MODULE 4

LOCAL DIRECT TAXES

Objectives:
The objectives of delegating taxation power to local governments are:
1. To promote self-sufficiency of local government units
2. To strengthen and make local government units more autonomous

Limitations:
The restrictions on the exercise of local taxation power are:
1. The taxpayer must be over-burdened or saddled with multiple and unreasonable impositions
2. Each local government must have its fair share of available resources.
3. The resources of the national government must not be unduly disturbed.
4. Local taxation must be fair, uniform and just.

Learning Focus:

A. LOCAL TAXES

List of Local Taxes in the Philippines

There are two basic types of taxes in the Philippines, namely, national and local taxes. National taxes
are what we pay to the government through the Bureau of Internal Revenue. This includes income tax, Value
Added Tax (VAT), percentage tax, excise tax, estate tax, donor’s tax, documentary stamp tax, capital gains tax,
and other taxes covered by the National Internal Revenue Code (Republic Act No. 8424 or known as the Tax
Reform Act of 1997, as amended) – the tax code or law that governs national taxation in the Philippines.

On the other hand, local taxes are what we pay to the local government units, which include the
provinces, municipalities, cities, and barangays. The local government taxation in our country is based on
Republic Act 7160 or otherwise known as the Local Government Code of 1991, as amended. Here is the list of
local government taxes in the Philippines

Local government units (LGUs) derive their revenues from local and external. Local sources include
tax revenues from the real property tax and the tax, and no-tax revenues from fees and charges, receipts from
government business operations and proceeds from sale of assets. External sources, on the other hand, include
the Internal Revenue Allotment (IRA) and other shares from special laws, grants and aids and borrowings.

TAXING POWERS OF LOCAL GOVERNMENTS

A. TAXES ON REAL PROPERTY

a. Basic Real Property Tax

The real property tax (RPT) is an ad valorem tax on real properties such as lands, buildings, and
other improvements, and machineries imposed by provinces, cities and municipalities within the
Metropolitan Manila Area (MMA), at the following rates:
  Provinces-Not exceeding 1% of the assessed value of the real property; and
 Cities or Municipalities within the MMA-Not exceeding 2% of the assessed value of the real
property

The Real Property Tax is based on the assessed value which is a certain percentage of the market
value of the real property. The assessed value is arrived at upon application of the assessment levels to the
market value of the property. The assessment levels are fixed by ordinance of the local Sanggunian
depending on the actual use of the property, at rates not exceeding the following:1 Book II, Title One of
Republic Act No. 7160,otherwise known as the “Local Government Code of 1991”.

(1) Lands
Class Assessment Levels

 Residential 20%
 Agricultural 40%
 Commercial, Industrial and Mineral 50%
 Timberland 20%

(2) Buildings and Other Structures

The rate progresses directly with the fair market value (FMV) as follows:

 Residential–0% for those with FMV of P175, 000.00 or less to 60% for those with FMV of more
than P10 million
 Agricultural–25% for those with FMV of P300, 000.00 or less to 50% for those with FMV of more
than P2 million
 Commercial/Industrial–30% for those with FMV of P300, 000.00or less to 80% for those with
FMV of more than P10million
 Timberland –45% for those with FMV of P300, 000.00or less to 70% for those with FMV of more
than P2 million.

(3) Machineries

Class Assessment Levels

 Agricultural 40%
 Residential 50%
 Commercial and Industrial 80%

(4) Special Classes.

The assessment levels for all lands, buildings, machineries, and other improvements are as follows:

Actual Use Assessment Levels

 Cultural 15%
 Scientific 15%
 Hospital 15%
 Local Water Districts 10%
 Government-owned or controlled corporations engaged
 in the supply and distribution of water and/or generation and
transmission of electric power 10%

Exemptions: The following are exempted from payment of the RPT:

Real property owned by the Republic of the Philippines or any of its political subdivisions, except
when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable
person;
Charitable institutions, churches, parsonages, or convents appurtenant thereto, mosques, non-profit
or religious cemeteries, and all lands, buildings, and improvements actually, directly, and exclusively
used for religious, charitable or educational purposes.
All machineries and equipment that are actually, directly and exclusively used by local water districts
and government-owned or–controlled corporations (GOCCs) engaged in the supply and distribution
of water and/or generation and transmission of electric power;
All real property owned by duly registered cooperatives as provided for under R.A. No.6938; and
Machinery and equipment used for pollution control and environment protection. Except as provided
in the LGC, any exemption from the payment of RPT previously granted to or presently enjoyed by,
all persons, whether natural or juridical, including all GOCCs were withdrawn upon the effectivity of
the LGC.

