A STUDY OF LEGAL DEDUCTIONS ON THE INTERNAL REVENUE ALLOTMENT

FOR LOCAL GOVERNMENT UNITS

Atty. Florecita Flores

June 2007

DISCLAIMER

“The views expressed in this report are strictly those of the authors and do not necessarily reflect those of the United States Agency for International Development (USAID) and the Ateneo de Manila University”.

Abstract

This brief surveys laws pertaining to the internal revenue allotment (IRA) scheme, including the legal bases for deductions from the IRA by the Bureau of Internal Revenue and Department of Budget and Management, National Government restrictions and reductions of the IRA, and issues such as the Local Government Service Equalization Fund, IRA lien and the monetization program.

A Study Of Legal Deductions On The Internal Revenue Allotment

For Local Government Units

By Atty. Florecita P. Flores

Local Government Research and Consultancy Service)

I. The 1987 Constitution of the Philippines: The new Internal Revenue Allotment scheme has its roots in Article X (Local

Government) of the 1987 Philippine Constitution which provides for the fiscal autonomy of local governments within the framework of local autonomy and accountability to the National Government, hereunder quoted in part:

Section 5. Each local government unit shall have

the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the local governments.

“Section 6. Local governments shall have a just share, as determined by law, in the national taxes which shall “be automatically released to them.

“Section 7. Local governments shall be entitled to an equitable share in the proceeds of the utilization and development of national wealth within their respective areas, in the manner provided by law, including sharing the same with the inhabitants by way of direct benefits.”

II. Historical Background: Prior to the enactment of Republic Act No.7160, otherwise known as The Local Government Code of 1991 (to take effect in January 1, 1992), the laws1 governing the allocation and use of the Internal Revenue Allotment (IRA) to local governments, were:

• Presidential Decree No. 144 (1973) which revised the IRA sharing scheme. Specifically, it provided that National internal revenue taxes not assigned to special funds and accounts shall be transferred to LGUs computed on the basis of BIR collections during the 3rd year prior to the current fiscal year. The 20% LGU share is distributed as follows: First, the barangay share of 10% is computed and deducted from the gross amount. Second, the remaining 90% of the 20% is divided as follows: 25% to provinces, 30% to cities; and 45% to municipalities. The share of

1 Source: Handbook on Local Fiscal Administration, Local Government Center, College of Public Administration, UP Diliman, Quezon City

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each local unit is computed on the basis of a weighted three-factor formula of population, 70%; land area, 20%; and equal sharing, 10%.

• Presidential Decree No. 559 (1974) amended PD 144 and Barangays were specified

as co-recipients of the allotment. The effect is that up to FY 1976, the BIR allotment was distributed as follows: 30% to provinces; 45% to municipalities; 25% ti cities; and to barangays the amount of P56 million that previously been earmarked for distribution to provinces, cities and municipalities. After FY 1976, the allocation among LGUs was changed to the following: 25% to provinces; 40% to municipalities; 25% to cities; and 10% to barangays. The share of barangays were distributed as community development project grants with the distribution administered by the President of the Philippines.

• Presidential Decree No. 937 (1976) further introduced modifications in the

allotment system for the purpose of adopting the grant distribution during the six-month transition from July 1-June 30 Fiscal Year to January 1-December 31 Fiscal Year effective January 1, 1977. It likewise carried a provisions disallowing decreases in the annual allotment of each LGU, while allotment increases were restricted to 25% of the FY 1976 level.

• Presidential Decree No. 231 (1977) was issued specifying that allocations for FY

1978 up to FY 1979 would be equal to those determined for 1977 under PD 144 as amended by PD 937 and in accordance with the provisions of PDs 559 and 898. The harsh effect of this provision is to hold constant the peso value of the allotment and cause a drastic decline in its real distribution which PD 231 tried to correct by further providing that beginning January 1981, the allotment shares shall be determined on the basis of Sections 1, 2 and 3 of PD 144 as amended by PD559 and 898.

• Presidential Decree No. 1741 (1981) provided for an additional grant to LGUs

whose income declined in 1980 due to low crop prices. It further provided for an allowance of year-to-year increases in allotment beyond the 25%-ceiling for 3rd, 4th, 5th, and 6th class-LGUs of up to 30%-, 35%-, 40%- and 45%- increase, respectively, subject to adequate justification and recommendation by the Ministry of Local Government and Community Development (now DILG) and the availability of funds.

