Augusto B. Agosto Cebu City, Philippines
Real property is an essential factor in the production process. It is also one of the significant contributors to economic growth. The importance of real estate in a nation’s economy has been recognized even by the World Bank in its study, which indicates that land comprised 50% to 75% of the nation’s wealth. However, real estate and related businesses still contained 9-10% of the Gross Domestic Products in our country. Which only means that we are still far from maximizing its role in the economy and development of our country.
Real estate is an engine of growth and could be the source of financing our country’s economic development and social change. The bill had been deliberated and passed by congress and is now pending in the senate. The Valuation Reform Bill, authored by Senator Panfilo Lacson entitled Real Property Valuation and Assessment Act, and other bills with the same subject, are all pending in the upper chamber like the Senate Bill 519 of Senator Zubiri; No.894 of Senator Ramon Revilla Jr.
The major thrust of the bill on the Real Property Valuation and Assessment Act is to solve the long-standing problem of low revenue collection of the local government units. This problem has created other issues like the continued reliance from the national government to fund its local projects and achieve self-sufficiency. Local government units (LGU) had been given powers by the Local Government Code of 1991 to generate income to augment the revenue and increase the pie for the provision of social services of its constituency.
This bill seeks to promote the development of just, equitable, impartial, and nationally consistent accurate property valuation by establishing appraisal standards, methods, and procedures of property valuations and assessment. The enactment of it will assist the LGUs in maximizing revenue collections, which will promote genuine local autonomy.
The Bureau of Local Government Finance, which now conducting an information campaign and soliciting support for the approval of the bill and become a law, reported in LGU Taxation and Revenue Practices that, on average, real property taxes contribute about 31% of the LGUs’ local sources throughout 2009 to 2014. The comprehensive conception of the local government revenue from the real property taxes is 30% of the LGU’s local sources. One of the principal sources of income of local government units (LGUs)from the taxes imposed on real properties.
Myriad Problems
At present, at least 23 national government agencies and 1,712 LGUs, including private individuals and institutional appraisers, use their systems and measures, resulting in conflicting values for the same piece of real property. These create confusion and more protracted litigation in courts due to different valuation methods and processes. It is also one reason for any delays in government projects; every government agency has its valuation methodologies and formulas. Thus, it is customary in the court deliberation of commissioners to attain deadlock and arrive in unity for the sake of unity but with different valuation conclusions of value and let the judge decide on the property’s final value.
Lack of valuation standards will aggravate these situations, formal education, and training for valuers resulting in incompetence and outdated techniques in the appraisal practice; Undervaluation and overvaluation of real properties causes unnecessary delays and substantial financial losses in the form of foregone government revenues and cost overruns; Outdated real property values which no longer capture the actual economic realities in the community where the property is situated; local governments fail to revise the Schedule of Market Values, as required by Republic Act No. 7160 otherwise known as the Local Government Code of 1991, as a basis for local real property taxation, due to political ambivalence and apprehension of political backlash;
The long-standing problem of low revenue collection of the local government units has created other issues like the continued reliance of the local government units from the national government to fund its projects instead of self-sufficiency. Based on the data of PIDS, as of June 2017, a total of 142 or 63 percent of the provinces, cities, and the lone municipality in Metropolitan Manila were still using outdated SMVs, thus undermining their potential to generate own-source revenues as mandated to them by law. The annual local revenue could increase by up to PhP25.75 billion if RPT collection efficiency is optimized using updated SVM’s, which can finance the essential services for local constituencies and reduce their dependence on national transfers.
Furthermore, there is a distorted real property transactions database due to cluttered real property sales transactions among various groups and individuals, e.g., the assessors, the Registry of Deeds, the Bureau of Internal Revenue, bank/s, etc.
The bill will attempt to address the preceding problems by instituting reforms in property valuation and assessment, reorganizing the bureau of local government finance, and appropriating funds. Also, by creating penal provision that will ensure the implementation and compliance of concerned government authorized agents in the valuation standards, single base valuation, and delay of the review and preparation of SVM’s.