B. Special Levies on Real Property

(1) Special Education Fund Tax

In addition to the basic RPT, a province or city, or a municipality within the MMA may levy
and collect an annual tax of 1% on the assessed value of real property which shall be in addition to
the basic RPT. The proceeds thereof shall exclusively accrue to the Special Education Fund (SEF
to support public education.
(2) Idle Lands Tax

A province or city, or a municipality within the MMA may levy an annual tax on idle lands at a rate
not exceeding 5% of the assessed value of the property which shall be in addition to the basic RPT.

 Coverage

(a) Agricultural lands, more than one

(1) Hectare in area, suitable for cultivation, dairying, inland fishery, and other agricultural
uses, on-half (1/2) of which remain uncultivated or unimproved. Not considered as idle
lands are
(i) Agricultural lands planted to permanent or perennial crops with at least fifty
(50) trees to a hectare, and
(ii) Lands actually used for grazing purposes.

(b) Lands, other than agricultural, located in a city or municipality more than one thousand (1,000)
square meters in area, one-half of which remain unutilized or unimproved. Regardless of land
area, the tax shall likewise apply to residential lots in subdivisions duly approved by proper
authorities, the ownership of which has been transferred to individual owners, who shall be
liable for the additional tax.
  Exemption

The LGU may exempt idle lands from the additional levy by reason of force majeure, civil
disturbance, natural calamity or any cause or circumstance which physically or legally prevents the
owner of the property or person having legal interest therein from improving, utilizing or cultivating
the same

(3)Special Levy

A province, city or municipality may impose a special levy on the lands within its territorial
jurisdiction specially benefitted by public works projects or improvements funded by the LGU
concerned. The special levy shall not exceed 60% of the actual cost of such projects and
improvements, including the costs of acquiring land and such other real property in connection
there with. The special levy shall not apply to lands exempt from basic RPT and the remainder of
the land portions of which have been donated to the LGU concerned for the construction of such
projects or improvements.

(4) Other Impositions on Real Property

a. Socialized Housing Tax

In addition to the RPT and SEF tax, a socialized housing tax may also be imposed by a
province, city or municipality within the MMA. The tax is 1/2 of 1% of the assessed value of all
lands in urban areas in excess of P50, 000.00.

b. Tax on Transfer of Real Property Ownership

A province, city or municipality within the MMA may impose a tax on the sale, donation,
barter, or any other mode of transferring ownership or title of real property at the rate of not more
than 50%of 1% in the case of a province and 75% of 1% in the case of a city or a municipality in
MMA of the total consideration involved in the acquisition of the property or of the FMV in case the
monetary consideration involved in the transfer is not substantial, whichever is higher. The sale,
transfer or other disposition of real property pursuant to R.A. No.6657 (Comprehensive Agrarian
Reform Law of 1988) shall be exempt from the tax.

(5) Collection of Real Property Tax

The real property tax for any year shall accrue on the first day of January. The basic RPT
and the additional SEF tax may be paid without interest in four (4) equal installments; the first
installment to be due and payable on or before March31; the second installment, on or before June
30; the third installment, on or before September 30; and the last installment on or before
December 31.
The special levy shall accrue on the first day of the quarter next following the effectively of
the ordinance imposing such levy. Its payments shall be governed by the ordinance of the
Sanggunian concerned. The tax on transfer of real property ownership shall be paid within sixty
(60) days from the date of the execution of the deed or from the date of the decedent’s death. The
date for the payment of any other tax on real property shall be prescribed by the Sanggunian
concerned.
B. OTHER LOCAL TAXES

Local government units are empowered to impose the following taxes:

1. Provincial Taxes

a. Tax on business of printing and publication at a rate not exceeding 50% of 1% of the gross
annual receipts for the preceding calendar year. In case of newly started business, the tax shall
not exceed 1/20 of 1%of the capital investment.
b. Tax on a business enjoying franchise at a rate not exceeding 50% of 1% of the gross annual
receipts for the preceding calendar year. In case of a newly started business, the tax shall not
exceed 1/20 of 1%of the capital investment.
c. Tax on sand, gravel and other quarry resources at a rate not exceeding 10% of the fair market
value in the locality per cubic meter of ordinary stones, sand, gravel, earth, and other quarry
resources, as defined under the National Internal Revenue Code (NIRC), as amended,
extracted from public lands or from the beds of seas, lakes, rivers, streams, creeks, and other
public waters within its territorial jurisdiction.
d. Professional tax on each person engaged in the exercise or practice of his/her profession
requiring government examination at a rate not exceeding P300.00.
e. Amusement tax payable by proprietors, lessees, or operators of theaters, cinemas, concerts
halls, circuses, boxing stadia, and other places of amusement at a rate of not more than 10% of
the gross receipts from admission fees.
f. Annual fixed tax not exceeding P500.00for every delivery truck or van used by manufacturers,
producers, wholesalers, dealers or retailers in the delivery or distribution of distilled spirits,
fermented liquors, soft drinks, cigars and cigarettes, to sales outlets, or consumers whether
directly or indirectly, within the province.