• Presidential Decree No. 1445, under Section 24 (3), stipulates that a maximum of

one-half of one percent (1/2 of 1% or .05%) of the Net General Fund collection from national internal revenue taxes should be remitted to the National Treasury to cover the cost of auditing services rendered (by COA) to local government units.

Pursuant to the foregoing, the Internal Revenue Allotment is based on the collection from national internal revenue taxes which is computed by the Bureau of Internal Revenue based on P. D. 144, as amended, i.e., “20% of the collections from national internal revenue taxes not otherwise accruing to special funds and special accounts in the general fund.”.

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Computation of Internal Revenue Allotment2

CY 1990 Net General Fund Collection (NGFC in 1987) P 57,765,764,515.07 Due to local governments (20% of NGFC) 11,553,152,903.00 Less: COA Share (1/2 of 1% per PD 1445) 228,828,822.58

Balance 11,264,324,408.04 Less: 10% Bgy. Dev. Fund 1,126,432,408.04 Share of Provinces, Cities & Municipalities P10,137,891,672.38 Distribution of IRA for CY 1990: Provinces 30% 3,041,367,501.71 Cities 25% 2,534,472,918.09 Municipalities 45% 4,562,051,252.58 10,137,891,672.38 The share of each Local Government is determined based on the following criteria: Population 70% Land Area 20% Equal Sharing 10% III, Republic Act No. 7160, the Local Government Code of 1991

As mandated under Section 6 of Article X of the 1987 Constitution, Republic Act No.

7160, the Local Government Code of 1991 contained under Title III (Shares of Local Government Units in the Proceeds of National Taxes), Chapter 1 (Allotment of Internal Revenue), the following provision: “Section 284. Allotment of Internal Revenues Taxes. The

local government units shall have a share in the national internal revenue taxes based on the allocation of the third fiscal year preceding the current fiscal year as follows:

(a) On the first year of the effectivity of this Code, thirty percent (30%); (b) On the second year, thirty-five percent (35%); (c) On the third year and thereafter, forty percent (40%).

2 Source: Bureau of Local Government Supervision (BLGS), Department of Local Government (DLG), 1990.

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Provided, That in the event that the National Government incurs an unmanageable public sector deficit, the President of the Philippines is hereby authorized, upon the recommendation of the Secretary of Finance, Secretary of the Interior and Local Government; and Secretary of Budget and Management, and subject to consultation with the presiding Officers of both Houses of Congress and the presidents of the LIGA, to make the necessary adjustments in the internal revenue allotment of local government units but in no case shall the allotment be less than thirty percent (30%) of the allocation of national internal revenue taxes of the third fiscal year preceding the current fiscal year; Provided further, That in the first year of the effectivity of this Code, the local government units shall, in addition to the thirty percent (30%) internal revenue allotment which shall include the cost of devolved functions for essential public services, be entitled to receive the amount equivalent to the cost of devolved personal services”. From the foregoing provision, it will be noted that the Code introduced significant

changes in the allotment system.

IV. Percentage Sharing of LGU’s3

PRE-CODE UNDER THE CODE

Provinces 25% 23% Cities 25% 23% Municipalities 40% 30% Barangay 10% 20%

The share of each province, city and municipality is determined on the basis of the

following formula: PRE-CODE UNDER THE CODE Population 70% 50% Land Area 20% 25% Equal Sharing 25% 25%

V. Deductions from the IRA by the Bureau of Internal Revenue (BIR) and

the Department of Budget and Management (DBM):

(a) Starting CY 1992, with the passage of the Local Government Code of 1991 (the Code), local government units have been entitled to the internal revenue allotment as follows:

1992 - 30% 1993 - 35% 1994 onwards - 40%

3 Source:LDAP/USAID Report July 15, 1994

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This percentage share is based on collections from the national internal revenue taxes actually realized during the 3rd fiscal year preceding the current fiscal year as certified by the Bureau of Internal Revenue:

Per the IRA Briefer of the Union of Local Authorities (ULAP)4 “the IRA of LGUs has been released intact from 1991 up to 1997, except for those amounts deducted by DBM/BIR prior to the computation of the 40% IRA share of LGUs totaling P20,767B for the period 1992-2001 and averaging about P2B per year for a 10-year period.”

