LGU Revenue & Resources Mobilisation Tools

TABLE OF CONTENTS
CHAPTER 1. APPROACHES AND TOOLS IN RESOURCE MOBILIZATION 8-14
Dual Nature of LGUs
Resource Mobilization Strategies
Who Benefits and Who Pays Principle (with Figure)
Service Delivery Options
Criteria in Determining Service Delivery Options
Five Steps for Effective LGU Revenue Generation and Resource Mobilization Strategy
A. Prepare the LGU Development Plan and Ensure an Efficient Local Tax
Collection System
B. Determine Service Costs and Standards
C. Investigate Other Revenue Generation Options
D. Investigate Resource Mobilization Opportunities
E. Monitor, Evaluate and Review
Strategic Plan to Manage the Fiscal Gap (with Table)
Distinct Classes of Potential Revenue Sources
LGU Resource Structure (with Table)
Key Features of the Local Tax Structure
Criteria of a Good Revenue Structure
Fundamental Principles in Local Taxation
Central Grants
A. Internal Revenue Allotment (IRA)
IRA Allocation
B. Share from National Wealth
C. Special Shares of LGUs in National Taxes
D. Other Components of LGU Assistance
LGU Impositions (with Table)
REAL PROPERTY TAX 15-26
Classification of Real Property
Stages in Real Property Tax Administration
A. Property Identification (with Table)
B. Appraisal and Assessment
C. Records Conversion and Management (with unlabeled Table)
D. Tax Collection and Enforcement
Approaches to Determine Property Values
Types of Real Property Impositions (with 2 Tables)
A. Basic RPT
B. Special Education Fund Tax
C. Idle Land Tax
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D. Special Levy
Exemptions from Paying of RPT/Land-Based Taxes
Other Features of RPT
RPT Formula (with Table)
Dynamics of Real Property Taxation
A. Real Property Tax Collection Efficiency (CE) (with unlabeled box)
B. Cost of Collection Ratio (CCR) (with unlabeled box)
Assessment Strategies (with Table)
A. Reappraisal
B. Explore Other Land-Based Taxes
C. Decentralize
D. Land Banking
E. Computerization
F. Implement RPTA
G. Improve Coordination Among Offices
Collection Strategies
A. Provide Legislative Support
B. Go After Delinquent Taxpayers
C. Involve Barangay Officials
D. Simplify Systems, Procedures, Forms for Payment
E. Educate and Inform Taxpayers
F. Motivate Staff and Provide Incentives
G. Network with Other Offices/Agencies
H. Explore Cost Recovery Mechanisms (with Table)
Reform Agenda for LGUs
Procedure for Enactment of Revenue Ordinances
Limitations on LGU's Taxing Powers
BUSINESS TAXES AND OTHER RELATED TAXES 26-41
Business and Other Related Taxes
Provincial and City Impositions: Business-Related Taxes (with Table)
A. Tax on Business of Printing and Publication
B. Franchise Tax
C. Tax on Sand, Gravel and Other Quarry Resources
D. Amusement Tax
E. Tax on Delivery Vans
Revenue Enhancement Measures for Business-Related Taxes
A. Tax on Business of Printing and Publication
B. Franchise Tax
C. Tax on Sand, Gravel and Other Quarry Resources
D. Amusement Tax
E. Tax on Delivery Vans
Other Local Taxes in Provinces and Cities
A. Tax on Transfer of Real Property
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B. Tax on Professionals
Revenue Enhancement Measures for Professional Taxes
City and Municipal Impositions: Business Tax
Business Tax Computation
Surcharge and Penalties
Rate Structure (with Table)
Rate Structure for New Business
Need for Proper Classification
Revenue Enhancement Measures for Business Taxes
A. Counteract Under-Declaration of Gross Receipts/Sales
B. Improved Tax Records Management
C. Improved Internal Controls
D. Educate and Inform Taxpayers
E. Enforce Collection Through Administrative Action
F. Strictly Enforce Ordinance
G. Improved LGU-Customer Relations
Other Local Taxes for Cities and Municipalities
A. Community Tax on Individuals
B. Community Tax on Corporations
Revenue Enhancement Measures for Community Taxes
Other Local Tax All LGUs May Impose
Computation of Sales Allocation Applying the Rule of Situs (with unlabeled Box)
Codal Provisions to Enhance Revenue Collection
Presumptive Income Level Technique (with Box and Table)
Civil Remedies for Collection of Revenues
NON TAX REVENUES: REGULATORY FEES AND SERVICE/USER CHARGES 41-47
Coverage of LGU Impositions on Fees and Charges
Regulatory Fees (with Table)
Other Regulatory Fees
Restructuring Mayor's Permit Fees
A. Definition of Business Size (with unlabeled Table)
B. Setting Permit Fees (with unlabeled Table)
C. Sin Goods and Activities
D. Sanggunian-Determined Fixed Rates
E. Acceleration Clause
F. Full Recovery
G. Elimination of Other Fees
H. Administration and Delineation of Responsibilities
I. New Assessment
Service and User Charges (with Table)
Setting Rates for Charges
Charges/Receipts from Local Economic Enterprises (LEEs) (with 2 Tables)
Revenue Enhancement Measures for Fees and Charges from LEEs
A. Increasing Gross Revenues
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B. Price and Rate Setting
C. Improving Collections Efficiency
LOANS AND OTHER FINANCING OPTIONS: PPP 48-57
Credit Financing
Financing Schemes (with Table)
Factors to Consider in Weighing Short-Term Over Term-Financing
Payment Schemes
Limitations on LGU Debt Servicing
LGU Credit Financing Options
A. Loans, Credits and Other Forms of Indebtedness
B. Deferred Payment and Other Financial Schemes
C. Inter-Local Government Loans
D. Bonds and Other Long-Term Securities (with Table and Figure)
E. Public-Private Sector Participation (PSP)
1. BOT Variants (with Table)
BOT Approval Scheme (with unlabeled Table)
Preparatory Work for BOT Arrangements
Project Development Facility
2. Service Contracts
3. Management Contracts
4. Lease or “Affermage”
5. Concession Arrangements
Ensuring Contractor Compliance
Credit Finance Program
Role of Government Financial Institutions (GFIs)
Role of the Municipal Development Fund (MDF)
LGU Credit Policy Framework (with Figure)
DEBT MANAGEMENT 57-62
Debt Management, General Principle
Oversight Framework for LGU Debt (with Table)
Authorization Process for New Borrowings, General Principles
The Cost of Debt, General Principles
Financing Rate
The Risks of Debt, General Principles
Evaluating Debt Proposals, General Principles
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CHAPTER 2. APPROACHES AND TOOLS IN PREPARING THE
STATEMENT OF RECEIPT AND EXPENDITURES (SRE) 63-71
Accounting Policies Used in SRE Preparation
A. Cash Basis
B. Modified Accrual Basis
C. Fund Balance
D. Chart of Accounts and Account Codes
SRE System
SRE Reporting Framework (with 2 Figures)
SRE Reports
A. Basic Financial Statement
B. Supplemental Statements
1. Statement of Receipt Sources (SRS)
2. Statement of Expenditures (SOE)
3. Statement of Financial Operations of Economic Enterprises
4. Statement of Indebtedness, Payments and Balances
C. Other Reports
1. Quarterly Report on Real Property Tax Collections (QRRPTC)
(with unlabeled Table)
2. Quarterly Report on Collection of Business Taxes, Fees and
Charges and Economic Enterprise (with unlabeled Table)
D. Other Records
1. Record of Real Property Tax Collections
2. Record of General Collections
3. Record of Expenditures
4. Record of Prior Year Accounts and Accounts Payable Payments
5. Record of Debt Service
Additional Account/Sector Classification
SRE Including Trust Fund
Quarterly Report on Real Property Assessments (QRRPA) and a Record of
Real Property Assessment by Property Classification (RRPA)
Deadline for Submission of Reports
Copy Distribution
CHAPTER 3. APPROACHES AND TOOLS IN CONDUCTING FINANCIAL
ANALYSIS AND REVENUE FORECASTING 72-79
BLGF Fiscal Performance Indicators (with Table)
Functions of Performance Indicators
Current or Constant Values
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Single Case versus Comparative Analysis
Standardizing Data
Trend Analysis
Financial Capacity Analysis
Analyzing LGU Income Trend and Composition
Analyzing LGU Expenditure Trend and Composition
Revenue and Expenditure Projection and Forecasting Techniques
A. Average Annual Growth Rate (AAGR) Method
B. Linear Regression Technique
Linear Regression By Hand
Formulating Multi-Year Revenue Estimates
Guide Questions for Evaluating Targets
Estimating the Fiscal Gap
Estimating Prospective IRA Shares
Tables, Boxes and Figures
Tables
1.1 Strategic Plan to Manage the Fiscal Gap
1.2 LGU Resource Structure
1.3 Comparative Summary of LGU Impositions
1.4 Tax Map Preparation
1.5 Summary of Land-Based Tools
1.6 Distribution of Proceeds
1.7 Sample Taxpayer's Index Card
1.8 Strategies for Improving Assessment
and Collection of Land-Based Taxes
1.9 Business Related Taxes Allocated
To The Province and Cities
1.10 Rates of Taxes by Business
Classification for Municipalities
1.11 List of Possible PIL Indicators
1.12 Common Regulatory Fees LGUs May Impose
1.13 Samples of Service and User Fees LGUs Collect
1.14 Sample of Receipts/Charges from Economic Enterprises
1.15 Analyzing the Financial
Performance of an Economic Enterprise
1.16 Comparison Between Short Term and Term Financing
1.17 Comparative Advantages of Bonds vs. Bank Loans
1.18 BOT Variants and Their Primary Characteristics
1.19 Oversight Framework for LGU Debt
3.1. BLGF Performance Indicators
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Figure
1. Municipal Bond Issuance Process
2.1. SRE Reporting Framework
2.2. Flowchart in the Preparation of Statement
of Receipts and Expenditures
Box
1. Procedures in Applying the PIL Technique
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CHAPTER 1. APPROACHES AND TOOLS IN RESOURCE MOBILIZATION
Dual Nature of LGUs. Awareness of the dual nature of local governments leads to
better understanding of resource mobilization opportunities. An LGU exercises its taxing and
police powers as it imposes taxes and issues permits. On the other hand, in their proprietary
and corporate capacity, LGUs can also establish and operate economic enterprises, charge
for its services, and enter into contracts.
Resource Mobilization Strategies. There are various revenue mobilization
strategies. They may carry different names but they normally revolve around the following:
increasing available resources and expanding fund facilities by creating special capital funds,
and earmarking budgetary appropriations to finance development projects.
•Expanding resource base by tapping potential partners from the private sector and
international community;
•Restructuring government budget in favor of poverty reduction programs. This
involves giving priority to government expenditures across geographic, program or
sectoral coverage to favor poverty-focused programs;
•Increasing efficiency of technology and processes for resource management. The
latter involves transparent fund management and efficient allocation and targeting;
•Effective use of official development assistance by streamlining them for poverty
reduction and economic development;
•Expanding the tax base;
•Exploring new revenue sources for LGUs, e.g., fees and charges in the use of
natural resources;
•Enhancing tax collection efforts;
•Encouraging partnerships with people’s organizations;
•Effective and efficient use of the countryside development fund or priority
development assistance fund.
Who Benefits and Who Pays Principle. The issue for all LGUs reviewing their
revenue generation and resource mobilization policies is determining who benefits from public
goods and services and who should pay for these. The following diagram highlights the
proportion of fees/charges versus general revenue funding. The more significant fees and
charges are as a source of revenues, the more entrepreneurial the LGU. This also connotes
that there exists several service delivery functions where the private sector could participate.
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Note: Line slopes are determined by the proportion of fees and charges levied versus the
proportion sourced from general revenues (IRA) to fund the service.
Service Delivery Options. The way in which the LGU delivers services impacts on
their revenue generation and resource mobilization choices. Service delivery options include
the following:
1.Do nothing, leaving the provision of services to market forces (laissez faire);
2.Regulate the activity, without directly providing the services (regulation);
3.Contract out services to the private sector (outsourcing);
4.Develop an in-house business to provide the service, or conduct as a joint
venture in combination with other services or partners (business unit);
5.Allow in-house teams to compete in the market place for the right to provide the
service (competition); and
6.Set up a public monopoly where no other organization is able to provide the
service (LGU monopoly).
Criteria in Determining Service Delivery Options. Service delivery options can be
sourced from a diverse range of revenue generation and resource mobilization strategies.
Answers to the questions below will assist in deciding which revenue generation and resource
mobilization strategy should be adopted. A 'yes' answer to the first three questions suggests
that the service should be financed by IRA and other tax revenues, while affirmative answers
to questions 4 to 7 imply that the LGU can just regulate the market. For services which are
contestable, the LGU might establish a separate economic enterprise wholly or partly owned
by the LGU.
1.Is there a statutory obligation?
2.Is this deemed a core activity (required under the Code)?
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Individuals EXPENDITURE –
WHO BENEFITS?
Community
From fees & charges
REVENUES –
WHO PAYS?
Individuals
From general revenue sharing (IRA) and local
property/ business taxes
Community
Slope for urban municipalitySlope for rural municipality