2. Municipal Taxes

a. Business Taxes
There are three (3) kinds of business taxes imposed by municipalities:
(a) a combination of a graduated-fixed and percentage business taxes;
(b) percentage tax; and
(c) annual tax.

The following are subject to a combination of a graduated-fixed and percentage business taxes:

(1) Manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers, and

compounders of liquors, distilled spirits, and wines or manufacturers of any article of
commerce of whatever kind or nature at rates ranging from P165.00 for gross
receipts of less than P10,000.00to P24,375.00for gross receipts of P5 million to
P6,499,999.00.
Those with gross receipts of 6,500,000.00 or more are taxed at a rate of not
exceeding 37 1/2% of 1% of the gross receipts.
(2) Wholesalers, distributors, or dealers in any article of commerce of whatever kind or
nature at rates ranging from P18.00 for gross receipts of less than P1,000.00to
P10,000.00 for gross receipts of P1 million to P1,999,999.00. Those with gross
receipts of P2 million or more are taxed at a rate of not exceeding 50% of 1% of the
gross receipts.
 (3) Exporters, and manufacturers, millers, producers, wholesalers, distributors, dealers or
retailers of essential
Definition of Terms:

1. Tax on Transfer of Real Property Ownership – tax imposed on the sale, donation, barter, or on any other
mode of transferring ownership or title of real property.

2. Tax on Business of Printing and Publication – tax on the business of persons engaged in the printing and/or
publication of books, cards, posters, leaflets, handbills, certificates, receipts, pamphlets, and others of
similar nature.

3. Franchise Tax – tax on businesses enjoying a franchise, at the rate not exceeding fifty percent (50%) of one
percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or
realized, within its territorial jurisdiction.

4. Tax on Sand, Gravel and Other Quarry Resources – tax imposed on ordinary stones, sand, gravel, earth,
and other quarry resources, as defined under the National Internal Revenue Code, as amended, extracted
from public lands or from the beds of seas, lakes, rivers, streams, creeks, and other public waters within its
territorial jurisdiction.

5. Professional Tax – an annual professional tax on each person engaged in the exercise or practice of his
profession requiring government examination.

6. Amusement Tax – tax collected from the proprietors, lessees, or operators of theaters, cinemas, concert
halls, circuses, boxing stadia, and other places of amusement.

7. Annual Fixed Tax For Every Delivery Truck or Van of Manufacturers or Producers, Wholesalers of, Dealers,
or Retailers in, Certain Products – an annual fixed tax for every truck, van or any vehicle used by
manufacturers, producers, wholesalers, dealers or retailers in the delivery or distribution of distilled spirits,
fermented liquors, soft drinks, cigars and cigarettes, and other products as may be determined by the
sangguniang panlalawigan, to sales outlets, or consumers, whether directly or indirectly, within the province.

8. Tax on Business – taxes imposed by cities, municipalities on businesses before they will be issued a
business license or permit to start operations based on the schedule of rates prescribed by the local
government code, as amended. Take note that the rates may vary among cities and municipalities.

9. Fees for Sealing and Licensing of Weights and Measures – fees for the sealing and licensing of weights and
measures at such reasonable rates as shall be prescribed by the sangguniang bayan of the municipality or
city.

10. Fishery Rentals, Fees and Charges – rentals, fees or charges imposed by the municipality/city to grantees
of fishery privileges in the municipal/city waters, e.g., fishery privileges to erect fish corrals, oysters, mussels
or other aquatic beds or bangus fry areas and others as mentioned in the local government code, as
amended.

11. Community Tax – tax levied by cities or municipalities to every inhabitant of the Philippines eighteen (18)
years of age or over who has been regularly employed on a wage or salary basis for at least thirty (30)
consecutive working days during any calendar year, or who is engaged in business or occupation, or who
owns real property with an aggregate assessed value of One thousand pesos (P1,000.00) or more, or who
is required by law to file an income tax return. Community tax is also imposed on every corporation no
 matter how created or organized, whether domestic or resident foreign, engaged in or doing business in the
Philippines.

Take note that under Section 151 of code local government code (as amended), it says that
“except as otherwise provided in this Code, the city, may levy the taxes, fees, and charges which the
province or municipality may impose: Provided, however, That the taxes, fees and charges levied and
collected by highly urbanized and independent component cities shall accrue to them and distributed in
accordance with the provisions of this Code. The rates of taxes that the city may levy may exceed the
maximum rates allowed for the province or municipality by not more than fifty percent (50%) except the
rates of professional and amusement taxes.