The ULAP Briefer continues to state: “Beginning 1998, the IRA was subjected to several impositions both by Congress and by the National Government totaling P62B; (e.g. Unprogrammed Fund, LGSEF, IRA Discrepancies. Administrative Fiats, and others due to DBM’s problems on cash flow/programming).”

(b) Article 378 of the Implementing Rules & Regulations (IRR) of the Code mandates

the BIR to certify the amount of internal revenue taxes actually realized during the appropriate base year, and DBM is the agency that determines the share of local government units in the form of internal revenue allotment that will be incorporated in the General Appropriations Act.

BIR vs DBM IRA Figures w/ Codal Formula5

(in Billion Pesos)

Year DBM/GAA BIR CODAL 1992 18.078 15.821 24.373 1993 37.072 36.155 36.718 1994 46.753 46.138 46.753 1995 51.925 51.924 52.715 1996 56.594 56.594 57.530 1997 71.039 72.848 73.878 1998 80.999 82.708 83.928 1999 96.780 102.590 103.882

Total ----- 459.231 464.778 479.777 Except for years 1995 & 1996 where DBM & BIR have similar figures, for years 1992-1994 DBM has higher figures while BIR had higher figures for the years 1997-1999.

For the eight year period from 1992-1999 BIR has certified a higher total IRA than that of DBM with the former registering a total of P464.778B while the latter only P459.231B. However, the higher BIR figure is still about P15B short of the total figure which would implement the formula set in Sec. 284 of the Code. This can be attributed to the various deductions included by BIR in its computation.

The conflicting figures is a result of what constitutes “basic income” as defined by the Bureau of Internal Revenue6 as basis of the computation of the internal revenue taxes to which the local governments are entitled, to wit: 4 IRA BRIEFER, September 26, 2001, Union of Local Authorities of the Philippines 5 Source: A Study on the Legality of Deducting Certain Taxes and Special Levies Before Determining the IRA Shares of the LGU by Atty. Raul G. Bito-on

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“Basic income shall refer to the sum of all internal revenue tax collections only during the base year less the amount released during the same year for tax refunds, payments for informer’s reward, and any portion of internal revenue tax collections which are presently set aside, or hereafter earmarked under special laws for payment to third persons, such as the amount intended for payment to the Commission on Audit, Insurance , etc “Base year shall refer to the third fiscal year preceding the current fiscal year”

__________________________________________________________________ ___________Legal Basis of Bureau of Internal Revenue Deductions _________

1 PD 739 as amended by Republic Act No.6942 approved on April 4, 1990. The purpose of the Act was to increase the insurance benefits of local government officials and to provide funds for the total annual premiums based on the actual number of local officials certified by the Department of Local Government and released to the Government Service Insurance System during the first month of every calendar year.

2. PD 1448 as amended by/EO 120-A7 Hotel Room Taxes given to Philippine Tourism

Authority and Philippine Convention and Visitors Corporation . 3 PD 1445 Ordaining and Instituting A Government Auditing Code of the Philippines

Sec. 24(3) stipulates that a maximum of one-half of one percent (1/2 of 1%) of the Net General Fund Collection from national internal revenue taxes shall be remitted to the National Treasury to cover the cost of auditing services rendered by the Commission on Audit to the local government units.

4. Republic Act 3051- Millers Tax given to the Sugar Regulatory Commission 5. Republic Act 6331 as amended by Republic Act 8407 but lapsed into law on November

23, 1997 without the Pre4sident’s signature pursuant to Sec. 27 ( i) Article VI of the Constitution.

Republic Act 6332 as amended by Republic Act 7953 approved on March 30, 1995 entitled, An Act Granting the Philippine Racing Club Inc. a Franchise to Operate and Maintain a Racetrack for Horse Racing in the Province of Rizal and Extending the said Franchise By Twenty Five (25) years from Expiration of the Term.

6. Republic Act 6754 “An Act Providing For An Organic Act for the Autonomous Region in

Muslim Mindanao”

7. Republic Act 7171 “An Act to Promote the Development of the Farmers in the Virginia- Tobacco Producing Provinces approved on January 09, 1992 in accordance with the provision of RA 7171, the Secretary of Budget and Management shall retain annually, the funds equivalent to fifteen per centum (15% ) of excise taxes on locally manufactured

6 Memorandum dated September 14,1943 of BIR Commissioner Liwayway Vinzons Chato 7 Could not find a copy of either PD1448 or EO 120-A

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Virginia-type cigarettes. The Funds allotted shall be divided among the beneficiary provinces pro rata according to the volume of Virginia tobacco production.