3.Do we have a community service obligation?
4.Is the service contestable?
5.Are there competitors in the market?
6.Is there profit potential?
7.Is there easy entry/exit to/from the market?
8.Is there a community interest?
9.Does the nature of the service suggest a particular provision?
Five Steps for Effective LGU Revenue Generation and Resource Mobilization
Strategy
A. Prepare the LGU Development Plan and Ensure an Efficient Local Tax
Collection System. This demands that the LGU has a clear idea of what it is trying to
achieve for the community. A key question is “What is the LGU's governance strategy?” or
specifically, “What are its vision, mission, goals and objective?”
B. Determine Service Costs and Standards. Determining the actual unit cost of
service provision and the standard at which that service is provided enables the LGU to
decide on the standard and the corresponding fees to charge for it. A key question is: “What
is the unit cost of service deliver and the standard of service delivered?”
C. Investigate Other Revenue Generation Options. Once the LGU has determined
the cost of service delivery, it is able to formulate its revenue generation policy and make long
term forecasts about the sustainability of its services. This assists the LGU in presenting the
business case to private investors about the likely returns on possible joint LGU-private sector
initiatives. A key question is, “What opportunities exist for the LGU to levy fees and charges?”
D. Investigate Resource Mobilization Opportunities. This typically involves the
LGU allowing private sector investors privileged, if not exclusive, access to resources which
by nature has a locational advantage. Public-Private Partnership (PPP) should be actively
pursued to enable LGUs to have access to sophisticated technology, cost effective design in
construction and operation, and flexible financing, including the use of private capital. PPP
could take the form of BOT, BOO, BLT, Joint Venture and other variants. A key question is:
“What joint venture opportunities exist for the LGU to work with the private sector?”
E. Monitor, Evaluate and Review. Leading practice LGUs closely and periodically
monitor their performance to ensure their goals are being achieved. This requires regularly
searching for new ways of doing. A key question is, “What strategies are in place to monitor,
evaluate and review service provision?”
Plan to Manage the Fiscal Strategic Gap1
. The five steps above were outlined to
assist LGUs determine revenue generation and resource mobilization policies that will enable
them to manage the fiscal gap. A strategic plan can be mapped out using the matrix below:
1 Fiscal gap estimation is described in Appendix 3.3.
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Table 1.1. Strategic Plan to Manage the Fiscal Gap
Steps Strategies to Implement Measures/ Indicators
(to confirm success)
Accountable
Official/s
Prepare the LGU Development
Plan and Ensure an Efficient Local
Tax Collection
Determine Service Costs and
Standards
Investing Revenue Generating
Options
Investigate Resource Mobilization
Opportunities
Monitor, Evaluate and Review
Distinct Classes of Potential Revenue Sources2
. Resource mobilization tools are
grouped into five distinct classes of potential revenue sources: (a) Land-Based tools-sources
that rely on real property resources (land and improvements) of LGUs; (b) Community
Activity-Based tools rely on the flow of economic activity within the territorial jurisdiction of the
LGU; (c) Infrastructure-Based tools are based on the “user” or “beneficiary”-pay principle; that
is, taxpayers pay for the use of or benefits derivable from public infrastructure. These tools
are primarily cost recovery mechanisms for infrastructure projects, however, they can be
converted to loan equivalents for purposes of raising credit finance for the projects; (d) Debt-
Based tools are those that allow LGUs to secure debt finance for so-called “income-
generating” projects and to make investments in financial instruments like securities, T-bills,
and commercial papers; and (e) Revenue sharing tools are based on national government
revenues shared with LGUs.
LGU Resource Structure. LGU resources come from two basic sources: (a) internal
funds are internally generated or come from regular income; and (b) external funds come
from the LGU's share in national revenues and foreign or local borrowings and grants.
Table 1.2. LGU Resource Structure
Local/Internal Sources
Tax Revenues
Real Property Tax
Business Tax
Other Tax
External Sources
Aids and Allotments
Internal Revenue Allotment (IRA)
Share in National Wealth
Share in Tobacco Excise Tax
2 Appendix 2.6 identifies examples for each of these revenue sources.
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Non-Tax Revenues
Regulatory Fees
Service/User Charges
Receipts from Economic
Enterprises
Other Receipts
Grants
Domestic
Foreign
National Aid
Loans, Borrowings, and Transfers
Loans
Transfers
Inter-local transfers
Key Features of the Local Tax Structure. LGUs can choose the taxes, fees and
charges to impose, set tax rates within prescribed ranges, and adjust tax rates every 5 years
at a maximum of 10 percent. Other options include the imposition of penalties and charges,
and the provision of tax relief, discounts and incentives.
Criteria of a Good Revenue Structure. The following criteria should be considered
when considering a new tax package: (a) revenue adequacy and elasticity; (b) administrative
efficiency; (c) equity; (d) economic efficiency; and (e) political acceptability. The five criteria
may not necessary turn out positive in all types of taxes. LGUs should set their priorities and
begin assessing taxes that are more advantageous to implement.
Fundamental Principles in Local Taxation. The LGC provides the following
fundamental principles that govern the exercise of the taxing and other revenue-raising
powers of LGUs:
Taxation shall be uniform in each local government unit;
Taxes, fees, charges and other impositions 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;
The collection of 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 otherwise provided; and
Each local government unit shall, as far as practicable, evolve a progressive
system of taxation.
Central Grants. The provision of grants involves the transfer of funds from the
National Governments to the LGUs with the idea of getting the LGUs to use the transfers for
augmentation of funds and not as an exclusive financing source. Following are central
grants:
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A. Internal Revenue Allotment (IRA). This is the share of all LGUs in the national
internal revenue taxes of the third year preceding. The LGU share is based on a
predetermined formula, i.e., 40 percent of gross internal revenue collections, which can be
reduced to 30 percent if an “unmanageable” public sector deficit is declared. Internal revenue
collections pertain to income tax, excise taxes, capital gains tax and other taxes collected by
the Bureau of Internal Revenue (BIR).
IRA Allocation3
. The IRA is vertically and horizontally allocated to provinces, cities,
municipalities and barangays. (a) Vertical allocation among the LGU levels has been fixed by
the formula: 23% each for provinces and cities, 34% for municipalities and 20% for
barangays. (b) Horizontal allocation for provinces, cities and municipalities is based on three
factors with corresponding weights of 50% for population; 25% for land area; and 25% for
equal sharing. For barangays, a distinction has to be made if it has 100 or more inhabitants.
All barangays with 100 inhabitants get an automatic P80,000 each. The remaining balance
shall be proportionately allocated to all barangays on the basis of 60% population and 40%
equal sharing. It is mandatory for LGUs to commit 20 percent of its IRA to a development
fund.
It is expected that the IRA will change over time due to factors which can positively or
negatively affect it, e.g., economic conditions, austerity programs, population census and the
creation and conversion of new LGUs. LGUs should also look at these factors for purposes
of anticipating trends in IRA shares.
B. Share from National Wealth. As part of entitlement to a just share in the
development and utilization of national wealth, LGUs are granted an additional share of 40
percent of the gross collections derived by the National Government on mining taxes,
royalties, forestry and fishery charges, among others; its share in the co-production, joint
venture or production sharing agreement in the utilization and development of the national
wealth within their jurisdiction; and administrative charges on activities just enumerated. The
revenues shall be shared by the provinces at 20 percent, component city or municipality at 45
percent and barangays at 35 percent. LGUs are further mandated to utilize at least 8 percent
of the proceeds derived from the development and utilization of geothermal, hydrothermal and
other energy sources to lower the cost of electricity in the LGU where such source is located.
C. Special Shares of LGUs in National Taxes. LGUs shall be entitled to the
following: (a) 15 percent of the excise tobacco tax from locally manufactured Virginia-type
cigarettes, with the following sub-allocation: 30%-provincial; 40%-cities and municipalities;
and 30%-cities and municipalities in the congressional district of a beneficiary province in
consultation with the congressional district of the province. Mandatory share is at least 50
percent for barangay economic development projects; (b) 2 percent from the gross income
tax paid by business enterprises within the economic zones; and (c) incremental collection
from VAT, referring to the LGU share from the resulting increase every year from VAT
3 Steps in estimating prospective IRA shares are outlined in Appendix 3.3.
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collections in the amount of 50 percent of the 20 percent of excess collections.
D. Other Components of LGU Assistance. The Allocation to Local Government
Units (ALGU) adds assistance in other forms. Most of them are project-specific which include
the (a) Local Government Empowerment Fund which shall be used to implement devolved
activities supportive of major national government priority programs and projects implemented
in depressed LGUS; (b) Local Officials Insurance Premium Fund; (c) Municipal Development
Fund (MDF) or a special loan and conduit facility for LGU development projects; (d) Subsidy
to the Metropolitan Manila Development Authority; and (e) Local Government Stabilization
and Equalization Fund (LGSEF).
LGU Impositions. Following is a comparative summary of LGU impositions on their
constituents:
Table 1.3. Comparative Summary of LGU Impositions
TYPE DEFINITION REMARKS EXAMPLE
Taxes Impositions under the
taxing power of LGUs
for the purpose of
raising revenues
Allocation among
LGUs of taxing
powers defined by law
Property taxes
Business taxes
Permit Fees Charges made by law
or ordinance for the
regulation or inspection
of business activities
Based on cost
regulation of the
activity
Mayor’s permit fees
Large cattle
registration fees
Service Fees Fees collected for
services rendered or
conveniences furnished
by the LGU
Amount
commensurate to
such services
Sanitary inspection
fee
Secretary’s fees
Charges Imposition for the
operation of public
enterprises
Full cost recovery as
basis for amount of
charge to be imposed
Market fees
Corral fees
Slaughter fees
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REAL PROPERTY TAX
Classification of Real Property. Assessment on real property is based on the
following classifications: residential, agricultural, commercial, industrial, mineral, timberland,
and special. The power to classify lands rests with the Local Sanggunian in accordance with
the LGU's zoning ordinance.
Stages in Real Property Tax Administration. These four stages are interdependent
such that the failure or deficiency in one stage affects the other and eventually the collection
of RPT:
A. Property Identification. The process of preparing an inventory of all existing real
property, whether taxable or exempt, located within the LGU. Indispensable to the
accomplishment of this function is the preparation of tax maps for ready updating from
changes in the field.
Table 1.4. Tax Map Preparation
Pre-field Operations
Step 1
Step 2
Step 3
Step 4
Step 5
Step 6
Step 7
Prepare the Base Maps from engineering-controlled survey maps or
other sources
Prepare the Field Appraisal and Assessment Sheet (FAAS)
Gather, classify, and complete property records
Do pre-field tie-up
Organize and train Tax Mapping Teams
Prepare and submit work plans
Conduct final briefing of Tax Mapping Teams
Field Operations
Step 1
Step 2
Step 3
Do actual survey and parcellary sketching
Conduct field interviews with property owners
Make field tie-up and gather data
Post-field Operations
Step 1 Prepare and finalize Index Maps
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Step 2
Step 3
Step 4
Prepare and finalize Section and Tax Maps
Assign Property Index Numbers (PINS)
Prepare and finalize Tax Mapping Control Rolls (TMCRS)
B. Appraisal and Assessment. Appraisal is the process of determining the value of
the property as of a specific date for a specific purpose. Assessment is the process of
applying the assessment level (a percentage) to the appraised/market value to determine the
assessed value or taxable value of the property. The assessment level is seen as a factor of
equalization because the level varies according to “actual use” (e.g., commercial, industrial).
C.Records Conversion and Management. This stage entails the creation, filing,
maintenance and disposition of records necessary to levy and collect real property tax.
Records conversion translates the actual field conditions to the following records, most of
which are completed in pre-printed forms:
RECORDS PURPOSE
Field Appraisal & Assessment (FAAS) Data capture format
Tax Declaration (TD) Legal format & record of assessment
Ownership Record Form (ORF) Alphabetical ownership file as cross-reference
for the numeric file
Assessment Roll (AR) Bases for the preparation of the RPTOP
Real Property Tax Order Payment (RPTOP) Notice to property owners to satisfy the due
process requirement
Journal of Assessments (JAT) Audit trail & preparation of reports
D. Tax Collection and Enforcement. This last phase consists of billing and record
updating, collection and recording, collection of delinquent taxes, redemption of real property
after sale; and financial reporting.
Approaches to Determine Property Values. Assessors use three internationally
accepted approaches to determine property values: (i) market value approach-allows
adjustments of values to consider time of sale, neighborhood quality, distance to amenities,
location and other factors directly affecting values; (ii) income capitalization approach-applied
to income producing properties; after comparing investment rates of return of similar type and
class, new income is capitalized based on existing market conditions to approximate the
value of the property under study; and (iii) cost approach-applicable for the valuation of
buildings and other improvement, summing up all costs to produce a replica; combining costs
with the accrued depreciation results in the current value of the property.
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Types of Real Property Impositions. Following is a summary of land-based taxes
with their distribution schedule and description below:
Table 1.5. Summary of Land-Based Tools
Tax Base Provincial Tax Rate City Tax Rate
Basic Tax on
Real Property
Tax for SEF
Tax on Idle Land
Special Levy
Assessed Value
Assessed Value
Assessed Value
Assessed Value
Maximum of 1%
1%
Not to exceed 5%
Not to exceed 60% of
actual cost of projects
and improvement
Maximum of 2%
1%
Not to exceed 5%
Not to exceed 60% of
actual cost of projects
and improvement
Table 1.6. Distribution of Proceeds
PROVINCIAL SHARING
Basic RPT Province
Municipality
Barangay
35%
40%
25%
SEF Provincial School Board
Municipal School Board
50%
50%
Idle Land Tax Province 100%
Special Levy Province 100%
CITY SHARING
Basic RPT City
Barangay
70%
30%
SEF City School Board 100%
Idle Land Tax City 100%
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Special Levy City 100%
A. Basic RPT. The basic real property tax covers land, buildings, machineries and
other improvement on land. Collection from this tax accrues to the all-purpose general fund
of the LGU.
B. Special Education Fund Tax. The SEF is an additional levy indexed on the real
property to support public education. The Local School Board determines the allocation of
funds for various needs of public schools.
C. Idle Land Tax. This is an annual levy on the assessed value of real property which
remains idle. Idle land tax is punitive. The relatively high tax rate is to discourage land
acquisition for speculative purposes and hopefully stimulate a more efficient and rational
utilization of land.
D. Special Levy. These are imposed on lands within an LGU's territorial jurisdiction
which are specially benefited by public works projects or improvements funded by the LGU.
Exemptions are those discussed below and the remainder of the land portions which have
been donated to the LGUs. The imposition provides LGUs with the opportunity to recover the
cost of infrastructure projects. Proceeds accrue to the general fund of the LGU.
Exemptions from Paying RPT/Land-Based Taxes. Exemption claims must be filed
before the local assessor within 30 days from the date of declaration of the real property, with
substantive proof. The LGC provides the following exemptions: (a) real property of the
Republic of the Philippines or any of its political subdivisions (b) all lands, buildings and
improvements actually, directly and exclusively used for religious, charitable, or educational
purposes; (c) all machineries and equipment used by local water districts and GOCCs
engaged in the supply/generation and distribution/transmission of water/electric power, and
those used for pollution control and environmental protection; and (d) all property owned by
duly registered cooperatives under RA 6938.
Other Features of RPT. (a) tax discounts must be legislated before it is granted; (b)
tax incentives may be given: 10% discount for prompt payment and up to 20% for advance
payment; and (c) penalty rate for delinquent accounts of 2% a month or a fraction thereof, up
to a maximum of 36 months or 72%.
RPT Formula. The LGC-provided tax rates and assessment levels on land are the
maximum rates and therefore could be adjusted downwards through legislation. However,
the determination of the market value is purely a technical function:
Real Property Tax Due = (MV x AL x TR) +/- Penalty/Discounts
where:
MV Market Value is the value determined by the Assessor in accordance
18

