VALDOVIEZO, JAN PAUL MPA 103

WESLEYAN UNIVERSITY – PHILIPPINES PUBLIC FISCAL ADMINISTRATION

GRADUATE SCHOOL

MASTER IN PUBLIC ADMINISTRATION

INTERNAL REVENUE ALLOTMENT (IRA) DEPENDENCY OF LOCAL GOVERNMENT UNITS

FACTS

The Local Government Code or LGC (Republic Act 7160) of 1991 and the Organic Act for Muslim Mindanao
(Republic Act 6734) of 1989 jointly define central-local relations in the Philippines. Both pieces of legislation
include provisions that increased the share of local government units (LGUs) in central government
revenues, widened LGU taxing powers and authorities, and devolved to LGUs functions that used to be
assigned to central government agencies. The allotment is largely based upon the type of government they
are and a formula based upon their land area and population. Section 284 of the Local Government Code of
the Philippines (RA 7160) sets up the formula for the distribution of the allotment.

All or nearly all of the revenue that a local government has to spend comes from their IRA, though some
local governments also have additional local sources of revenue such as property taxes and government
fees. Typically for municipalities, the IRA accounts for 90% of total revenues. Since cities have more sources
of local revenues, their IRA ranges from 50% to 70% of their total budget. The IRA is transferred as a grant-
in-aid and, as such, LGUs enjoy significant discretion in its utilization.

BEFORE MANDANAS
RULING

IRA

NG

NATIONAL
TAXES

In 2019, the Supreme Court of the Philippines ruled with finality on separate petitions filed by Batangas
Governor Herminaldo Mandanas and Bataan Governor Enrique Garcia regarding the share of local
government units (LGUs) in national internal revenue taxes as mandated under Section 284 of the 1991
Local Government Code (LGC).

According to the petitioners, the computation of the internal revenue allotment (IRA) allocated to local
government units was erroneous. With the Supreme Court having ruled in the Governors’ favor, the IRA in
2022 will increase by PHP 225.3 billion (to reach PHP 1,102.7 billion) relative to what it would have been
prior to the promulgation of the Supreme Court’s ruling.

The Mandanas Doctrine clarifies that the share from the Internal Revenue Allotment (IRA) of the local
government units (LGUs) does not exclude other national taxes like customs duties. The exclusion of other
national taxes like customs duties from the base for determining the just share of the LGUs contravened the
express constitutional edict in Section 6, Article X of the 1987 Constitution. Accordingly, the national taxes
to be included in the base for computing the just share of the local government units (LGUs) shall not be
limited to the following:
a) The national internal revenue taxes enumerated in Section 21 of the National Internal Revenue Code
collected by the Bureau of Internal Revenue and the Bureau of Customs;

b) Tariff and customs duties collected by the Bureau of Customs;

c) 50% of the value-added taxes collected in the Bangsamoro Autonomous Region in Muslim Mindanao, and
30% of all other national tax collected in the Bangsamoro Autonomous Region in Muslim Mindanao;

d) 60% of the national taxes collected from the exploitation and development of the national wealth;

e) 85% of the excise taxes collected from locally manufactured Virginia-type cigarettes and other tobacco
products;

f) The entire 50% of the national taxes collected under Sections 106 (Value-Added Tax on Sale of Goods or
Properties), 108 (Value-added Tax on Sale of Services and Use or Lease of Properties) and 116 (Tax on
Persons Exempt from Value-Added Tax (VAT)) of the NIRC as provided under Section 283 (Disposition of
National Internal Revenue) of the NIRC; and

g) 5% of the 25% franchise taxes given to the National Government under Section 6 of Republic Act No.
6631 and Section 8 of Republic Act No. 6632.

AFTER MANDANAS RULING (NATIONAL

TAXES)

40%

60%

National Government Internal Revenue Allotment

DISCUSSION

The LGC gives local government units “the power to create its own source of revenue and levy taxes, fees,
and charges . . . Such taxes, fees, and charges shall accrue exclusively to the LGUs.” (LGC 1991, Sec. 129).
The task of revenue generation of LGUs is the responsibility of the local chief executive (LCE). The LCE shall:
“Initiate and maximize the generation of resources and revenues . . . as provided for under Sec. 18 of this
Code.” The LCE however considers the recommendation of the local finance committee (LFC) regarding tax
and other revenue measures or borrowing appropriate to the finance the budget.

However, there are issues regarding IRA and why some LGUs are being dependent on it.

