The Philippine Valuation Standards

Philippine Valuation Standards The Need for Valuation Standards

The need to use a common financial language in a global world has led to a wide variety of initiatives in recent years. Among the most notable are the developments of international accounting standards (IAS) in the accounting field and bank solvency standards, known as Basel II, in prudential supervision. Nevertheless, the market and regulatory flaws that have surfaced in the recent financial and economic crisis demonstrate that there are still aspects on which reforms should be undertaken.

In the area of valuation, there are numerous examples of the lack of a solid framework for valuation: problems and debates relating to the concept and application of fair value; the discussion on how to value multiple financial assets when the markets collapse; problems that have arisen in various countries relating to granting mortgage loans; conflicts concerning the valuations of companies that are initially admitted to trading, etc. In this context, globally applied IAS will be of little use if there is no clear and universally applied set of valuation rules on which to rely. Accounting standards and valuation standards are two different (though in many ways similar) sets that interconnect in various aspects.

Valuations also have multiple applications in the economy. The following are just some of these: financial reporting of all kinds of companies and mutual funds; real estate transactions; investment in a wide variety of financial assets; company transactions; securitization operations; payment of taxes and duties; financial regulation and supervision; settlement of inheritance or other disputes covering a variety of goods; and measurement of the level of collateral in  public and private loan transactions. Valuations are the basis of important economic decisions taken in developed countries, where more weight is given to the concept of value than cost when making investment decisions or when measuring risk or determining solvency requirements. (Excerpts (Ex cerpts from “The IVSC: the challenge of developing global valuation standards”,  Mr. Carlos Arenillas Lorente Lorente)

In the Philippines, there are multiple systems and methodologies on real property valuation used by at least 23 national government agencies, the 1,712 local government units, and the private institutional and individual appraisers each using own systems and methodologies resulting in wide disparities in valuation, e.g. zonal values, ∼

schedule of market values, private appraisers´ values, and other values determined for purposes of social policy, expropriation, agrarian reform, etc. The absence of uniform standards used in valuation has led to conflicting values which undermined transparency and resulted in the lack of public and investor confidence in the valuation system. In the private sector, for example, the Institute of Philippine Real Estate Appraisers (IPREA) which is currently a member of IVSC has adopted IVS in its entirety while the Philippine Association of Realty Appraisers (PARA) has adopted the US valuation standards (USPAP). In the public sector side, LGUs are regulated by the Local Government Code and the Assessors´ Manual, and individual national government agencies undertake or outsource

 property valuations to the private sector without any guidance on uniform standards, due to the absence of a central government valuation authority.  Approach on the Development of Valuation Standards

The LAMP project, which started with Phase 1 in 2001, established that the existing property valuation system contributes to an inefficient and inequitable land market in the Philippines. It found, among other things, that there is a wide variety of valuation practices and associations in the Philippines. The Project seeks to rectify this situation by providing a uniform set of national valuation standards based on internationally accepted valuation standards, concepts, principles and practices that can be used to regulate valuations for and by government agencies, including local government units. It is also hoped that Government can provide leadership to the private sector and that these national standards will provide a model for private sector valuations. Tasked with raising the level of and professionalising the property valuation industry and more specifically with developing valuation standards for use by public and private sectors, the DOF, through an expert technical working group, drafted the standards by choosing an appropriate format or template upon which the Philippine Valuation Standards could be based.  A review of e xisting st andards, used internationally, regionally, or locally, found that there are different valuation standards developed historically for use in their respective countries, regional groups, or through international agreements. These valuation standards include the Uniform Standards of Professional Appraisal Practice (USPAP), the International Valuation Standards (IVS), the Royal Institution of Chartered Surveyors (RICS) ´Red Book´, the ASEAN Valuation Standards, the standards used by the European Group of Valuers Associations (TEGOVA), etc. The International Valuation Standards (IVS) published by the International Valuation Standards Council (IVSC) was found to be a purpose-built model that could be easily modified to accommodate Philippine practice and terminology. It was therefore decided to develop a set of national standards that were based on the latest edition of the IVS (8th Edition) but that would appropriately reflect the Philippine context. To operationalize the approach, the TWG harmonized with the IVS 8th Edition through a four-stage process, involving the Property Valuation Staff in the DOF, and conducting a series of exposure road-shows. The TWG comprised of representatives from public and private sector valuers and accountants associations, banks, academic institutions and National Government Agencies. This broad exposure also ensured that the draft standards would be consistent with the requirements of the current legal framework, national accounting standards and the various statutory bodies. Each section of the IVS was adopted as an initial draft and subjected to individual detailed review and discussion. Where it was felt that modification, amendment or further explanation was necessary to fully reflect conditions in the Philippines the draft was amended. For ease of identification and future updating, all changes have been highlighted in grey ´boxes´ within the text of this edition of the Philippine Valuation Standards, which otherwise retains the format of the IVS. The IVSC supports this approach as it has previously been adopted by Australia, New Zealand, Mongolia, and others.  Amendments and updates to this edition of the Philippine Valuation Standards will be published in response to changing requirements as necessary. Such requirements may result from changing conditions within the Philippines, or changes in the global context. Such amendments and updates may take the form of either supplementary papers or new editions replacing Philippine Valuation Standards - 1st Edition: Adoption of the IVSC Valuation Standards Under Philippine Setting in its entirety, at the discretion of the responsible authority.