with the schedule of values approved by Sanggunian
AL Assessment Level used as an intermediary ratio to equalize the tax
burden as prescribed by the Sanggunian
TR Tax Rate adopted by the Sanggunian
Penalty or
Discount
These either serve as a disincentive or incentive implemented
depending on the timeliness of the payment
Assessed Value: Market Value x Assessment Level
Therefore: RPT due = (Assessed Value x Tax Rate) +/- penalty/discount
Dynamics of Real Property Taxation. The assessment levels and tax rates are not
fixed rates. The Sanggunian may exercise its legislative fiat by manipulating the assessment
level and/or tax rates while allowing the market value to seek its level, i.e., reflect actual
conditions and be insulated from politics.
A. Real Property Tax Collection Efficiency (CE). This is the ratio of tax collections to
tax collectible, an indicator that measures LGU performance in collecting real property tax.
B. Cost of Collection Ratio (CCR). Indicates the amount spent for every peso
collected from property tax and reflects LGU performance in administering real property tax.
These data can help LGUs decide whether to add more resources to the administration of
real property tax or cut back its support to maximize revenue potential from RPT.
19
CE = Current Year Collection from Basic & SEF
Current Year Collectible (Basic & SEF)

Assessment Strategies. Below are strategies for LGUs to improve assessment and
derive huge economic and financial gains from their land resources.
A. Re-appraisal. A general revision of real property assessment should be conducted
every three years to keep the tax roll and values updated.
B. Explore Other Land-Based Taxes. Explore the potentials of idle land tax and
special levy which remain largely untapped by LGUs.
C. Decentralize. Decentralizing the assessment function and day-to-day operations
from the province to the municipality can be a possibility with the province retaining macro
services.
D. Land Banking. Bank or reserve land through an integrated land control and
management policy. Investment in land development provides direct revenues to the LGU in
terms of profits upon disposition, enhanced property value and higher property tax base.
E. Computerization. Slowly move towards computerization by integrating all tax
records using the real property assessment and collection record as basis. This will reduce
the cost of revising the assessment and tax collection records periodically.
F. Implement RPTA. The RPTA program encompasses support to improve tax
mapping records, records conversion, tax collection and data computerization.
20
CCR 1: CCR for the current year's tax
100% of Assessor's Office + 20% of Treas.Office expenses
Current year's collection (basic tax)
CCR 2: CCR for current and preceding years' taxes
100% of Assessor's Office + 20% of Treas.Office expenses
Total collections (current & preceding years)+penalties+ SEF
CCR 3: CCR for Municipalities (which only share from RPT)
100% of Municipal Assessor's Office + 20% of Treas.Office expenses
Total Share of Municipalities from RPTa/
_____________
a/ 40% of Basic Tax + 50% of SEF (assuming a basic tax rate of 1% and additional levy of
1% for SEF)

