, directly to the provincial, city,
municipal or barangay treasurer, as the case maybe on a quarterly basis within five (5) days
after the end of each quarter and which shall not be subject to any lien or holdback that maybe
imposed by the national government for whatever purpose.”
Under Executive Order No. 494 dated January 18, 2006, the release of the
unprogrammed IRA in CYs 2000 and 2001 amounting to P17.5 Billion was ordered on
installment basis for a period of seven (7) years starting CY 2007 up to CY 2013, or avail in
advance their respective shares from the unreleased IRA through a monetization program.
The IRA Monetization Program, as initiated by the various Leagues, is a scheme which
will give LGUs the option to collect in advance from the trustee bank their respective shares
from the unreleased IRA at a discounted value, net of interest and other charges from the
trustee bank.
In the ULAP President’s Update Report dated February 6, 2004 11 , “For the period
2001-2004, the average IRA per year is P135.134 Billion or 17.50% of the total National
Budget compared to the computed annual average of P57.887 Billion which is only 13.32% of
the total National Budget for the ten-year period 1`991-2000”.
The Update Report (attached) had a Table which “shows that of the P62.09 Billion total
IRA impositions or IRA cuts made by the National Government (i.e.Executive and Congress),
they (LGUs) were able to collect only 56% of this amount or P34.59 Billion …”
10
ibid
11
Source: ULAP official Website www.ulap.gov.ph (Report of Gov. Rodolfo P. Del Rosario)
15
(I wish to acknowledge the assistance of Ms. Teresita Mistal, retired Director of the
Department of Interior and Local Government, in undertaking the research for this study.)
REFERENCES
2. Report: National Policy Workshop on Fiscal Equalization and the IRA, June 14,
1999 Shangrila Hotel, Mandaluyong City
3. Study on the Legality of Deducting Certain Taxes and Special Laws Before
Determining the IRA Shares of LGU; Atty. Raul C. Bito-on, May 1999
4. Reexamining the Internal Revenue Allotment Issues and Options; Dr. Romulo
Miral, Jr. Ph. D., Workshop on Fiscal Equalization, June, 1999 Local Government
Bulletin, Local Government Center, CPA, UP, 1990