31.1 Local Taxation and Real Property Tax

Local Taxation and Real Property Tax

Local government units raise their own revenue under the Local Government Code of 1991 (RA 7160). This section covers the fundamental principles of local taxation, the taxing powers of provinces, cities, municipalities, and barangays, local business taxes, real property taxation, remedies against local tax and assessment disputes, and a worked real property and business tax computation.

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1. Local Government Taxation under the Local Government Code of 1991 (RA 7160)

Constitutional Foundation and Fundamental Principles

Unlike national taxation, which is an inherent attribute of national sovereignty, local taxation derives directly from Article X, Section 5 of the 1987 Constitution, which provides that each local government unit (LGU) shall have the power to create its own sources of revenues and to levy taxes, fees, and charges, subject to guidelines and limitations enacted by Congress.

Under Section 130 of the Local Government Code (LGC), local taxation is governed by fundamental principles:

1. Uniformity: Taxation shall be uniform in each local government unit;
2. Equitability and Ability to Pay: Taxes, fees, charges, and other impositions shall be equitable and based as far as practicable on the taxpayer's ability to pay;
3. Public Purpose: Levied and collected only for public purposes;
4. Non-Confiscatory: Taxes shall not be unjust, excessive, oppressive, or confiscatory;
5. No Restraint of Trade: Shall not be contrary to national economic policy or in restraint of commerce;
6. Local Revenue Retention: The collection of local taxes, fees, and charges shall in no case be let to any private person.

Common Limitations on Local Taxing Powers (Section 133)

Section 133 of the LGC explicitly prohibits LGUs from levying certain categories of taxes, reserving them to the national government or protecting inter-jurisdictional commerce:

• Income tax, except when levied on banks and other financial institutions;
• Documentary stamp tax (DST);
• Taxes on estates, inheritances, gifts, legacies, and other acquisitions mortis causa or inter vivos;
• Customs duties, registration fees of vessels, and wharfage on wharves;
• Taxes, fees, and charges on goods passing through the territorial jurisdictions of LGUs (anti-toll / transit fee prohibition);
• Taxes on agricultural and aquatic products when sold by marginal farmers or fishermen;
• Taxes on business enterprises certified by the Board of Investments (BOI) as pioneer or non-pioneer for a period of 6 and 4 years, respectively;
• Taxes on petroleum products, natural gas, or biofuels;
• Taxes on the gross sales or receipts of common carriers of passengers or goods by land, air, or water (reserved to national franchise/percentage taxes);
• Taxes on premiums paid by ways of reinsurance or retrocession;
• Taxes on National Government agencies, instrumentalities, and GOCCs.

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2. Allocation of Taxing Powers across LGU Tiers

The Local Government Code strictly delineates taxing jurisdictions across the four tiers of local government:

                                   Hierarchy of Local Taxing Authority
                                                   │
         ┌─────────────────────────────────────────┴─────────────────────────────────────────┐
         ▼                                                                                   ▼
     Provinces                                                                         Municipalities
• Transfer of real property ownership                                              • Local Business Taxes (LBT) on:
• Printing & publication tax                                                         Manufacturers, wholesalers, retailers,
• Franchise tax (within province)                                                    contractors, banks & financial inst.
• Sand, gravel & quarry resources                                                  • Fees for sealing weights & measures
• Professional tax (PHP 300 cap)                                                   • Fishery rentals & privilege fees
• Amusement tax on admission (excluding cities)
• Delivery truck / van tax
         │                                                                                   │
         └─────────────────────────────────────────┬─────────────────────────────────────────┘
                                                   ▼
                                                 Cities
                       • Dual Taxing Authority: Can levy ANY tax that a Province
                         OR a Municipality may impose!
                       • Maximum Tax Rates: May exceed Province/Municipality
                         statutory rate caps by UP TO FIFTY PERCENT (50%)
                         (except for professional tax and amusement tax caps).
                                                   │
                                                   ▼
                                               Barangays
                       • Taxes on stores/retailers with gross sales ≤ PHP 50,000 (cities)
                         or ≤ PHP 30,000 (municipalities), at max 1% of gross receipts.
                       • Barangay clearance fees for commercial & building permits.

1. Local Business Tax (LBT) on Municipalities and Cities

Under Sections 142 and 143 of the LGC, municipalities and cities levy Local Business Taxes (LBT) on commercial enterprises operating within their territorial boundaries:

Rules on Retirement of Business (Section 145)

When a business ceases operations or retires from business, its final local business tax is computed not on the preceding year, but on its gross sales or receipts of the current calendar year up to the date of retirement. The tax paid for the current year based on the preceding year is credited against this final liability; any excess is refunded, and any deficiency must be settled before a business clearance is granted.