8. Republic Act 7156 - An Act Granting Incentives to Mini-Hydro Electric Power Developers

proved on September 12, 199€1

Under Sec. 10 on Tax Incentives - Any person, natural or juridical, Authorized to engage in mini-hydroelectric power development shall be Granted the following tax incentives or privileges: (1) Special Privilege tax rates – the tax payable by all grantees to develop

potential sites for hydroelectric power and to generate, transmit and sell electric power shall be two percent (2%) of their gross receipts and shall be payable to the Commissioner of Internal Revenue.

(2)Tax and duty free importation of machinery, equipment and materials-That

within seven (7) years from the date of award, importation of machinery and equipment, materials and parts shipped with such machinery and equipment, including control and communication equipment shall not be subject to tariff duties and value-added tax.

(3) Tax Credit on Domestic Capital Equipment – A tax credit equivalent to one hundred percent (100%) of the value of the value-added tax and custom duties that would have been paid on the machinery, equipment materials and parts had these items been imported shall be given to anawardee-developer who purchases machinery, equipment, materials And parts from a domestic manufacturer.

(4) Special Realty Tax Rates on Equipment and Machinery - Any provision of the Real Property Tax Code or any other law to the contrary notwithstanding, realty and other taxes on civil works, equipment, machinery and other improvement of a registered mini hydroelectric power developer shall not exceed two and a half percent (2 .5%) of their original cost (5) Value-Added Tax Exemption – Exemption from the ten percent (10%) value-added tax on the gross receipts derived from the sale of electric power whether wheeled through the NPC Grid or through existing electric utility lines;

(6) Income Tax Holiday- For seven (7) years from the start of commercial operation, a registered mini-hydroelectric power developer shall be fully exempt from income taxes levied by the National Government.

In addition, Department of Budget and Management also maintains that before

distribution to the local governments, of the amount certified by the Bureau of Internal Revenue, there are still additional impositions in order to avoid double counting because part of the proceeds of certain laws, i.e., such as those of the Ecozones, the Documentary Stamp Law and the Value Added Tax are earmarked to go directly to the local governments, e.g..:for CY1998-1999

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Additional Deductions by DBM in the Internal Revenue Collection8

(In Million Pesos)

Year RA 7227 Ecozones RA 7660 DST RA 7643 VAT 1998 15.236 4,301.00 1999 47.000 14,292.00 260.453 TOTAL 62,236 18,593.00 260.453

The total deductions from national internal revenue taxes before computation of the

IRA increased from P13B in 1994 to P17.76B in 1999. ____________________________________________________________________________

Legal Basis of DBM Deductions 1. Republic Act 7227 - An Act Accelerating the Conversion of Military Reservation into

Other Productive Uses and Creating the Bases Conversion & Development Authority approved on March 13, 1992

Section 12 provides that no taxes, local and national shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes, three percent of the gross income earned by all businesses and enterprises within the Subic Economic Zone, shall be remitted to the national government, one percent (1%) each to the local government units affected by the declaration of the4 zone in proportion to their population, area and other factors.

In addition, there is hereby established, a development fund of one percent(1%) of the gross income earned by all businesses and enterprises within the Subic Economic Zone to be utilized for the development of municipalities outside the city of Olongapo and the municipality of Subic and other municipalities contiguous to the base area.

2. Republic Act 7660- An Act Rationalizing Further the Structure and Administration of

the Documentary Stamp Tax, Amending Certain Provisions of the National Internal Revenue Code approved December 23, 1993.

As provided for in Sec. 22 of the Act, the incremental revenues from the increase in the documentary stamp taxes shall be set aside for the following:

(a) In 1994 and 1995, twenty-five percent (25%) shall accrue to the Unified Home-

Lending Program for mass-socialized housing program to be administered by the National Housing Authority provided that not more than one percent (1%) of the allocations shall be used for administrative expenses;

(b) In 1996, twenty-five percent (25%) to be utilized for the National Health Insurance Program;

8 ibid (Bitoon Study)

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(c) In 1994 and every thereafter, twenty-five (25%) shall accrue to a Special Education Fund to be administered by the Department of Education, Culture and Sports for the construction and repair of school facilities, training of teachers, and procurement or production of instructional materials and teaching aids.