G. Improve Coordination Among Offices. (i) Require the Building Official to provide
the Assessor's Office with a list of all occupancy permits quarterly for proper adjustments to
land classification and assessment levels; (ii) Adopt BIR zoning valuation system for transfer
taxes; and (iii) Require notaries public to send a copy of Deeds of Sale to local treasurer.
Collection Strategies. Following are strategies to minimize delinquent taxes and
ensure improved revenue collections without resorting to administrative and judicial actions,
which in some cases, likewise proved to be very effective measures.
A. Provide Legislative Support. Pass the required legislative ordinances related to
land-based taxes and support tax mobilization initiatives. Base the need and rate for idle land
tax on real estate market conditions.
B. Go After Delinquent Taxpayers. Avail of administrative or judicial action; maintain
a classified list of good and delinquent taxpayers; post list of delinquent taxpayers in public
places; and prepare a tax index card for each taxpayer which should show the tax dues for
each taxpayer for easy reference (refer to sample below) when this is reviewed each quarter
to identify delinquent taxpayers that should be sent notices to.
C. Involve Barangay Officials. Institutionalize the practice of involving barangay
officials in the distribution of tax bills.
D. Simplify Systems, Procedures, Forms for Payment. Simplify forms and cut
down on number of signatories and processing time; set up and post for reference, a
flowchart incorporating required documents and number of copies; and prepare an Annual
Land-Based Revenue Mobilization Work Plan for integration in the Annual Revenue Plan of
the LGU.
E. Educate and Inform Taxpayers. Set up a year-round collection drive through
annual and quarterly issuance of notices which can be incorporated in a Tax Bill to be sent to
taxpayers summarizing all taxes due; designing a single application form; intensive creative
tax information and education drive through contests, door-to-door campaigns, airing jingles
over radio, publishing in newspapers, etc; and through advance notice and bonded barangay
collectors, conduct house-to-house collection campaigns particularly in far-off barangays.
F. Motivate Staff and Provide Incentives. In general, an incentive scheme should
be set up; incentives to barangays may be given as a percentage of collections on top of the
barangay share; sponsor barangay contests, exchange tax payments/receipts with raffle
tickets; and train out-of-school youths to assist in tax mapping.
G. Network with Other Offices/Agencies. Tie-up with relevant offices (e.g., NBI, DTI,
SSS, Mayor's Office, banks) to require RPT clearance before issuance of clearances, IDs,
approval of business permits, transfer of real property ownership, or accepting property as
collateral for loans.
21

H. Explore Cost Recovery Mechanisms. Pricing of development permits and similar
mechanisms to recover imputed cost impact of development of existing asset base.
22

Table 1.7. Sample Taxpayer's Index Card
Ownership Record Form
Province/City: ________________ Municipality: ____________________
Barangay: ________________
Name of Owner: ________________ Address: ____________________
Telephone No.: ________________
Name of
Administrator: ________________ Address: ____________________
Telephone No.: ________________
PIN ARP
NO.
PROPERTY
LOCATION
AREA ASSESSED
VALUE
DISPOSITION/ ACQUISITION TOTAL OF CURRENT
ASSESSMENT
Transaction
Code
Previous
ARP Ref.
23

Table 1.8. Strategies for Improving Assessment and
Collection of Land-Based Taxes
LGU: ___________________________________
Revenue Enhancement
Strategies
I.ASSESSMENT
Person
Responsible
Administrative
Costs
Expected
Incremental
Revenues
Revenue Enhancement
Strategies
II.COLLECTIONS
Person
Responsible
Administrative
Costs
Expected
Incremental
Revenues
24

Reform Agenda for LGUs4
. Possible steps LGUs can take to improve local resource
mobilization and delivery of services within the LGC framework:
•improving the collection of real property and business taxes;
•increasing direct cost recovery through greater use of user fees to link payment
with the provision of services and special levies on the real property tax for lands
which have benefited from public works or improvements funded by the local
government. Direct cost recovery would help break the vicious cycle of poor
services, lack of additional funds, and further deterioration in services;
•training key local staff through programs to enhance the technical capabilities of
the local government staff in those areas where they will be taking on additional
functions;
•improving local planning procedures by developing basic information available to
decision makers and better targeting of investments;
•automating routine administration with greater use of computers.
Procedure for Enactment of Revenue Ordinances. The LGU should issue an
appropriate ordinance to implement LGC provisions. The ordinance should define the subject
covered by the impositions, rates of levy, frequency and procedure of collection, and the
sanction in case of violations. Aside from establishing the legal basis, the approved
ordinance gives authority to the local treasurers to start collecting revenues.
Following are the steps in enacting a valid ordinance: (1) Pre-publication and/or
posting of proposal within ten days from date of filing, for three consecutive days in a
newspaper of local circulation, or posted in four conspicuous places; (2) Written notices to
interested or affected parties specifying the dates and venue of the public hearings, with
attached copy of ordinance; (3) Public hearing which should have a ten-day lead from last day
of publication or sending of written notices. LGUs should adequately prepare a package of
responses and explanations to answer expected adverse comments. The Sanggunian is
required to compile and document people's reactions including submissions which may serve
as inputs to their decisions; (4) Once approved by the Sanggunian, the Ordinance shall be
forwarded for signature by the LCE who shall, in case he decides to veto it, put his specific
veto in writing and communicate this to the Sanggunian within fifteen days in case of a
province and ten days in case of a municipality. The Sanggunian may override the veto by
2/3 votes; and (5) The LGU should publish the approved ordinance three consecutive times in
a newspaper of local circulation within ten days after approval. Within three days after
approval the Sanggunian Bayan/Panlungsod shall forward it to the Sangguniang
Panlalawigan who shall act on the Ordinance within thirty days from receipt thereof. The
Ordinance is deemed approved if no action is taken within said period.
Limitations on LGU's Taxing Powers. Local governments are prohibited from
imposing the following taxes except as otherwise provided by the LGC: (a) income tax, except
when levied on banks and other financial institutions; (b) documentary stamp tax; (c) taxes on
4 Supporting details for this agenda are enumerated in the Assessment Strategies and Collection Strategies described above.
25

estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise
provided in the Code; (d) customs duties, except wharfage on wharves constructed and
maintained by the city; (e) goods passing through; (f) agricultural and aquatic products when
sold by marginal farmers or fisherman; (g) enterprises certified by BOI as pioneer or non-
pioneer for a period of six and four years, respectively, from the date of registration; (h) excise
taxes on alcohol, tobacco, petroleum and miscellaneous products (e.g., fireworks, jewelry,
perfume, etc.); (i) percentage of VAT on sales, barters or exchanges; (j) transportation
contractors; (k) taxes on premiums by way of reinsurance or retrocession; (l) vehicle
registration, except tricycles; (m) export products; (n) Countryside and Barangay Business
Enterprises duly registered under RA 6810 and cooperatives duly registered under RA 6938
of the Cooperatives Code of the Philippines; and (o) National Government.
BUSINESS TAXES AND OTHER RELATED TAXES
Business and Other Related Taxes. As part of the taxing powers of LGUs, the LGC
specifies a wide range of business and other related taxes that may be imposed.
Provincial and City Impositions: Business-Related Taxes. The following are
business-related taxes exclusively granted to provinces and cities.
A. Tax on Business of Printing and Publication. This tax may be imposed on the
business of printing and/or publication of books, calendars, posters, leaflets, handbills,
certificates, receipts, pamphlets and other printed materials of similar nature.
B. Franchise Tax. A right or privilege, affected with public interest, conferred upon
private persons or corporations, under such terms and conditions as the government and its
political subdivisions may impose in the interest of public welfare, security and safety.
C. Tax on Sand, Gravel and Other Quarry Resources. The tax covers the
extraction of ordinary stones, sand, gravel, earth and other quarry resources from public lands
or beds of seas, lakes, rivers, streams, creeks and other public waters within the territorial
jurisdiction of the LGU. Before extraction is allowed, a permit to quarry identifying the place
and quantity of extraction, must be secured from the Provincial Governor.
D. Amusement Tax. A tax imposed on patrons of shows and entertainment activities.
Exempted from payment are the holding of operas, dramas, recitals, printing and art
exhibitions, flower shows, musical programs, literary and oratorical presentations, except pop
rock and similar concerts.
E. Tax on Delivery Vans. The levy shall cover trucks, vans or any motor vehicles
used by manufacturers, producers, wholesalers, dealers, or retailers within the province. The
owners of these trucks shall be exempt from payment of the peddler's tax.
26

Table 1.9. Business Related Taxes Allocated To The Province and Cities
Subject Tax Base Maximum Tax Rate Distribution of Proceeds
Provinces Cities Provinces Cities
Business of Printing
and Publications
-Gross Receipts
based on preceding
calendar year
-Capital Investment
for newly started
business
50% of 1%
1/20 of 1%
75% of 1%
3/40 of 1%
100% 100%
Franchise -Gross Receipts
based on preceding
calendar year
-Capital Investment
for newly started
business
50% of 1%
1/20 of 1%
75% of 1%
3/40 of 1%
100% 100%
Sand, Gravel &
Other Quarry
Resources
Fair Market Value of
the extract at place
of extract
10% 15% Prov.- 30%
Mun.-30%
Bgy.-40%
City-60%
Bry.-40%
Amusement Places Paid Admission Fee 30% 30% Prov.-50%
Mun.-50%
100%
Delivery Vans/
Trucks
Per Delivery Van and
Truck
P500.00 P500.00 100% 100%
Revenue Enhancement Measures for Business-Related Taxes
A. Tax on Business of Printing and Publication. (a) Get periodic advisory from
DepEd on the list of school texts and references; (b) Keep and maintain an updated listing of
business and persons engaged in the printing or publication of books, cards, posters, leaflets,
handbills, certificates, receipts, pamphlets and others of similar nature; and (c) Provide for
accounting and bookkeeping guidelines.
B. Franchise Tax. (a) Require submission of sworn statements of gross
sales/receipts; (b) Keep and maintain an updated list of businesses enjoying a franchise; (c )
Use the Presumptive Income Level (PIL) in assessing tax liabilities; and (d) Require
mandatory reporting of receipts by territorial jurisdiction.
C. Tax on Sand, Gravel and Other Quarry Resources. (a) Promulgate rate and
regulations on the taking, removal, and disposition of sand, gravel, and other quarry products;
and (b) Closely monitor compliance with rules and regulations in close coordination with
NGOs, POs and the public in general.
27