2. Community Tax (Title VI)

• Individuals: Every resident of the Philippines 18 years of age or over who has been regularly employed, engaged in business, or owns real property with aggregate assessed value of PHP 1,000 or more pays:
  • Basic Community Tax: PHP 5.00
  • Additional Community Tax: PHP 1.00 for every PHP 1,000 of income derived from business, profession, or property (annual cap of PHP 5,000).
• Corporations: Every domestic or foreign corporation doing business in the Philippines pays:
  • Basic Community Tax: PHP 500.00
  • Additional Community Tax: PHP 2.00 for every PHP 5,000 of gross receipts or earnings derived from business in the Philippines and PHP 2.00 for every PHP 5,000 of real property owned (annual cap of PHP 10,000).

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3. Real Property Taxation (RPT) under the LGC

Real Property Tax is an annual ad valorem tax levied on the ownership, possession, or control of real property (land, buildings, machinery, and other permanent improvements).

Fundamental Principles of Real Property Taxation (Section 198)

1. Real property shall be appraised at its current and fair market value;
2. Real property shall be classified for assessment purposes on the basis of its actual use;
3. Real property shall be assessed on the basis of a uniform classification within each local government unit;
4. The appraisal, assessment, levy, and collection of real property tax shall not be let to any private person.

The Doctrine of Actual Use (Actual Use Controls): Real property is classified, appraised, and assessed based on its actual use regardless of where located, who uses it, and whoever owns it (Section 217). If a parcel of land titled to a charitable institution is leased to a commercial restaurant, it is classified and assessed as commercial, losing its constitutional exemption.

Real Property Tax Computational Framework

$\text{Assessed Value} = \text{Fair Market Value (FMV)} \times \text{Assessment Level}$

$\text{Basic Real Property Tax} = \text{Assessed Value} \times \text{Basic RPT Rate}$

$\text{Special Education Fund (SEF) Tax} = \text{Assessed Value} \times 1\%$

$\text{Total Real Property Tax Due} = \text{Basic RPT} + \text{SEF Tax}$

Assessment Levels and Statutory RPT Rates

Statutory Tax Rates on Real Property

• Basic RPT Rate:
  • In a Province: Maximum of 1% of Assessed Value;
  • In a City (or Municipality within Metro Manila): Maximum of 2% of Assessed Value.
• Special Education Fund (SEF): Mandatory levy of 1% of Assessed Value across all LGUs, accruing exclusively to the local school board.
• Additional Optional Levies:
  • Idle Land Tax: Up to 5% of assessed value on idle agricultural lands (over 1 hectare where 50% remains uncultivated) or urban lands (over 1,000 sq.m. where 50% remains unutilized);
  • Special Benefit Levy: Imposed on lands specially benefited by public infrastructure projects (maximum of 60% of the total infrastructure project cost).

Constitutional and Statutory RPT Exemptions (Section 234)

• Real property owned by the Republic of the Philippines or any of its political subdivisions (except when beneficial use has been granted to a taxable person);
• Charitable institutions, churches, parsonages, convents, mosques, and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable, or educational purposes;
• Non-profit or religious cemeteries and burial grounds;
• Machinery and equipment actually, directly, and exclusively used by local water districts and government GOCCs generating or distributing electric power;
• Real property owned by duly registered cooperatives under RA 6938; and
• Machinery and equipment used for pollution control and environmental protection.

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4. Local Tax Remedies and Appeals Pipeline

                             Real Property Tax Remedy Pipeline
                                             │
       ┌─────────────────────────────────────┴─────────────────────────────────────┐
       ▼                                                                           ▼
Questioning Reasonableness of Assessment                                    Disputing Tax Collection (Payment)
• File written appeal with the                                              • Taxpayer MUST first Pay Under Protest!
  Local Board of Assessment Appeals (LBAA)                                  • Protest filed in writing with City/Provincial
• Within 60 DAYS from receipt of notice of assessment                         Treasurer within 30 DAYS of payment
• LBAA decides within 120 days                                              • Treasurer decides within 60 days
       │                                                                           │
       └─────────────────────────────────────┬─────────────────────────────────────┘
                                             ▼
                           Central Board of Assessment Appeals (CBAA)
                           • File appeal within 30 DAYS from receipt of adverse decision of LBAA
                                             │
                                             ▼
                           Court of Tax Appeals (CTA) - En Banc
                           • File Petition for Review within 30 DAYS from receipt of CBAA decision