(d) In 1994 and every year thereafter, fifty percent (50%) shall accrue to a Special Infrastructure Fund for the construction and repair of roads, bridges, dams and irrigation, seaports and hydroelectric and other indigenous power projects for depressed provinces as declared by the President on the basis of equity.

3. Republic Act 7643 – An Act to Empower the Commissioner of Internal Revenue to

Require the Payment of the Value-Added Tax Every Month and to Allow Local Government Units to Share in Vat Revenue approved December 28, 1992.

Sec. 282 provides that in addition to the internal revenue allotment, fifty percent (50%) of the national taxes collected in excess of the increase in collections for the immediately preceding year shall be distributed as follows: (a) Twenty percent (20%) shall accrue to the city or municipality where such taxes are collected in accordance with Sec. 150 of RA 7160 and (b) Eighty percent (80%) shall accrue to the National Government.

Further, under Republic Act 7160, LGUs share in the utilization and development of

national wealth which shall be allotted among entitled provinces, cities, municipalities and barangays in accordance with the formula prescribed under Sec. 292 , RA 7160 as follows:

Where the natural resources are located in the province:

( a ) Province – 20% (b) Component city/municipality -45% c) Barangay 35%

Where the natural resources are located in two (2) or more provinces, or in two (2) or more component cities or in two (2) or more barangays, their share shall be computed on the basis of:

(1) Population – 70% (2) Land Area – 70%

The proceeds from the utilization and development of national wealth shall be directly remitted by the national government to the provincial, city, Municipal Treasurer concerned within five (5) days after the end of each quarter

VI. Administrative Fiats to Reduce the IRA There were also National Government restrictions on the IRA due to unfunded

mandates: Legal Basis Year____

(a) Minimum of 20% to be spent RA 7160 GAA 1996 for development projects, 20% of Sec. 325 (a) and (b) which to be allocated for human Sec. 331 (b) & ecological concerns

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(b) Fifty percent of the IRA increment RA 7160 GAA 1999 for the year to be allocated to food Sec. 287 security program on poverty alleviation and resettlement of squatters

(c) Payment of the Magna Carta benefits RA 7305 GAA 1997 of Devolved Public Health Workers

(d) Concreting of Barangay Roads/ RA 6773 GAA 1994

Multipurpose pavements in all barangays (e) Capitalization of the Partido Development Administration in Camarines Sur RA 7820 GAA 1999 (f) Barangay Health Worker’s Benefits RA 7883 GAA 1995 and Incentives Act (g) National Local Government Olympics EO 64 (h) Salary Standardization Law RA 6758 GAA 1999

The legality of the following administrative fiats to reduce the Internal Revenue

Allotment was questioned9::

(1) Under Administrative Order 372 (1997) 10% of the IRA was withheld in 1998; (2) P9 Billion of the regular IRA of LGUs was not released for CY 2000 (3) Unreleased portions of the National wealth and LGU’s special shares from the

ECOZONEs, VAT and others (4) Impositions on the release of the 20% Development Fund (EO 189; EO 190 and EO

250)

The Supreme Court ruled in Pimentel vs. Aguirre (GR L-132988) “The Constitution vests the President with the power of supervision, not control, over LGUs …x x x… . He may not withhold or alter any authority or power given them by the law. Thus, the withholding of a portion of internal revenue allotments legally due them cannot be directed by administrative fiats”.

V. Congressional Initiatives to reduce/control the IRA – the Local Government Service Equalization Fund

Executive Order No. 48 dated December 7, 1998 of then President Joseph Estrada established a Program for Devolution Adjustment and Equalization “to facilitate the process of enhancing the capabilities of LGUs in the discharge of the functions and services devolved to

9 IRA BRIEFER September 26, 2001, Union of Local Authorities of the Philippines

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them by the National Government Agencies concerned pursuant to the Local Government Code.” Later, under Republic Act No. 8745, the program was renamed as the Local Government Service Equalization Fund (LGSEF) and its allocation and distribution became a contentious issue.