Other taxes that may be collected by barangays:

12. Taxes on stores or retailers with fixed business establishments with gross sales of receipts of the preceding
calendar year of Fifty thousand pesos (P50,000.00) or less, in the case of cities and Thirty thousand pesos
(P30,000.00) or less, in the case of municipalities, at a rate not exceeding one percent (1%) on such gross
sales or receipts.

13. Service Fees or Charges – fees or charges for services rendered in connection with the regulations or the
use of barangay-owned properties or service facilities, such as palay, copra, or tobacco dryers.

14. Barangay Clearance – a reasonable fee collected by barangays upon issuance of barangay clearance – a
document required for many government transactions, such as when applying for business permit with the
city or municipality.

15. Other fees and Charges – fees and charges that may be levied by barangayas on commercial breeding of
fighting cocks, cockfights and cockpits; on places of recreation which charge admission fees; and on
billboards, signboards, neon signs, and outdoor advertisements.

For more information, such as the schedule of rates on certain local taxes and other important
things you may need to know about the local taxation in the Philippines, you may read the full text or PDF
file of the Republic Act 7160 or otherwise known as the Local Government Code of 1991 here.

 POST TEST:

1. What particular law governs the true exercise of local government unit taxation power?

Answer: Republic Act 7160 or otherwise known as the Local Government Code of 1991

2. What are the primary objectives of delegating the exercise of taxation power to local government units?

Answer: To promote self-sufficiency of local government units and to strengthen and make local government
units more autonomous

3. What is the maximum amount of professional tax for each profession?

Answer: 300

4. What is a community tax? What are the three community taxes being collected by local government units?
 Answer: Community Tax is a tax levied by cities or municipalities to every inhabitant of the Philippines
eighteen (18) years of age or over who has been regularly employed on a wage or salary basis for at least
thirty (30) consecutive working days during any calendar year, or who is engaged in business or occupation,
or who owns real property with an aggregate assessed value of One thousand pesos (P1,000.00) or more,
or who is required by law to file an income tax return. Real property Tax, Business Tax and Cedula.

5. When is the deadline for the payment of annual community tax, and annual professional tax?

Answer: Every January 31.

PROBLEM SOLVING

Case 1: MRX Corporation, a domestic corporation, has the following properties all located in Baguio City.

a. Farm lot acquired at P 800,000.00 with present FMV of P 1,200,000.00

b. Farm house on the lot used to house the farm animals and serves as storage for farm harvest; constructed
at cost of P 200,000.00; present FMV of P250,000.00
c. Farm tractor and threshing machine, acquired at P 100,000.00 with present FMV of 150,000.00

Question 1: which of these properties should be included in the real property tax declaration?

Answer: All of the properties

Question 2: If the prevailing assessment levels were the maximum provided under the Code, how much would
be the real estate tax at a rate of 1%?

Answer: 4,8000+625+600 total of 6,025

Case 2: Mr. J Suya is a Filipino, residing in Baguio. As a lawyer, he has P200, 000.00 as a professional fee earned in
the preceding year. For the same year, he earned P120, 000.00 as his salary from his employment as Accountant of
a construction firm. As an Accountant practitioner, he earned P60, 000.00 as professional fee. His Real Property tax
declaration stated at fair market value includes the following:

House and Lot 2, 000,000.00

Agricultural Land 500,000.00

Question 1: How much community tax does he have to pay on or before February 28 of the current year?

Answer: 380

Question 2: If he intends to practice his profession as a lawyer and as an accountant, how much
professional tax should be paid on or before January 31 of the year if all professions which need to pass Board and
Bar exams are taxed at P 150.00 per year?

Answer: 150

Question 3: How much real property tax must he pay in January of the current year if the total assessed
value of his properties is P 1,000,000.00 and the basic tax rate is 1%?
 Answer: 10,000

Case 3: Rolly sold his real property for 1,000,000.00. The property has a zonal value of 800,000.00 with an unpaid
mortgage of 200,000.00 to be assumed by the buyer?

Question 1: Compute for the documentary stamp tax.

Aswer:15,000

Case 4: Evelyn Paragas imported a yacht for $100,000 when the exchange rate was P50.00 per $1.00. The custom
duty is 120%.

Question1: How much is the excise tax for the transaction?

Answer: 1,000,000

Case 5: The annual business fee in Baguio City is P500.00 per business establishment and its local business tax is
1% of annual sales or receipts.

Question 1: If X is single proprietorship business with annual sales of P150,000.00, How much would be his
total fees and taxes to be issued with business permit?

Answer: 2,000