Highlights of the Philippine Valuation Standards

Problems in Real Property Valuation and Taxation The Philippine Valuation Standards - 1st Edition: Adoption of the IVSC Valuation Standards Under Philippine Setting is comprised of 24 Standards.

Highlights of the Philippine Valuation Standards The Philippine Valuation Standards is comprised of 24 standards, as follows: 

Concepts Fundamental to Generally Accepted Valuation Principles (GAVP) This Section defines and explains basic valuation terms and concepts, including Real Estate, Real Property, Personal Property, Asset, Market Value, and has a useful explanation of Price, Cost, and Value as well as Highest and Best Use. It also introduces the three market-based valuation approaches - the Sales Comparison, Income Capitalisation, and Cost Approaches.

In the IVS the nomenclature is "Plant and Equipment," whereas in the Philippines the term generally used is "Plant, Machinery and Equipment (Sec. 3.5.2.1.1, page 15). This was further explained and elaborated in Item 12, ´Valuation of Plant, Machinery and Equipment.´ 

Code of Conduct This Section addresses the ethical and competency requirements of Valuers in professional practice which ensures that valuation results are reliable, consistent and done in an objective manner.

Inserted note is just an iteration of the existing National Code of Ethics under DTI Ministry Order 39 which regulates realty service practice in the Philippines and the Civil Service Commission Ethical practice covering the government sector. (Sections 1.1 & 1.2 page 22) N.B. the word "state" referred in the IVS was changed to "country" in the PVS. 

Property Types This Section discusses and distinguishes the four property types, namely: real property, personal property, businesses and financial interests. It provides further explanation on Real Property and the ´bundle of rights´ such as freehold and leasehold interests, easements, etc.

 As suggested by PICPA director, the phrase "and some joint-ventures" were considered as example of incorporated entities (section 4.2.2, page 32); In contrast, some terms that were deemed inappropriate were deleted from IVS (see footnotes 1 & 2, pages 35 & 36, respectively). 

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Market Value Basis of Valuation This is the main ´Core´ Standard providing the internationally (and inter-professionally) accepted definition of Market Value, together with a full explanation and discussion of its use. It is the principal basis of valuation. No annotation. Bases Other Than Market Value

This is the second ´Core´ Standard. It deals with three non-market bases (as opposed to methods) of valuation. The first reflects the benefits that a specific entity enjoys from ownership of a specific asset, which is known as Investment Value. The second represents the price that would be reasonably agreed between two specific parties such as Fair Value, Special Value, Marriage Value, and also defines Going Concern Value and Liquidation Value bases. Elaboration of ´Fair Value´ inserted (see section 3.2, page 48); Likewise, a definition of "Scrap Value" under subsection 6.9.3.1, page 51 was added. 