D. Amusement Tax. (a) Assign as checkers in movie houses college students doing
practicum or, as in the case of Olongapo City, disabled members of the community; (b) Use
registered tickets; (c) Require centralized procurement/printing of tickets through the Local
Treasurer; (d) Rotate checkers to avoid collusion with business operators; (e) Conduct
surprise inspections; (f) Impose heavy penalties and closure for delinquencies; (g) Use the
PIL approach to establish gross receipts from admission fees; and (h) Monitor trend per
theater.
E. Tax on Delivery Vans. (a) In coordination with the local LTO, require tax
clearance for registration/renewal or registration for deliver tucks and vans; (b) Require all
deliveries to be covered by cash or charge invoice; and (c) Establish checkpoints with the
assistance of barangay officials.
Other Local Taxes in Provinces and Cities
A. Tax on Transfer of Real Property. Tax imposed on the sale, donation, barter or
any mode of transferring ownership or title of real property. The maximum rate is 50% of 1%
of the total consideration in the acquisition of the property or fair market value based on the
values enacted by the Sanggunian for property tax purpose, whichever is higher. Payment of
the tax shall be within sixty days from the date of the execution of the deed or from the date of
the property owner's death. Exemption is granted to the sale, transfer, or other disposition of
real property pursuant to the Comprehensive Agrarian Reform Law. A revenue enhancement
measure could be for LGUs to enforce the codal provision requiring the Registrar of Deeds
and the notaries public to furnish the Assessor with all copies of contracts related to real
property.
B. Tax on Professionals. The tax covers persons engaged in the practice of their
professions requiring government examination, except when practiced exclusively as a
government employee. This shall not exceed three hundred pesos (P300.00). Professional
taxes shall be paid on or before January 31 in the province where the professional practices
his profession or where he maintains his principal office. Payment of this tax entitles the
professional to practice his profession in any part of the country.
Revenue Enhancement Measures for Professional Taxes. (a) Enact an ordinance
imposing this tax; (b) Post notices in conspicuous places on who are liable to pay and the due
dates; (c) Remind employers of business establishments in the area that professional taxes
should be paid before employment and annually thereafter; (d) Monitor enforcement of the
requirement for any person subject to pay the tax with the number of official receipts issued to
him; (e) Obtain listing of members of professional association in the area for billing purposes;
(f) Request through leagues and the Professional Regulatory Board to require proof of tax
payment before registration or renewal of registration; and (g) Tap barangays as monitors for
reporting list of residents engaged in professional practice.
City and Municipal Impositions: Business Tax. This is an annual tax specifically
allocated to cities and municipalities imposed on the act of doing business within the LGU.
28

This is based on gross sales or gross receipts of the preceding year. For old businesses,
unless otherwise specified, business taxes shall accrue on the first day of January each year;
for new businesses, these shall accrue on the first day of the next quarter following the
effectivity of the ordinance imposing such levies. Business taxes may be paid within the first
twenty days of January of each subsequent quarter, as the case may be. The Sanggunian
may also extend the period of payment for a period not exceeding six (6) months for justifiable
reasons or allow payment in four equal monthly installments.
Business Tax Computation. Step 1: Classify the business based on the business
clusters provided in the LGC; Step 2: Determine the gross receipts based on the declaration
by the owner; and Step 3: Locate the tax based on the schedule of graduated fixed rates if
the gross receipts has a pre-determined bracket, or compute the tax due on the basis of
standard tax formula: Tax due = tax base X tax rate +/- penalty/discounts.
Surcharge and Penalties. A surcharge not exceeding twenty five percent (25%) may
be imposed on delinquent taxpayers. The LGU may also increase the tax liability through 2%
per month or a fraction thereof, of penalty/interest on the unpaid amount for a maximum of 36
months equivalent to 72%.
Rate Structure. The rate is structured as a graduated fixed tax with each business
classification falling under a tax schedule based on accumulated gross receipt. Each bracket
in the tax schedule has an equivalent fixed tax amount. After reaching the highest level in the
tax schedule, the tax becomes a percentage tax.
Table 1.10. Rates of Taxes by Business Classification for Municipalities
(Note: Cities are allowed to impose rates 50% higher than that allowed municipalities)
CLASSIFICATION AND TAX RATE AMOUNT
a)Manufacturers, assemblers, repackers, processors, brewers,
distillers, rectifiers and compounders of liquors, distilled spirits,
wines and any other articles of commerce of whatever kind or
nature with gross sales or receipts for the preceding calendar year
in the amount of:
Less than P10,000.00
P10,000.00 or more but less than P15,000.00
P165.00
P220.00
P302.00
P440.00
P660.00
P825.00
P1,320.00
P1,650.00
P2,200.00
P2,750.00
P3,850.00
29

P750,000.00 or more but less than P1,000,000.00
P1,000,000.00 or more but less than P2,000,000.00
P6,500,000.00 or more
P5,500.00
P1,320.00
P8,000.00
P10,000.00
P13,750.00
P16,500.00
P19,800.00
P23,100.00
P24,375.00
at a rate not exceeding
thirty-seven and a half
percent (37.5%) of one
percent (1%)
b)On wholesalers, distributors, or dealers in any article of
commerce of whatever kind or nature with gross sales or receipts
for the preceding calendar year in the amount of:
Less than P1,000.00
P2,000,000.00 or more
P18.00
P33.00
P50.00
P72.00
P100.00
P121.00
P143.00
P165.00
P187.00
P220.00
P275.00
P330.00
P440.00
P660.00
P990.00
P1,200.00
P1,870.00
P2,420.00
P3,300.00
P4,400.00
P6,600.00
P8,800.00
P10,000.00
at a rate not exceeding fifty
percent (50%) of one
percent (1%)
c)On exporters, manufacturers, millers, producers, wholesalers,
distributors, dealers or retailers of essential commodities
enumerated below:
30

a)Rice and corn
b)Wheat or cassava, flour, meat, dairy products, locally
manufactured processed or preserved food, sugar, salt, and other
agricultural, marine, and fresh water products, whether in their
original state or not
c)Cooking oil and cooking gas
d)Laundry soap, detergents and medicine
e)Agricultural implements, equipment, and post harvest facilities,
fertilizers, pesticides, insecticides or other farm output
f)Poultry feeds, and other animal feeds
g)School supplies
h)Cement
at a rate not exceeding one-
half percent (1/2%) of the
prescribed rates under
sections (a0 and (b) and (d)
of this table
a)On retailers with gross sales or receipts for the preceding
calendar year in the amount of:
P400,000.00 or less
More than P400,000.00
2%
1%
b)On retailers and other independent contractors with gross sales
or receipts for the preceding calendar year in the amount of:
Less than P5,000.00
P2,000,000.00 or more
P27.50
P61.60
P104.50
P165.00
P275.00
P385.00
P550.00
P880.00
P1,320.00
P1,980.00
P2,640.00
P3,630.00
P4,620.00
P6,160.00
P8,250.00
P9,250.00
P10,250.00
P11,500.00
percent (1%)
c)On banks and other financial institutions with gross receipts of
the preceding calendar year derived from interest, commissions,
and discounts from lending activities, income from financing,
leasing, dividends, rentals on property and profit from exchange or
percent (1%)
31

sale of property, and insurance premium
d)On peddlers engaged in the sale of any merchandise of article or
commerce
percent (1%)
On any other business not otherwise specified in the preceding paragraphs which the
Sanggunian may deem proper to tax: provided that on any business subject to the excise value-
added or percentage under the National Internal Revenue Code, as amended, the rate shall not
exceed 2% of gross sales or receipts of the preceding calendar year.
Rate Structure for New Business. New businesses have another tax base and rate
structure. With capital investment of new businesses as base, the maximum rate for cities is
3/40 of 1 percent, while that for municipalities is 1/20 of 1 percent.
Need for Proper Classification. The most critical role of the evaluator is classifying
business under a specified classification, as misclassification can mean excessive exaction
for the taxpayer or forgone revenues for the government. Another challenge is sorting through
business lines when an owner operates several establishments and several business lines.5
Revenue Enhancement Measures for Business Taxes
A. Counteract Under-Declaration of Gross Receipts/Sales. (a) Compare BIR gross
sales date versus declared gross sales; (b) Local Treasurer examines books of accounts and
pertinent records of businessmen; (c) Allow for fixed percentage increase over the taxpayer's
prior year declaration; and (d) Use Presumptive Income Levels (PILs) in validating gross
sales declared by the taxpayers.
B. Improved Tax Records Management. (a) Conduct business tax mapping and
establish revenue data bank; (b) Conduct regular census and listing of taxpayers; and (c)
Prepare business firms'/taxpayers' lists.
C. Improved Internal Controls. Install an internal control system (ICS) suited to the
LGU's requirements and capabilities. This can evolve from either the COA Model or the LGC-
UPCPA/LRM-NEDA Model.
D. Educate and Inform Taxpayers. Wage a continuing tax information and education
campaign (TIEC) to overcome taxpayer resistance and make citizens more tax conscious.
Direct campaign can come in many forms: flyers, leaflets, bulletin boards, media
announcements, town criers, etc; indirectly, through popularity contests and school-organized
activities such as poster or essay-writing contests.
5 Module IV of the Revised Resource Mobilization Manual, pp. 17-20, discusses examples of cases related to business classification for
which the Department of Finance has rendered an opinion.
32