It would be more accurate to refer to the facts as stated in the case of “The Province of Batangas, represented by its Governor, Hermilando I. Mandanas, petitioner, vs. Hon. Alberto G. Romulo, Executive Secretary and Chairman of the Oversight Committee on Devolution; Hon. Emilia Boncodin, Secretary, Department of Budget and Management; Hon. Jose D. Lina, Jr., Secretary, Department of Interior and Local Government, respondents. (GR No. 152774, May 27, 2004) The Facts of the Case: Briefly, the facts of the case - an Oversight Committee (referred to as Devolution Committee under EO 48) was created to issue the appropriate rules and regulations necessary for effective implementation; to address the funding shortfalls of functions and services devolved to the LGUs and other funding requirements, the “Devolution Adjustment and Equalization Fund” was created to be sourced from the available savings of the national government for CY 1998. For 1998, the DBM was directed to set aside an amount to be determined by the Oversight Committee based on the devolution status appraisal surveys by the DILG; for 1999 and succeeding years, the corresponding amount required to sustain the program; the Oversight Committee has been authorized to issue the rules and regulations governing the equitable allocation and distribution of the fund to the LGUs.

To quote the salient features in the Supreme Court decision on the handling of the LGSEF Fund from 1999 to 2001:

“The LGSEF in the GAA of 1999: In RA 8745, otherwise known as the GAA of 1999, the amount of P96,780,000.00 was allotted as the share of the LGUs in the internal revenue taxes. Provided, that the amount of FIVE BILLION shall be earmarked by the LGSEF for the funding requirements of projects and activities arising from the full and efficient implementation of devolved functions and services of LGUs; Provided further, that said amount shall be released to the LGUs subject to the implementing rules and regulations including such mechanisms and guidelines for equitable allocations and distribution prescribed by the Oversight Committee Under OCD Resolutions proposed by then Executive Secretary Ronaldo Zamora and approved by then President Estrada in 1999, the allocation of the P5 Million LGSEF in accordance with the OCD implementing rules and regulations was as follows:

i) the 1st tranche (P2Billion) shall be allocated in accordance with the codal formula sharing scheme

ii) the 2nd tranche (P2Billion) shall be allocated in accordance with a modified CODEF formula using the cost of devolution (CODEF) sharing scheme

iii) the remaining (P1Billion) shall be earmarked to support Local Affirmative Action Projects and other priority initiatives such as food security, poverty alleviation rural electrification and peace and order, among others. Further, under another OCD, the LGUs were required to identify the projects eligible

for funding by the P1 Billion pf the LGSEF.

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“The LGSEF in the GAA of 2000: Under RA 8760, otherwise known as the GAA of 2000, the amount of P111,778,000,000 was allotted as the share of the LGUs in the internal revenue taxes. As in the GAA of 1999, the GAA of 2000 contained a proviso earmarking P5 Billion of the IRA for the LGSEF.

OCD in Resolution No. 2000-023 adopted the following allocation governing the P5

Billion LGSEF for 2000: i) P 3.5 Billion of the CY2000 LGSEF shall be allocated to and shared by

the four levels of LGUs using the following percentage-sharing formula: Provinces 26% or P910,000,000 Cities 23% or P805,000,000 Municipalities 35% or P1,225,000,000 Barangays 16% or P 560,000,000 ii) P1,500,000,000 of the CY 2000 LGSEF shall be earmarked to support

initiatives and local affirmative action programs endorsed to and approved by the OCD In July,2000, then President Estrada issued a Memorandum authorizing then Executive

Secretary Zamora to implement and release the P2.5 Billion LGSEF in accordance with OCD Resolution No. 2000-023

Thereafter, OCD under President Macapagal-Arroyo promulgated Resolution No.

2001-29 entitled “Adopting Resolution No. OCD-2000-023 in the Allocation, Implementation and Release of the Remaining P2.5 Billion LGSEF for CY2000.” Under this Resolution, the amount of P1 Billion was to be released to complete the P3.5 Billion allocated to the LGUs while the remaining P1.5 Billion was allocated for the LAAP (Local Affirmative Action Projects). However, out of this latter amount, P400,000,000 was to be allocated and released as follows:P50,000,000 as financial assistance to the LAAPs of LGUs; P273,360,227 as financial assistance to cover the decrease in the IRA of LGUs concerned due to reduction in land area; and P74,639,773 for the LGSEF Capability Building Fund.

