7 August 2018

Supreme Court rules that local government units’ just share includes all national taxes

Republic Act 7160, or the Local Government Code of 1991, provides internal revenue allotments (“IRA”) for local government units (“LGU”) amounting to 40% of national internal revenue taxes based on the collection of the third fiscal year preceding the current fiscal year. However, on 3 July 2018, the Supreme Court (“SC”) of the Philippines ruled that the LGU’s just share in state revenues includes all national taxes, such as franchise fees collected by government agencies and customs and duties collected by the Bureau of Customs (“BOC”), and not merely internal revenue taxes collected by the Bureau of Internal Revenue (“BIR”). This effectively increased the IRAs and the budget of LGUs to provide basic services and improve certain economic sectors on a regional basis, among others.

According to Benjamin Diokno, Secretary of the Department of Budget and Management (“DBM”), the government’s fiscal position may be at risk due to the aforesaid SC decision. The exact damage to the national government is still uncertain but is estimated to range from PHP 1.2 trillion to about PHP 6 trillion primarily by reason of the reduction in retained earnings by the national government. He added that although LGUs will have more revenues to fund their respective projects, the country’s investment-grade credit rating may be compromised — making it more difficult for the government to secure cheaper credit as it implements its PHP 8 trillion infrastructure development program together with the private sector, also known as “Build Build Build” program, until 2022. Furthermore, some economists believe that many LGUs have a poor track record in spending allocated resources productively and wisely, effectively crippling and slowing down the “Build Build Build” national program.

Nevertheless, the SC decision is seen by some lawmakers as a tremendous boost to the fiscal autonomy of provincial, city and municipal governments, in support of the proposed constitutional amendments by the incumbent administration regarding a shift to a federal form of government. Federalism is intended as a move to hasten development in the countryside. Therefore, the implementation of the SC decision is a stepping stone to help spell the financial viability of all would-be federal states under the proposed government structure.

However, a contrary view suggests that it only emphasises that there is no necessity to shift to a federal form of government because greater fiscal autonomy, based on the aforesaid SC decision, would allow the LGUs to chart their respective development programs and give them adequate financial resources to bankroll their own projects designed to spur local economic growth. Under the Local Government Code of 1991, LGU heads can partner with the private sector to do their own “Build Build Build” program, such as roads, railways, airports, seaports, government centers, public markets and school buildings.

The impact of the implementation of the SC decision on the Philippine infrastructure industry is uncertain, in light of the direction of the current Philippine administration to transition the present unitary form of government into a federal form. Nonetheless, a pivot towards countryside infrastructure development is an interesting trend that investors, contractors and any other party interested in participating in public bidding for government infrastructure projects, local and foreign alike, should take note of.

If you have any questions or require any additional information, please contact Felix Sy or Lorybeth Baldrias-Serrano or the ZICO Law partner you usually deal with.

This alert is for general information only and is not a substitute for legal advice.


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