E. Enforce Collection Through Administrative Action. Local Treasurers will need
full support from local leadership to enforce collection of delinquencies through distraint of
personal property and by levy upon real property.
F. Strictly Enforce Ordinance. Closure of business establishments, auction of
delinquent real property, inspection of book of accounts and other punitive actions against
evaders should be done regularly.
G. Improved LGU-Customer Relations. Taxpayers can be surveyed on their
expectations in terms of administrative ease and processing time when they pay taxes.
LGUs can also closely monitor and maintain cordial relationships with large taxpayers
through “Thank You” cards.
Other Local Taxes for Cities and Municipalities
A. Community Tax on Individuals. Individuals cover inhabitants of the Philippines
18 years old and above who: (a) are regularly employed on a wage or salary bases for at
least 30 consecutive working days; or (b) engaged in business or occupation; (c) owns real
property with an aggregate assessed value of P1,000,000 or more, or (d) are required to file
income tax return. Diplomatic and consular representatives and transient visitors (with less
than three months stay) are exempted. Basic Community Tax is P5.00 plus P1.00 per
P1,000.00 income from business, profession or property, but should not exceed P5,000.00.
In case of husband and wife, the additional tax shall be based upon the total property owned
by them and the gross earnings derived by them. This should be paid in the LGU where the
individual's residence is located because payment in other LGUs does not extinguish this
liability.
B. Community Tax on Corporations. A tax imposed on corporations, no matter how
created or organized, whether domestic or resident foreign engaged in doing business in the
Philippines, except those duly registered under R.A. 6180 and 6938 per DOF opinion on May
3, 1983. Basic Community tax is P500.00 plus additional P2.00 for every P5,000.00 worth of
real property in the Philippines and P2.00 for every P5,000.00 of gross receipts or earnings.
The community tax shall be paid only once in the LGU where the principal office is located.
Community taxes shall accrue on January 1st
of each year and will become payable
without penalty until February 28. Proceeds collected by the City or Municipal Treasurer shall
entirely accrue to the city or municipality while proceeds collected by the Barangay Treasurer
shall be shared by the city/municipality and barangay at 50 percent each.
Revenue Enhancement Measures for Community Taxes. (a) Require individuals or
juridical persons to file a community tax payment certification; (b) Request proof of payment
of Community Tax prior to transaction with LGU; (c) Deputize the Barangay Treasurer to
collect the community tax payable by individual taxpayers in their respective jurisdiction; (d)
Obtain from the Assessor a list of worth of real properties owned by juridical persons for
purposes of assessing and collecting the additional tax based on assessed values of real
33

property; (e) Require evidence of gross receipts or earnings derived from business during the
preceding year by juridical persons for purposes of collecting additional tax; and (f) Request
other government agencies (BIR, GSIS, SSS, LTO, etc.) to have clients show proof of
payment of community tax before servicing them.
Other Local Tax All LGUs May Impose. The LGC provides that LGUs may impose
other taxes on any other tax bases or subject not otherwise specifically enumerated in the
Code or taxed under the provisions of the National Internal Revenue Code, provided that the
taxes, fees or charges shall not be unjust, excessive, oppressive or contrary to national
policy; the ordinance levying such taxes, fees and charges shall be subjected to a public
hearing; and that the tax is not part of the common limitations which LGUs are prohibited to
impose.
Computation of Sales Allocation Applying the Rule of Situs6
. There are complex
businesses which run nationwide operations. While key decisions are taken from the head or
principal office, production, sales, shipment and other key activities may be scattered in
different parts of the country. For purposes of giving LGUs their rightful share of the business
tax, the rule of situs allocates the gross sale in accordance with the rule provided in Section
250 of the LGC.
Businesses involved: manufacturers, assemblers, repackers, brewers, distillers, rectifiers
and compounders of liquor, distilled spirits and wines, millers, producers, wholesalers,
distributors, dealers, contractors, banks and financial institutions and other businesses
maintaining or operating branch or sales outlet making the sale or transaction.
The tax shall accrue to the LGU where the branch is located.
Situation 1
In areas where no such branch is located, the sales shall be recorded in the principal office.
For purposes of business tax, the following allocation shall apply:
•30% to the city or municipality where the principal office is located; and
•70% to the city or municipality where the factory, project office or plantation is located.
Situation 2
In cases where plantation and factory exist and the two are located in different LGUs:
•60% of the 70% share shall be allocated to the city or municipality where the factory is
located; and
•the remaining 40% of the 70% shall be allocated to the LGU where the plantation is
located.
Situation 3
Where there are two or more factories or plantations, their respective allocations shall be
prorated to the cities or municipalities where they are located on the basis of production
during the period when such tax is due.
Codal Provisions to Enhance Revenue Collection. The LGC provides the following
6 Two cases with sample computations are provided on the application of the situs rule in Module IV of the Revised Resource Mobilization
Manual, pp.31-33.
34

opportunities:
LGUs may impose taxes on forest products and forest concessions;
LGUs may now impose income tax on banks and other financial institutions. This
is different from the business tax, which is a tax for the business of operating a
bank or financial institution;
LGUs may impose income taxes on non-bank intermediaries such as lending
investors, pawnshops, stock brokers, etc.;
LGUs may explore a more equitable distribution of the situs rule;
Tax ceilings on the graduated fixed tax on business have been increased;
LGUs are authorized to adjust tax rates but not oftener than once every five years
provided such adjustment does not exceed 10 percent of the rate fixed therein;
Tax exemption privileges of certain GOCCs have been withdrawn;
Withdrawal of all tax exemptions or incentives except on local water districts,
cooperatives, non-stock and non-profit hospitals and educational institutions;
Increase in interest of unpaid taxes, fees and charges from 14% per annum to
2% per month up to 36 months;
Examination of books of accounts once every tax period;
Availability of BIR records to the Local Treasurer;
The Local Treasurer may deputize the Barangay Treasurer in the collection of
taxes, fees and charges;
Stricter penalty on Treasurers for failure to issue and execute warrant of distraint
or levy;
Provision of local government's lien not only on property or rights subject of lien
but also upon property used in business, occupation, practice of profession or
calling, or expert privilege with respect to which the lien is imposed; and
LGUs should explore interpretations of their taxing powers, such as in the
following industries: agricultural and aquatic products, sugar centrals,
transportation contractors, and vehicles that are taxable.
Presumptive Income Level (PIL) Technique. The PIL makes use of easily verifiable
indicators as a means for determining gross sales for purposes of computing the tax due.
Major considerations in identifying possible indicators are for these to be quantifiable,
verifiable, common for the business and acceptable to both the LGU and taxpayers.
Civil Remedies for Collection of Revenues7
. Either of these remedies or both may
be pursued concurrently or simultaneously at the discretion of the Local Treasurer: (a)
administrative action through distraint of goods, chattels or effects and other personal
property of whatever character, including stocks and other securities, debts, credits, bank
account, and interest in and rights to personal property and through levy upon real property
and interest in or rights to real property; and (b) judicial action.
7 Annex D, Module IV of the Revised Resource Mobilization Course Book, pp.63-69 outlines the procedures and details using each of
these remedies.
35

Box 1. Procedures in Applying the PIL Technique
36
Step 1. Identify a type of business in the locality or simply identify the business in your
community where you have difficulty determining actual or realistic annual gross sales.
Step 2. Identify possible indicators which must be readily verifiable and realistic, for
each type of business. (See list of possible PIL Indicators below).
Step 3. Categorize according to sale or operation. Group the businesses into
categories that will help determine uniform minimum acceptable declaration for each
group. The classification can be based on physical size of operations such as floor
area, number of employees, level of operations, etc. For example, general goods
establishment may be grouped according to the following:
General Goods Store
Class A Sari-sari store
Class B Mini-grocery
Class C Grocery
Class D Supermarket
Step 4. Prepare a presumptive assessment of average taxable income for each
registered business type in the locality.
a)Provide for a realistic percentage of actual daily operations. For example,
using number of table as indicator for a restaurant, provide a reasonable
customer occupancy rate per table, e.g., 50% daily occupancy rate or 50%
occupancy rate x 2 turnovers daily (e.g., lunch and dinner). A sample table
is found under Step 5.
b)Determine the current cost of service/goods being provided. For
example, assume that each customer would probably order a minimum of
P50.00 worth of food, or that every table occupied would generate an
average P150.00 in sales.
c)Identify how many days in a year the business is likely to be in operation.
A restaurant is most likely to operate 6 days a week or 324 days in a year.
Step 5. Compute the estimated gross sales based on identified indicators.
a)Do a sample computation for actual business in the area.
b)Compare the result of your PIL table with actual taxes paid for the
preceding year.

37
Actual tax payments made by majority of business taxpayers will most likely be
below the PIL computation. Often, actual tax payments should have been at least 50
percent more using PIL.
Sample Presumptive Assessment Sample Minimum
Annual Gross
Sales
Type of
Business
Indicator Assessment Estimates
Apartment No. of units No of units x
monthly rent
4 units x
P3,000/unit x 12
months = P144,000
Coffee Shop No. of tables No. of tables x
estimated sales per
table x occupancy
rate
10 tables x P150 x
50% x 324 days =
P243,000
Movie House No. of seats No. of seats x
admission rate x
occupancy rate per
screening x no. of
screening
200 seats x P15.00
x 30% x 3
screenings x 360
days = P972,000
Step 6. Negotiate the taxable income with business taxpayers.
•Prior to institutionalizing the use of PIL technique, it would be advisable to hold
a meeting with the business sector and agree on the indicators for their sectors
and the assumptions to be used for the computation. Note that in the above
computation, very low rates and assumptions are used, hence, actual gross
sales should be a lot higher. It is left to the discretion of the LGU taxing
authorities to determine the rates for computing the least acceptable gross
sales.
•For ease in assessment, a Minimum Acceptable Gross Sales Declaration Table
may be prepared based on business classification and scale of operation. Any
business in a given category cannot pay a business tax lower than the pre-
determined minimum amount of gross sales for the category. This of course
does not mean that only the minimum amount needs to be paid.

38
Sample Table of Minimum Gross Sales
Business Minimum Gross Sales
Sari-sari store
Mini-grocery
Grocery
Supermarket
P100,000.00
P250,000.00
P400,000.00
P750,000.00
Step 7. Compare the result of Steps 5 and 6 with the taxpayers' sworn declaration and
tax payment made.
It will be very hard for the business taxpayer to argue against the computations
for determining the least acceptable gross sales and will most likely settle for the
compromise business income rather than have his book of accounts examined.
Step 8. Levy the appropriate business tax on the compromise business income.
Failure or refusal of taxpayers to settle their tax payments can be ground for
revocation or non-renewal of their business permit.
It is suggested that the base amount be regularly updated every three years and
base data from businesses regularly monitored, keeping in mind price increases,
possible expansion of operations, increase in floor space, additional machinery, etc.
Passing a local ordinance adopting the use of the PIL technique in conjunction with
other strategies is also recommended.