Valuation Reporting This is the third ´Core´ Standard which describes the critical importance of a Valuation Report as the final step in

the valuation process. While the use of the valuation and the complexity of the property determine the level of detail appropriate to the Valuation Report (Code of Conduct Standard, Section 7.2) this Standard sets out minimum requirements, which are mandatory.

Private practitioners recommended sub-sections 5.1.11.1 & 5.1.11.2 (page 55) commonly practiced in the Philippines. 

Valuation for Financial Reporting This Section contains direct extracts from the International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS). It provides definitions and the categorisation of assets (including land and buildings, machinery, etc) for accounting purposes.

 As noted by the PICPA executive director that accountants in the Philippines has already adapted the IAS and IFRS. No annotation. 

Valuation for Secured Lending Purposes This Section underlines the requirement for Market Value to be the basis for all mortgage valuations and is motivated by the need to reduce risk through exposure to inaccurate valuations used by the banking sector.

TWG members from the banking sector deemed no significant departures in Philippine practice vis-�-vis the IVS. 

Valuation of Public Sector Assets for Financial Reporting This Section defines and explains the requirements for valuing assets owned or controlled by government or quasigovernment bodies. These are directly linked to International Public Sector Accounting Standards (IPSAS). It provides for ´measuring´ public assets at either ´Historic Cost´ (less accounting depreciation) or ´Fair Value´ (that is, re-valued to Market Value).

The terms "Government Owned and Controlled Corporations (GOCC)"; Government Financial Institutions (GFI)"; and Economic Enterprises (EE) were cited as commonly used in the Philippines (section 6.2.1, page 85). 

Real Property Valuation This Section has some good definitions of real property. There is also diagram on The Valuation Process showing the three valuation approaches: Cost; Sales Comparison; and Income. It also summarizes the appraisal process and the requirements to be complied with a Valuer to arrive at a reasonable and realistic valuation. Section 5.9 etc provides discussion on the various methods of land valuation, and 5.24 covers Highest and Best Use.

 A common practice in the Philippines in data gathering called Inferential Opinion Surveys was inserted as subsection 5.10.1 (page 96). 

Valuation of Lease Interest This Section provides definitions and explanations of leasehold interests and the bundle of rights, including a good diagram showing the hierarchy of rights which explains the rights and interest inherent in the leasehold.

The term "Leasehold" commonly used in the Philippines was inserted all throughout this chapter. 

Valuation of Plant, Machinery and Equipment This Section provides useful material for this specialize field but it is drafted with individual ´full´ valuations in mind rather than statutory valuations or mass appraisals for taxation purposes.

 A number of provisions inserted as sub-sections representing local practice, framework for methods and techniques were elaborated in this chapter, particularly the application of Depreciated Replacement Cost in lieu of the Income Approach and some terms which are commonly used, e.g., Machinery and Equipment, Liquidation Value, among others as the equivalent terms in IVS. 

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Valuation of Intangible Assets This Section discusses intangible asset valuation process and definitions on intellectual property, legal life of intangible asset, goodwill, etc. and provides basis of comparison with other types of valuations. No annotation. Valuation of Personal Property This Section provides further guidance on the definition and valuation of Personal Property which includes tenant´s fixtures and fittings and plant, machinery & equipment. This Standard also makes it clear that any of the three main valuation approaches may be used to value personal property.

The categorization of equipment in Philippine practice in sub-section 3.6.1 (page 129) was added for clarification purposes. 

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Business Valuation This Section covers the valuation of businesses for the purpose of shareholdings, acquisitions and disposals. Its relevance to property valuation is mainly with regard to the relationship between the property assets as part of a going concern and the overall value of the business. All property asset valuers should be generally aware of the business valuation process but this Standard is primarily aimed at those providing or procuring business valuations or providing asset valuations as part of such an exercise. No annotation. Consideration of Hazardous and Toxic Substances in Valuation

This Section provides useful guidance for situations where environmental conditions may have an adverse affect on property values. It is an area that is becoming increasingly relevant. In the Philippines it is particularly relevant to land-fill sites, and residential areas affected by industrial pollution (and smoke and smells from waste dumps, etc) and also power transmission lines. No annotation. 