Instituting Reforms
First is adopting a single real property valuation base to help assess all ad valorem taxes in the country. This single base valuation will address the proliferation of many valuation methods and formulas used by government agencies, institutions, and private appraisers. It will eliminate wide disparities in the right of way acquisition, lease, rental. The single valuation base will also hasten the processes and avoid unnecessary delays in administrative procedures.
The current practice adopts different valuation bases depending on compensation, insurable value, liquidity, retrospective value, etc. The proposed adoption of standard market value as the single basis to appraise real properties, whether taxable or tax-exempt or for whatever purpose, will reduce confusion, reduce duplication costs, and discourage corrupt practices. The appraisal based on market value can also provide a reliable benchmark for real property appraisal for other purposes. Since this is alongside the international standards, foreign investors will be confident of capitalizing on the country.
In addition, proposing a single property valuation base for assessing real property-related taxes and for the valuation of real property for various transactions by all government agencies addresses two ideal characteristics of the tax system, administrative simplicity and political responsibility (Stiglitz and Rosengard, 2015). By having a single property valuation policy for the computation of tax liability for local and other government transactions, it will be easier to compute the tax due and make tax liability transparent for taxpayers.
| Real Estate Professional | Total as of Aug.10,2019 | Total as of Feb.2,2012 |
| Real Estate Broker | 31,864 | 12,628 |
| Real Estate Appraiser | 9,516 | 2740 |
| Real Estate Consultant | 265 | 69 |
| TOTAL | 41,645 | 15,437 |
| Source: Professional Regulation Commission | ||
Second, professionalization of the valuation practice. Since the passage of the law, Real Estate Service Act or the R.A.9646, there has been a significant increase in the number of real estate appraisers in the country. Based on the Professional Regulation Commission data, the number of Real Estate Appraisers increased from 2,740 in 2012 to 9,516 in 2019. However, this figure is not enough to compensate the number of Provincial cities and municipalities, which totaled 1,715 and employs assessors nationwide.
The Supreme Court, in its ruling, emphasizes the importance of professionalization of the real estate rank. In the case of Rehman Enterprises v. Professional Regulation Commission, the high court states that “the legislature recognized the importance of professionalizing the ranks of real estate practitioners by increasing their competence and raising ethical standards.” As real property transactions are “susceptible to manipulation and corruption, especially if they are in the hands of unqualified persons working under an ineffective regulatory system.” The new regulatory regime aimed to fully tap the vast potential of the real estate sector for a more significant contribution to our gross domestic income. And real estate practitioners “serve a vital role in spearheading the continuous flow of capital, in boosting investor confidence, and in promoting overall national progress.
Furthermore, the Civil Service Commission and the Department of Interior and Local Government issued a memorandum circular (Memo #2019-86) for strict implementation of the Real Estate Service Act by requiring every LGU to submit a report of their existing assessor, licensed or non-licensed.
The bill will help in developing the Republic Act 9646 or the Real Estate Service Act. One by promoting professionalization in the government sector. Second, hiring assessors accredited and licensed by the Professional Regulation Commission and continuing capacity building through regular conduct of seminars and training will develop the capabilities in property taxation, property studies, and others.
Third, it will help in solving the low revenue generation of the local government units. The dependency of the local government units in the Internal Revenue Allotment (IRA) is in the table below. We can notice the local government revenue from external sources comprised 67% of the total Operating Income of the local government collection. Meanwhile, local sources are 33% only of the total. However, from 2015, it has increased by 1%, which means that local government reliance on external sources is growing. Also, the real property tax collection is 10% of the total operating income.
Collection efficiency through optimization of updated SMVs will help increase the annual revenue, which will help finance the provision of essential services for local constituents and reduce dependency on the national government. The valuation reforms will address the financial risks by ensuring that SVM’s are up-to-date as provided and will be used to regularly prepare SVMs and general revision.