” The LGSEF in the GAA of 2001: In view of the failure of Congress to

enact the GAA for 2001, the GAA of 2000 was deemed re-enacted, together with the IRA of the LGUs therein and the proviso earmarking P5 Billion thereof for the LGSEF. On January 9, 2002, the Oversight Committee adopted Resolution No. 2002-001 allocating the P5 Billion LGSEF for 2001 as follows: Modified Codal Formula P3,000 billion Priority Projects 1,900 billion Capability Building Fund .100 billion P5,000 billion

Further, the P3.0 Billion of the CY 2001 LGSEF is to be allocated according to the modified codal formula and released to the four levels of LGUs, as follows:

LGUs Percentage Amount

Provinces 25% P 0.750 billion

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Cities 25% 0.750 billion Municipalities 35% 1. 050 billion

Barangays 15% . 0. 450 billion That the P1.9 billion earmarked for priority projects shall be distributed according to

the following criteria: for projects of the 4th, 5th, and 6th class of LGUs or projects in consonance with the President’s State of the Nation (SONA) commitments

Finally, the remaining P100 million LGSEF capability building fund shall be

distributed in accordance with the recommendation of the Leagues of Provinces, Cities, Municipalities and Barangays, and approved by the OCD.”

Upon receipt of a copy of the above resolution, Gov. Mandanas wrote to the individual

members of the Oversight Committee seeking the reconsideration of Resolution No. OCD-2002-001. He also wrote to President Macapagal-Arroyo urging her to disapprove said resolution as it violates the Constitution of the Local Government Code of 1991.

On January 25, 2002, Pres. Macapagal-Arroyo approved Resolution No. OCD-2002-

001.”

The Petition: Hence, the case brought by Gov. Mandanas to the Supreme Court praying that the

Court should declare as unconstitutional and void the assailed provisos relating to the LGSEF in the GAAs of 1999, 2000 and 2001 and the assailed OCD resolutions (Resolutions Nos. OCD-99-003, OCD-99-005, OCD-2000- 023, OCD-2001-029 and OCD-2002-001) issued by the Oversight Committee pursuant thereto; that the Court direct the respondents to rectify the unlawful and illegal distribution and releases of the LGSEF for the aforementioned years and release the same in accordance with the sharing formula under Section 285 of the Local Government Code of 1991. Finally, that the Court declare that the entire IRA should be released automatically without further action by the LGUs as required by the Constitution and the Local Government Code.

The Decision:

The salient features of the decision of the Supreme Court are:

the entire process involving the distribution and release of the LGSEF is constitutionally impermissible;

that a basic feature of local fiscal autonomy is the constitutionally mandated

automatic release of the shares of the LGUs in the national internal revenue;

Sec. 284 of the Local Government Code provides that, beginning the third year of its effectivity, the LGUs’ share in the national internal revenue taxes shall be 40% which is fixed and may not be reduced except “in the event the national government incurs an unmanageable public sector deficit” and only upon compliance with stringent requirements set forth in the same section;

the Local Government Code of 1991 is a substantive law and while it is

conceded that Congress may amend any of its provisions, it should be done in a separate law, not through appropriations laws or GAAs.

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VII. Another IRA-related issue (Lien or Holdback) As of 2001, ULAP,10 concerned about the pending IRA releases (Lien or Holdback) made an appeal to the President to (1) release the P6.5 Billion balance of the regular IRA, and (2) convene the OCD so that the P5 Billion LGSEF will be approved and released to the LGUs based on a codal formula and not on a project-based arrangement

Also according to ULAP, the total P34,25 Billion pending release is broken down, as

follows: P 17.50 Billion Unprogrammed funds for CY 2000 and 2001 10.00 Billion IRA Discrepancy for CY 2001 (at P131 B down to P121B)

6.75 Billion Regular IRA for CY 2000 (3/4 of the P9B shortfall – Dec., 2000 Under Section 286.of the Code: Automatic Release of Shares “(a) The share of each

LGU shall be released, without need of any further action, directly to the provincial, city, municipal or barangay treasurer, as the case maybe on a quarterly basis within five (5) days after the end of each quarter and which shall not be subject to any lien or holdback that maybe imposed by the national government for whatever purpose.”