Table 1.11. List of Possible PIL Indicators
Type / Nature Possible Indicators
Apartment Lessor Number of doors
Banana Producer Number of hectares
Bakeshop Average number of fastest item sold as a
percentage of total
Bakery Number of ovens
Balut Making Number of ovens
Banana Producer Number of hectares
Barber Shop Number of chairs
Number of barbers
Beauty Parlor Number of seats
Number of beauticians
Bowling Alley Number of lanes
Butchers (Individual) Slaughterhouse records
Average number of heads sold
Buy and Sell Truckloads per week
Cable T.V. Number of subscribers
Canteen in the factory Number of workers
Catering Service Average number of receptions service
Chicken Retailers Average number of chicken sold
Coconut Wires Number of distilleries
Construction Supply Number of cement bags sold per day as a
percentage of gross sales
Floor space
Number of employees
Estimated inventory turnover
Dental Clinic Estimated no. of patients
Dress Shop/Tailoring Number of sewing machines
Drug Stores Estimated sales from fastest moving items as a
percentage of total sales
Gasoline Dealers Estimated taxable items sold for non-petroleum
products only, e.g., batteries, tires, etc.
Estimated sales from service rendered (repair,
change oil, etc.)
Grocery Store Inventory turnover
Number of employees
Floor space
39

Factory Number of production machines
Financial Institutions Financial Statements
Fish Dealer Average number of boxes of fish sold
Fishpond (bangus) Number of hectares
Number of fish pens
Funeral Parlor Number of deaths recorded with the Local Civil
Registrar
Number of reception rooms
Garments Factory Number of employees
Number of sewing machines
General Merchandise Average daily sales
Number of employees
Floor space
Inventory turnover
Grains dealer Average number of sacks sold per item
Hardware Estimated daily sales of top 5 moving items (e.g.,
cement, plywood, etc.) as a percentage of total
sales
Hotel Number of rooms
Lease of commercial units Number of units
Floor area
Line Production Number of tons harvested
Medical Clinic Estimated number of patients
Oil Mill Number of mills
Onion Trader Number of truckload per week
Poultry Number of chicken coops
Pawnshops Number of employees
Piggery Number of pens
Planters (Vegetables, fruits, etc.) Number of hectares
Real estate lessor Lease contract terms
Resort Number of cottages/rooms
Restaurant Number of tables
Floor area
Number of employees
Resorts Number of swimming pools
Number of cottages
Rice and Corn retailer Estimated no. of sacks sold
Rice Mill Milling capacity
40

Saltbeds Number of saltbeds
Sari-sari store Estimated sales from fastest moving items
Inventory turnover
Floor area
Supermarket Number of check-out lans/cash registers
Inventory turnover
Floor area
Number of employees
Telephone company Number of subscribers
Textile mills Number of machineries
Vehicle rental Number of vehicle units
Video shop Number of racks
Floor space
Welding shop Number of welders
NON TAX REVENUES: REGULATORY FEES AND SERVICE/USER CHARGES
Coverage of LGU Impositions on Fees and Charges. (a) Municipalities - fees and
charges on business and occupation and on the practice of any profession or calling (except
on professionals reserved to the province); (b) Cities - fees and charges that the province and
the municipalities are authorized to impose or collect; and (c) Cities and Municipalities – fees
for sealing and licensing of weights and measures, and for the grant of fishery privileges over
municipal waters.
Regulatory Fees. A charge fixed by law or ordinance for the regulation or inspection
of a business or activity; an exaction in the exercise of the LGU's police power for the general
welfare of the people and is intended to cover the cost of regulation, inspection and
surveillance. Even if the revenue side of the fees is secondary, the LGUs must see to it that
resultant costs, e.g., costs of issuing the permit or license plus inspection costs, are fully
recovered.
Table 1.12. Common Regulatory Fees LGUs May Impose
IMPOSITION BASES
Business permit Cost of issuing permit and regulating the activity or
privilege, and size and type of business
Building permit Cost of issuing the permit and surveillance based on the
National Building Code
Plumbing permit Cost of issuing the permit and inspection based on the
41

Electrical permit Cost of issuing the permit and inspection based on the
Occupancy permit Cost of issuing the permit and inspection
Mechanical permit Cost of issuing the permit and inspection based on the
Demolition permit Cost of issuing the permit and inspection
Dog license fees Cost of issuing
Registration fees on fishing
boats, tricycles and
caretelas or calesas
Cost of issuing the permit and inspection, and type of
conveyance
Holding benefits permit Cost of issuing the permit and surveillance
Police clearance Cost of issuing and purpose for securing clearance
Impact fees and exactions Cost of issuing permit and inspection and negotiated or
formula-based payments made by the developer to cover
“damages” to the existing system of infrastructure or
provide facilities at private expense
Development permit Cost of issuing the permit, surveillance, type of activity
based on cost-benefit analysis (i.e., benefit conferred on
the developer which cannot be reflected in the typical
charge incurred for permit issuance
Large cattle registration and
transfer fees
Cost of registration, inspection, and type of cattle
Excavation fees Cost of issuing the permit and type and area to be
excavated and surveillance based on length of time of
excavation
Permit for cockfighting Cost of issuing the permit, inspection and type of
cockfights held
Permit fee for cockpit
owners, operators,
licensees and other cockpit
personnel
Cost of issuing the permit and surveillance based on type
of personnel
Permit fee on film-making Cost of issuing the permit, surveillance, and type of film
and number of film-making days
Permit fee on parades Cost of issuing permit and surveillance
Permit fee for agricultural
machinery and equipment
Cost of issuing permit and type of machinery and
equipment
Permit fee for zoning and
locational clearance
Cost of issuing based on HLURB guidelines
Permit on occupation/calling Cost of issuing permit based on category of occupation
42

not requiring government
examination
or calling
Occupation fee for mining
claims
Cost of issuing based on hectare coverage and type of
mining claim
Other Regulatory Fees8
. (a) Fees for licensing of weights and measures; (b) fishery
rentals, fees and charges; (c) public utility charges; (d) toll fees and charges; and (e) Mayor's
permit fees on business.
Restructuring Mayor's Permit Fees. Since permit fees are impositions under the
police power of municipal corporations, they must be just, reasonable and not confiscatory.
A. Definition of Business Size. For purposes of the mayor's permit fee, the following
Philippine definition of business size may be adopted.
Classification Size
Manufacturers/Importers/Producers Micro Industry
Cottage Industries
Small Scale Industries
Large Scale Industries
Banks Rural Banks
Thrift/Savings Banks
Development Banks
Commercial/Industrial Banks
Universal Banks
Other Financial Institutions Small
Medium
Large
Contractors/Service Establishments Micro Industry
Cottage Industries
Medium Scale Industries
Wholesalers, Retailers, Dealers or
Distributors
Micro Industry
Cottage Industries
Other Business Micro Industry
Cottage Industries
8 These fees are described in detail on pp. 5-10, Module V of the Revised Resource Mobilization Course book.
43

B. Setting Permit Fees. The permit fee shall be based either on capital investment or
number of workers whichever will yield higher fees.
Scale Capitalization Assets Employment Size
Micro Industry P150,000 and below No specific number
Cottage Industry Above P150,000 – P1.5 million Less than 10 workers
Small Scale Industry P1.5 million – P15 million 10 – 99 employees
Medium Scale Industry P15 million – P60 million 100 – 199 employees
Large Scale Industry Above P60 million 200 or more employees
C. Sin Goods and Activities. The “social dimension” involved makes it justifiable to
fix higher rates of permit fees in the following class of business: retail dealers of foreign and
domestic liquors and manufactured tobacco, retailers of distilled spirits and fermented liquors,
tobacco dealers, amusement places, and etc.
D. Sanggunian-Determined Fixed Rates. This applies to mayor's permit fees on (a)
retailers; (b) banks and other financial institutions; (c) operators of public utility vehicles; (d)
peddlers; and (e) other businesses not specifically mentioned.
E. Acceleration Clause. This may be included as a provision, e.g., providing that
fees shall be automaticallyincreased annually by a certain percentage.
F. Full Recovery. Permit fees should reflect full cost recovery.
G. Elimination of Other Fees. Elimination of fees that are better enforced at the
barangay level or fees in the tax ordinance that the LGU has no intention of enforcing. It may
be prudent for the LGU to concentrate its efforts on collecting taxes, fees and charges with
the highest yield.
H. Administration and Delineation of Responsibilities. (1) Improving administration
through clear administrative provisions on revocation of permits, for instance; (2) Extensive
use of subsidiary ledgers for recording of fees and charges in the accounting records that
shows disaggregation of revenues by sources corresponding to the itemization in the revenue
code or tax ordinance; (3) Performing responsibilities and maintaining accountabilities as
mandated, e.g., LCE to focus on granting permits and licenses while the Treasurer does the
assessment and collection of fees and charges; and (4) Review and processing application
for permits, revenue collection and records maintenance should be assigned to competent
and regular personnel.
44

I. New Assessment. Provide for developmental fees that promote the LGU's
environmental and conservation concerns, e.g., higher fees for golf links and forest
conservation fees, etc.
Service and User Charges. These are impositions for services rendered by the LGU
which directly benefit certain individuals. Failure to pass the cost in full to readily-
determinable beneficiaries implies it is being subsidized, to the detriment of other services. In
the delivery of services by a public officer, charges are justified to cover the cost and therefore
ensure continuance of the performance of such services.
Setting Rates for Charges. The LGUs may adopt any or a combination of the
following forms of service and user charges: (a) fixed rates for each kind of business activity;
(b) a schedule of graduated fixed rates for each kind of business activity; (c) similar business
or activities are grouped and assigned a fixed rate; and (d) a schedule of permit fees for each
type of business based on number of employees, floor space, etc.
Table 1.13. Sample of Service and User Fees LGUs Collect
Type of Fee Base of Imposition
Secretary's fees Cost of issuance based on type of records
and no. of copies needed
Local Civil Registry fees Cost of issuance based on type of records
and no. of copies needed
Permit fee for inspection and certification
of subdivision
Cost of issuance, inspection and
surveillance based on HLURB guide
Police clearance fee Cost of issuance and purpose for clearance
Dog vaccination fee Cost of issuance and vaccination
Fees on impounding of stray animals Cost of impounding and feeding based on
size of animal
Inspection fee on machineries and
equipment
Cost of inspection based on type and
capacity of machinery/engine
Hospital fees Full-cost recovery based on cost of type of
medical treatment availed
Tuition fees Full-cost recovery
Garbage collection fees Full-cost recovery based on cost of type of
establishment and volume of garbage
Medical and physical examination fees Full-cost recovery
Parking fees Full-cost recovery based on type of vehicle
45