Recentralize the approval of the SVM’s from the local Sanggunian back to the Secretary of Finance, with review functions of the Bureau of Local Government Finance (BLGF). In coordination with the BIR and improve oversight function on property valuation and assessment by the Department of Finance-attached BLGF; Currently, under Section 3 of the Manual, the Sanggunian will enact an ordinance adopting the SMV.
This step will also strengthen the leadership of BLGF in the government valuation by establishing the Real Property Valuation Service in the BLGF that will oversee and manage valuation-related concerns of local governments.
Based on the previous data from BLGF, out of the 286 first-class municipalities in the country, 116 municipalities (40%) remain dependent on their share from the Internal Revenue Allotment (IRA). This dependency is partly because 199 towns (70%) have poor collections for real property taxes, making up less than 30% of their respective local incomes in 2017. As of June 2018, there are 142 or 63 percent of the provinces, cities, and municipalities in Metro Manila with outdated SVM’s. It is undermining the potential to generate resources and minimize reliance on national funding (IRA).
The inclusion of penal provisions for failure to comply with the required submission of documents, valuation standards, preparation of the schedule of market values; the delaying of review and approval of SMVs and conduct of general revisions by the government agents’ concerned and other violations will ensure the implementation of the programs underlined herein. To ensure that will implement the law, an acceptable equivalent to the official’s or employee’s one to six months basic salary, or suspension from service for a period not exceeding one year or both, at the discretion of the competent authority, will be imposed.
Benefits of the Reforms
Investors will be more confident in the land market and real estate industry in a single valuation base. An assurance that what they have invested in is the amount or value of the property in the market. There is consistency in the valuation with the single valuation base and through the use of appraisal methodology, which is in line with the international standards adopted by the appraisers, both government and private. It will ensure transparency in different levels of the government, businesses, and lenders and will trust in the reports provided by the appraisers. Creating a database system will also help attain informed decision-making of the government legislators and agencies, which can provide sound judgment on the data provided.
Establishing a comprehensive database on land values will centralize actual sold property data from the Register of Deeds, Assessor, Geodetic Engineers, and Local Government Units. It will share with private entities through subscription. And help in fostering transparency in land transactions and give more credibility to the appraiser’s comparable data that is vital in arriving at an opinion of value.
The bill’s passage will also help reduce government costs, which is the typical result of conflicting appraisals that lead to court litigations, project delays, and overruns. Transfer cost will minimize cost, from BIR to LGUs and RDs, and other national government agencies by having SVM’s as a benchmark in acquisition and valuation purposes.
The adoption of market-based taxation will help the national and local governments collect additional revenues without imposing new tax measures. The payments generated through real property tax, transfer taxes, capital gains tax, and others will increase. These revenues could help improve the local government’s capacity to finance projects for its constituents and the national government to fund projects like the build, build, build, and now for the rehabilitation of the economy due to the covid-19 crisis. The bill will also help enhance the local government’s capacity in self-sufficiency through improved collection efficiency on real property tax and other taxes. The improved collection of real property tax will also help raise the collection of the special education fund (SEF). This initiative only meant that more funds are available for public education, which is an average of Php 760 per general student; however, it will increase to Php 1,280 per student.
The revenue generated from the proposed valuation reform act will help fund government projects such as the ‘Build, build, build” of the Duterte Administration, which facilitates the faster movement of goods and people in different parts of the country. In the long run, the provision of infrastructures in regions will unlock new markets in various parts of the country and help stimulates the real estate market. It will further impact other related activities and businesses. Also, the additional revenue generated by the local government units will help fund local economic enterprises, projects that will add value to the services provided to the people.
References:
Bureau of Local Government Finance, Proposed Real Property Valuation and Assessment Reforms, Department of Finance
Philippine Institute of Development Studies, Comments on Train Package 3 entitled “Real Property Valuation and Assessment Act”, January 30,2020
National Tax Research Center (2018), Public Finance and Related Statistics, NTRC Department of Finance
Llanto, G.M. (2009), Fiscal Decentralization and Local Finance Reforms in the Philippines, Philippine Institute of Development Studies
Real LexEcon 