• Payment Under Protest Requirement: Under Section 252 of the LGC, no protest against the collection of a real property tax shall be entertained unless the taxpayer first pays the tax under protest. There shall be annotated on the tax receipts the words "paid under protest". The written protest must be filed within thirty (30) days from payment with the local treasurer, who has sixty (60) days to decide.
• LBAA Appeal: If questioning the assessment itself, the taxpayer appeals to the Local Board of Assessment Appeals (LBAA) within sixty (60) days from date of receipt of the written notice of assessment.
• CBAA Appeal: Adverse decisions of the LBAA are appealed to the Central Board of Assessment Appeals (CBAA) within thirty (30) days from receipt of decision.
• CTA En Banc Appeal: Under RA 9282, decisions of the CBAA are appealed directly to the Court of Tax Appeals En Banc within thirty (30) days.

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5. Comprehensive Worked Calculation Example: Real Property Tax & Local Business Tax

Scenario

Beacon Towers Commercial Corporation owns a three-story commercial office building situated on a 1,200-square-meter commercial lot in Quezon City (a highly urbanized city in Metro Manila). For taxable year 2025, the local city assessor and treasurer report the following tax records:

• Real Property Details (Actual Use: Commercial):

  • Land: Fair Market Value (FMV) = PHP 30,000,000; Commercial Assessment Level = 50%.
  • Building: Fair Market Value (FMV) = PHP 20,000,000; Commercial Assessment Level = 80%.
  • Quezon City Tax Rates: Basic RPT = 2% (maximum city rate); Special Education Fund (SEF) = 1%.
  • Early Payment Discount: Quezon City provides a 10% prompt payment discount if the entire annual real property tax is settled on or before January 31, 2025.

• Local Business Tax Details:

  • Preceding year (2024) gross commercial leasing receipts = PHP 15,000,000.
  • Applicable City Contractor / Service Lessor LBT Rate = 0.75% of gross receipts.

Step-by-Step Computational Solution

Step 1: Compute Assessed Value of Real Properties

$$\begin{aligned} \text{Assessed Value of Land} &= \text{PHP }30{,}000{,}000 \times 50\% = \text{PHP }15{,}000{,}000 \\ \text{Assessed Value of Building} &= \text{PHP }20{,}000{,}000 \times 80\% = \text{PHP }16{,}000{,}000 \\ \mathbf{\text{Total Assessed Value}} &= \text{PHP }15{,}000{,}000 + \text{PHP }16{,}000{,}000 = \mathbf{\text{PHP }31{,}000{,}000} \end{aligned}$$

Step 2: Compute Basic Real Property Tax (2%) and SEF Tax (1%)

$$\begin{aligned} \text{Basic RPT (Land)} &= \text{PHP }15{,}000{,}000 \times 2\% = \text{PHP }300{,}000 \\ \text{Basic RPT (Building)} &= \text{PHP }16{,}000{,}000 \times 2\% = \text{PHP }320{,}000 \\ \text{Total Basic RPT} &= \text{PHP }300{,}000 + \text{PHP }320{,}000 = \mathbf{\text{PHP }620{,}000} \\ \text{Special Education Fund (1\% of Total Assessed Value)} &= \text{PHP }31{,}000{,}000 \times 1\% = \mathbf{\text{PHP }310{,}000} \end{aligned}$$

Step 3: Compute Total Annual Real Property Tax Due & Prompt Payment Discount

$$\begin{aligned} \text{Gross Annual Real Property Tax Due} &= \text{PHP }620{,}000 + \text{PHP }310{,}000 = \mathbf{\text{PHP }930{,}000} \\ \text{Less: 10\% Prompt Payment Discount} &= \text{PHP }930{,}000 \times 10\% = \underline{\text{PHP }93{,}000} \\ \mathbf{\text{Net Real Property Tax Payable (on or before Jan 31)}} &= \mathbf{\text{PHP }837{,}000} \end{aligned}$$

Step 4: Compute Annual Local Business Tax (LBT) for 2025

$\text{LBT Due} = \text{Gross Receipts } (\text{PHP }15{,}000{,}000) \times 0.75\% = \mathbf{\text{PHP }112{,}500}$

Beacon Towers Commercial Corporation remits a discounted annual Real Property Tax of PHP 837,000 and a Local Business Tax of PHP 112,500 to the City Treasurer of Quezon City.