Charges/Receipts from Local Economic Enterprises (LEEs). The operation and
maintenance of economic enterprises is an exercise of the proprietary functions of local
governments. Traditionally, these undertakings were viewed as part of the LGU's
responsibility although these may incur losses. However, with the LGC's permission to allow
private sector participation, LGUs are now looking at economic enterprises from the
investment perspective.
Table 1.14. Sample of Receipts/Charges from Economic Enterprises
Charges Base of Imposition
Market charges Full cost recovery based on type of merchandise and
size of stall occupied
Fishery rentals Full cost recovery based on size of area leased and
type of lease such as corrals, oyster culture beds, or
gathering of bangus fry or other species for a period not
exceeding 5 years
Hospitals Full cost recovery based on type of room, service
required, etc.
Ferry rentals Full cost recovery operation based on type and size of
cargo
Wharfage fees Full cost recovery based on areas used and type of sea
conveyance
Waterworks system Full cost recovery based use and volume of
consumption
Educational institution Full cost recovery based on level and type of course
Rental of cemeteries Full cost recovery based on type of niche and length of
rental period
Slaughterhouse and corral
charges
Full cost recovery based on type and size of animal
Revenue Enhancement Measures for Fees and Charges from LEEs. Increasing
the productivity of local economic enterprises requires taking steps to ensure a positive
financial position (i.e., a profit) by keeping operating costs low while implementing measures
to increase collections of fees and charges.
A. Increasing Gross Revenues. This can be achieved by (a) increasing fees and
charges (as low rental fees and under-pricing have been cited as major concerns); (b)
improving collection efficiency; (c) collecting delinquencies; and (d) eliminating
spillage/leakage by stalling an effective internal control system.
B. Price and Rate Setting. Factors that influence pricing: (a) cost recovery
considerations - e.g., factor in capital cost, operating costs, hidden costs, inflation; (b)
46

physical infrastructure - location of the enterprise and condition of structures and amenities;
(c) demand/need – utilization rate or the demand for facilities/services and social benefits-
perceptions on the “good” to society that the economic enterprise offers; (d) commercial
aspects – opportunities, profitability, nature and volume of business conducted; and (e)
political considerations – acceptability and political will.
C. Improving Collections Efficiency. Elements to consider: (a) presence of a well-
crafted ordinance, good revenue records management and committed human infrastructure;
(b) setting of realistic collection targets; (c) keeping physical infrastructure in good state; (d)
paying attention to legal aspects; and (e) specific aspects such as keeping tab of delinquent
payers (or stallholders).
Table 1.15. Analyzing the Financial Performance of an Economic Enterprise
Step 1 Select an economic enterprise, one where it is possible
to match expenses against receipts, e.g., public market
Step 2 Enter here income from the enterprise P _____________
Step 3 Enter here expenditures for PS and MOOE. Do not
include those for CO _____________
Step 4 Enter here expenditures for PS and MOOE rendered for
the enterprise which were charged against the budget of
other offices, if there are any _____________
Step 5 Factor in capital costs. Enter either the annual
amortization if the enterprise is funded from loan/s or
borrowing/s. If funded from other sources, e.g., local
appropriations, grants or aids, compute for depreciation
as follows:
Cost of asset less estimated scrap or residual value,
divided by useful life in years of the asset, equals annual
capital cost _____________
Step 6 Enter as negative entries expenses charged against the
operating income of the enterprise, but which are not
related to or rendered from the enterprise _____________
Step 7 Add figures entered in Steps 3, 4, and 5, and from the
sum deduct the figure in Step 6 _____________
Step 8 Get the difference between figures entered in Step 2 and
Step 7
P ___________
_____________
If income exceeds expenditures, the enterprise is
considered a profit center or a profitable undertaking.
Otherwise, the enterprise is a cost center and therefore
is not a revenue-generating enterprise
47

LOANS AND OTHER FINANCING OPTIONS: PPP
Credit Financing. Credit Financing is a mechanism for acquiring adequate capital
from alternative sources at the best possible terms for the borrower.
Financing Schemes. The basic difference among financing schemes is the
repayment term or maturity period: (a) short-term financing schemes have repayment periods
of less than one year; these could be secured credit which require a collateral backing, or
unsecured or clean credit which do not require a collateral; (b) medium-term financing
schemes have maturity periods of more than one year but less than five years; and (c) long-
term financing are those with maturity periods of 5 years or more. Both items b and c are also
referred to as term financing. Bonds, lease financing, and other securities are usually
designed to be medium-term and long-term financing instruments.
Table 1.16. Comparison Between Short Term and Term Financing
TYPE ADVANTAGES DISADVANTAGES
CREDIT LINE •ideal for back-up reserve / reserve
for opening costs
•interest is not paid unless funds
are used
•short-term
•much documentation
SHORT-TERM
FINANCING
•easier to obtain since less risky
from the point of view of the creditor
when appraising LGU
•often less costly since cost of
short-term borrowing are lower than
costs of long-term debt when rolled-
over
•LGUs will not be saddled with
interest payments on debts over
periods of time when funds are not
needed
•offers flexibility to borrower; once
settled, the borrower may elect
other sources of credit
•good source for seasonal and
temporary fund requirements
•matures more frequently,
which may put an LGU in a
tight financial position to
cover debt payments as
scheduled
•uncertainty in interest costs
of refinancing
•refinancing may be difficult
to obtain if payment record of
LGU for the previous loan is
unsatisfactory
48

MEDIUM-AND
LONG-TERM
•all things equal, less risky for
LGUs since the chances of
defaulting on principal and interest
payments are reduced
•the LGU borrower is stuck
with the terms of the long-
term loan for a longer period
•higher cost of financing,
more expensive for the LGU
•pay interest on debt over
periods of time when the
funds are not needed
Factors to Consider in Weighing Short-Term Over Term-Financing.
Considerations in selecting the type of financing term: (a) nature of financing need-use of
short-term debt to finance short-term or seasonal variations in current assets and long term
debts to finance acquisition of fixed assets; (b) 20% debt servicing limit provided under the
LGC; and (c) trade off between risk and profitability determined by maturity schedule of debt
and interest costs.
Payment Schemes. Several ways by which LGUs can pay their debts: (a) pay or
amortize loans, including all interests incurred, partly from the income of projects or services
from the regular income of the LGU; (b) appropriate regularly in the annual budget the
amounts necessary for debt servicing until all loans and interest have been fully paid; and (c)
creation of a sinking fund for the repayment of bond issues. The LGC also allows LGUs to
maintain trust funds which can only be used for a specific purpose, and likewise maintain
special accounts in the general funds for “loans, interest, bond issues and other contributions”
for specific purposes.
Limitations on LGU Debt Servicing. While there is no specific amount or limit on the
level of LGU borrowing, the LGC specifically provides that the amount of debt servicing shall
not exceed twenty percent of the regular income of the LGU. LGUs will have to carefully
select the credit mix to use in financing their projects to ensure that debt servicing for the year
will not exceed this limit.
LGU Credit Financing Options9
A. Loans, Credits and Other Forms of Indebtedness. Loans refer to a debt
(normally cash in nature) for a specific period, repaid with interest usually by regular periodic
payments. The principal is the amount borrowed and the interest is the charge for the use of
capital over a specified period.
Key features of Codal provisions: (a) sources of loans include GFIs, domestic private
banks and other private financing institutions, other LGUs, agencies with specific lending
programs for LGUs (e.g., Municipal Development Fund administered by DOF); (b) terms and
9 A different classification is found in Appendix 2.5.
49

conditions as may be agreed upon by the LGU and the lender; (c) no requisite evaluation and
recommendation by the Secretary of Finance; (d) shortened loan approval process; and (e)
LGUs encouraged to package viable projects and be proactive in accessing funds from the
financial system.
Usual requirements for availment: (a) no past due obligations and other adverse
findings on credit standing; (b) statement of the purpose of the loan; (c) approved local
development plan and public investment program; (d) endorsement of Local Sanggunian
through a resolution; (e) LGU to contribute at least 10%-30% of total project cost; (f)
professional managers to make up project management team; (g) project viability with loan
capable to repaid within approved loan tenor; (h) loan 100% covered by collateral; (i) loan
term should not be longer than tenure of local officials who contracted the loan; (j) a longer
repayment period not exceeding 5 years may be granted if an irrevocable commitment to pay
could be legally configured; (k) affidavit from LGU that it has no other applications with other
creditors for the same purpose and that it will not contract loans for the project without
knowledge and written consent of the concerned bank; (l) certification from the Local
Treasurer acknowledging the loan and that it will be officially entered in the LGU's books as
contractual obligation; and (m) COA-audited financial statements for the past two consecutive
years.
B. Deferred Payment and Other Financial Schemes. LGUs are authorized to enter
into lease contract arrangements with suppliers with the option to purchase later on, in
acquiring property, plant machinery, equipment, etc. This arrangement allows the LGU tax
exemption privileges for the importation of heavy equipment or machinery which shall be used
in civil works and other infrastructure projects, as well as garbage and fire trucks and similar
equipment.
C. Inter-Local Government Loans. LGUs may obtain loans, grants and subsidies
from other LGUs, up to the extent of the surplus funds of the latter provided the loan is
approved by a majority of the lending LGU's Sanggunian. Further, LGUs may jointly or
severally contract loans, credits and other forms of indebtedness for mutually-beneficial
purposes upon approval of their respective Sanggunian.
D. Bonds and Other Long-Term Securities. A local bond is an instrument-bearing
obligation by the LGU, the bond issuer, to finance project operating and/or capital cost. Bond
flotation requires a good sense of fiscal prudence and financial innovativeness. Ideally,
project funded by bonds should be able to pay for themselves, or be self-liquidating. LGU
projects for possible financing by bonds include: power plants, waterworks, toll bridges/roads,
prier, reclamation project, sports complex, irrigation, telephone system, commercial building,
housing project, bus terminal and park.
50

Table 1.17. Comparative Advantages of Bonds vs. Bank Loans
BONDS BANK LOANS
Accessible to wider capital market
Open to community investment (bigger
amounts)
Longer repayments period
More flexible repayment scheme
Lower interest rates, pricing based on
margins over T-bills
Sinking fund arrangement, interest
earning
More widely established and developed
credit standing in the financial market
Whenever possible, interest rates can be
fixed
Allows members of the community to
involve themselves in, and at the same
time, earn from the project
Currently limited to government financial
institutions
Pure bank assets
Shorter maturities
Dictated by banking arrangement / term
loans
Pricing is based on transfer pool rates of
banks
Amortized loan repayment
Limited to credit standing in the banking
sector
Floating interest rate
No community participation and earning
51

Figure 1. Municipal Bond Issuance Process10
I.Certification of debt service capacity
I.Project identification and feasibility study
preparation
I.Authority to issue bonds and feature of the bond
I.Guarantee
I.Approval by government agencies
I.Bond offering
I.Debt servicing and payment of principal
10 According to the Resource Mobilization Course book, a Municipal Bond Manual is available free of charge to LGUs from the FINEX
Committee at tel no. (02) 811-4397. Details of each step are also provided in pp.14-18 of the Course book Module VIII. Loans and
Other Financing Options: Public and Private Partnership.
52
•Certification by BLGF-DOF of debt
service capacity
•Project ID, evaluation, and feasibility
study
•Sanggunian ordinance approving the
project, and authorizing issuance of
bonds and engaging services of
underwriting team
•Designing features of the bond
•Sanggunian ordinance approving
final bond terms and appropriating
funds
•Bangko Sentral ng Pilipinas approval
•Preparation of official statement,
primer, and bond documents
•Debt servicing and payment of
principal to bondholders
•Selection and appointment of
underwriting team
•Sanggunian Panlalawigan Resolution
approving bond issuance by component
city or municipality
•Municipal bond offering and issuance
•Securing guarantee for bond

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