VIII. The Monetization Program

Under Executive Order No. 494 dated January 18, 2006, the release of the unprogrammed IRA in CYs 2000 and 2001 amounting to P17.5 Billion was ordered on installment basis for a period of seven (7) years starting CY 2007 up to CY 2013, or avail in advance their respective shares from the unreleased IRA through a monetization program.

The IRA Monetization Program, as initiated by the various Leagues, is a scheme which

will give LGUs the option to collect in advance from the trustee bank their respective shares from the unreleased IRA at a discounted value, net of interest and other charges from the trustee bank.

IX. IRA Releases per the ULAP

In the ULAP President’s Update Report dated February 6, 200411, “For the period 2001-2004, the average IRA per year is P135.134 Billion or 17.50% of the total National Budget compared to the computed annual average of P57.887 Billion which is only 13.32% of the total National Budget for the ten-year period 1`991-2000”.

The Update Report (attached) had a Table which “shows that of the P62.09 Billion total

IRA impositions or IRA cuts made by the National Government (i.e.Executive and Congress), they (LGUs) were able to collect only 56% of this amount or P34.59 Billion …”

10 ibid 11 Source: ULAP official Website www.ulap.gov.ph (Report of Gov. Rodolfo P. Del Rosario)

15

X. The President’s Commitments on the IRA: (Presented during the ULAP Board Meeting on July 14, 2001)

1. Automatic Appropriation of the IRA beginning FY 2002; 2. No Conditional release of the IRA

• IRA will be allocated only in accordance with the formula prescribed in the Local Government Code, i.e. No LGSEF, No Unprogrammed Fund from the IRA.

3. On the CY 2001 LGSEF – P5B: • GMA directed the Executive Secretary to call a meeting of the Oversight

Committee on Devolution. DBM will release the LGSEF in accordance with the OCD Resolution.

4. 5% Remaining Reserve on the 1998 IRA – P4 Billion • DBM to release this is in 4 tranches starting July, 2001

5. Deferred Release of CY 2000 IRA (1 Month) – P9 B • DBM to release the equivalent of ¼ of P9 Billion not later than November 2001 • No commitment on the balance of P6.75 B

6. Unreleased Unprogrammed IRA FY 2000-2001 (P17.5 B) • LGUs should consider the financial constraints of the National Government

7. LGU Remittances to the National Government • Appeal to LGUs to remit promptly unpaid withholding taxes to BIR and remit

unpaid premiums to GSIS, HDMF.

(I wish to acknowledge the assistance of Ms. Teresita Mistal, retired Director of the Department of Interior and Local Government, in undertaking the research for this study.)

*** end ***

REFERENCES

2. Report: National Policy Workshop on Fiscal Equalization and the IRA, June 14,

1999 Shangrila Hotel, Mandaluyong City

3. Study on the Legality of Deducting Certain Taxes and Special Laws Before Determining the IRA Shares of LGU; Atty. Raul C. Bito-on, May 1999

4. Reexamining the Internal Revenue Allotment Issues and Options; Dr. Romulo

Miral, Jr. Ph. D., Workshop on Fiscal Equalization, June, 1999 Local Government Bulletin, Local Government Center, CPA, UP, 1990

5. IRA Briefer 26 September 2001 Union of Local Authorities of the Philippines

(ULAP)

6. Notes on Internal Revenue Allotment (IRA) Issues, Prepared by Dennis Lopez

16

7 Province of Batangas, represented by its Governor, Hermilando I. Madanas, Petitioner, vs. Hon. Alberto G. Romulo, Executive Secretary and Chairman of the Oversight Committee on Devolution; Hon. Emilia Boncodin, Secretary, Department of Budget and Management; Hon. Jose D. Lina, Jr., Secretary, Department of Interior and Local Government, Respondents. (G.R. No. 152774, May 27, 2004).

8. Executive Order No. 48 Series of 1998 Establishing a Program For Devolution

Adjustment and Equalization

(b) Resolution No. OCD-99-003 (c) Resolution No. OCD-99-005 (d) Resolution No. OCD-99-006

9. Department of Budget and Management Circular Letter No.2001-16

i. Local Budget Memorandum No. 32 Tentative Allocation For CY2000 IRA

ii. Local Budget Memorandum No. 2000-33: CY 2000 IRA

Allocation To Local Government Units (March 31, 2000)