First, the term “Imperial Manila” where Local Government Units’ mindset of looking at center for additional
financial assistance and continuing acceptance of such requests from the center which is the National
Government for their infrastructure development responsibility. Some Local Government Units leave these
projects to the next higher level of government to deal with, or ask that level of government for additional
funding. This continuing mindset shouldn’t be practiced since LGUs are not made to see that the Internal
Revenue Allotment (IRA) is the only additional money that they can have to carry out all their
responsibilities within their jurisdiction. Other examples of the LGUs being dependent on their IRA and the
National Government’s support are the pending projects such as development of ports, bridges, drainage,
sewerage, and dumpsites that would serve local needs. Local Government Units tend to look at these not
for them to develop and fund, but for the National Government or somebody else to do.

The other side of the problem is the lack of accountability. The IRA is, in effect, free money given to the
LGUs. This money is not raised as taxes directly from the LGUs’ own citizens, so these citizens may not be
even aware of the magnitude of this money and it does not come into their consideration as the LGU
officials’ accountability during election time. LGU officials should have been made clearly accountable for
the LGU’s IRA by informing the citizens of each barangay, municipality, city, and province annually of the
amount of its IRA, its budget, and, after the end of the year, its actual revenue, including IRA, and its actual
expenditures in a form giving reasonable, pertinent, and understandable details.

The Department of Finance (DOF) has been releasing the fiscal performance rating of local government
units (LGUs) for years, indicating that most have not improved their tax-collection activities and rely heavily
on the internal revenue allotment (IRA) for funding. The low-collection performance translates to very high
dependence on the IRA.

The poor tax campaign of the Local Government Units. Under the RA 7160 or also known as the LGC Code
of 1991, each LGUs has given a power to create sources of revenue, to levy taxes, fees and charges within
its jurisdiction. For me, the Local Government Units depended more on the Internal Revenue Allotment
(IRA) resulting to the eroded efforts of LGUs to collect own-source revenues. Why? Because for some LGUs,
it is much easier to rely on the IRA transfer than to collect real property taxes and business taxes.

The dependence on the Internal Revenue Allotment (IRA) of the LGUs will result into a weaker Local Fiscal
Autonomy.

RECOMMENDATION

The role of each LGUs is to ensure that its community, its people and its territory will enjoy the benefits that
the government is giving them. But how can it be possible if these LGUs will continue to depend on the IRA
shares? What can they do in order for them to generate more revenues so they can offer and they can
implement more projects within their jurisdiction? Here’s my suggestions:

1. The Revision of Revenue Code for the increase of rates of fees and charges that LGUs can collect,
implement and impose within their jurisdiction should be considered by the National Government
since these are part of Local Sources of each LGUs. It is still a pending topic that I think the
Government should focus on and should be implemented very soon.

2. Relevant Training and Capacity Building Programs which includes revenue generation for the LGUs.
Through this, the LGU will learn how to exert and extend their efforts on tax campaigning and will
not rely on the IRA. Example in Zaragoza, Tax campaigns were done through information
dissemination when someone goes to their office, they also distribute flyers and leaflets where all
the Tax Payment information are stated. However, I think one of the best ways to implement Tax
Campaigning now is through posting the information online or in Social Media where most of the
people spend most of their time.

3. The Department of Tourism and Department of Trade and Industry should assist the LGUs in
promoting local prosperity and economic development programs. Through the DOT and DTI, the
LGUs could promote tourism within their place. Tourism will benefit the LGU and its people in line
with the Government’s campaign of (#LoveLocal) which promotes local goods and services of a
certain Province, City and Municipality. Example here in Zaragoza, we are known for the making of
Buro and Itlog na Pula, these were the products that our LGU is investing and focusing at because it
provides income to our people and with that, they will be able to pay their taxes.

4. We live in modern generation today, LGUs should be encouraged to switch to digital technologies
as the Supreme Court Ruling for the Mandanas Case will be implemented on 2022. IRA shares will
increase but the devolved functions, services and facilities will be transferred to LGUs as well. The
LGUs should adopt advanced Information Technology to effectively and efficiently deliver frontline
 services to the general public. Advanced Technology is needed since we are in a pandemic area and
we should anticipate the switching into a new economy.

Sources:

https://www.rappler.com/newsbreak/iq/what-is-included-new-bigger-ira-local-governments

https://constitutionalreform.gov.ph/ufaqs/what-is-mandanas-ruling/

https://www.unescap.org/sites/default/files/Day%203%20Session%205_Justine%20Diokno-
Sicat_Intergovernmental%20Fiscal%20Transfers%20in%20Philippines.pdf