The Cost Approach for Financial Reporting (DRC)  –  Notwithstanding its reference to financial reporting, this is the basic guidance for DRC valuations, which provides definitions of physical, functional and external obsolescence. It also introduces the concepts of ´subject to adequate profitability´ and ´service provision´ (in the case of public buildings). While these are concepts for financial reporting rather than Real Property Taxation (RPT), reference could be made as this would be relevant for LGUs undertaking valuations for non-RPT purposes.

The equivalent term of Reproduction Cost New Less Depreciation was cited in sub-section 3.1.1 (page 158). 

Discounted Cash Flow (DCF) Analysis for Market Valuations and Investment Analyses This Section provides the approach in valuing businesses and certain types of investment properties. It comes with a precaution with regard to the level of expertise and specialist skill required in undertaking such valuations. No annotation.

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Valuation of Agricultural Properties The Section provides good guidance on categorizing non-realty elements and also on adopting different valuation approaches for different asset elements.

The Local Government Code provides a slightly different definition for Agricultural Land (and therefore this should takes higher precedence). To cite Philippine condition, the following were added: Sub-section 3.3.1 citing non-orchard trees Section 3.12, Philippine definition of agricultural land as quoted from RA 7160, Local Government Code; o Section 3.13, definition of Integrated Forest Management Agreement per DENR Administrative Order 9953; Reviewing Valuations This Section distinguishes between administrative (compliance), desk, field, technical, and valuation reviews. It crystallizes the purpose of the review and so it should be a useful reference point even within government (for example, for senior valuers carrying out informal reviews of their staff´s work). No annotation. Valuation of Trade Related Property This Section relates to valuation of hotels, gas stations (i.e. petrol filling stations), restaurants etc. It provides that the Profits Method is the ´normal´ approach adopted for individual valuations of this category of properties. Mass Appraisal for Property Taxation This Section discusses the methodology for Ad Valorem Property Taxation, or statistical and economic studies under government administrative programs. It recognises that valuations undertaken for taxation purposes are carried out in compliance with local laws and regulations, which may result in departure from full compliance with the Standards. No annotations. Valuation of Properties in the Extractive Industries This Section differentiates between mineral extraction and the petro-chemical industry in accordance with the UN Framework Classification and provides a good general explanation of the industries and terminology used. It also differentiates between four categories of properties; exploration, resource, development, and production properties and stresses the specialist nature of the quantifying reserves, etc. o o

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Complementary definitions extracted from the Philippine Mining Act of 1995 (RA 7942) were added, to wit: Sub-sections 3.4.1 & 3.4.2 on definitions of Mineral and Mineral Lands; Sub-section 3.5.1 on definition of Mineral Reservations Sub-sections 3.13.1 & 3.13.2 citing royalty payments and Modes of Mineral Agreements in the o Philippines The Valuation of Historic Property This Section provides guidance on valuing heritage properties and reinforces the use of the three main valuation approaches as applicable to the type and use of the property being valued, e.g. functional/income producing, monumental, etc. The main point to note is the purpose of the valuation, for example, why would you value it if there wasn´t beneficial occupation. o o

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The classification of Historic Sites and Structures as cited in the National Historic Act of the Philippines (PD Nos. 260 & 1505) were deemed appropriate.

Benefits and Impact 

The valuation standards are envisaged to help LGUs improve local revenue generation by providing common understanding on basic concepts and principles in valuing real properties as reflected in the Schedule of Market

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Values. Appropriate property valuation could help achieve equitable taxation and increase in tax revenues which could therefore generate resources to provide goods and services to their constituents. Promote competency of practitioners at par with international best practices through the standards as basis in the development of the valuation course by enabling stronger linkages between the technical development aspects of valuation with the contents of the education curriculum, and aligning the requirements for new competencies and skills amongst valuation professionals resulting from the valuation reform with the development of the curriculum. Keep abreast with international valuation standards updates and trends. Sustain consistency and reliability of valuations and reporting. Help achieve the effective regulation of the valuation practice. Improve land use planning, policy development, and fiscal and financial governance to stimulate the land market and encourage investment flows.

 Valuation Reform Act  What is VRA? VRA stands for Valuation Reform Act –  a proposed legislation (Senate Bill No. 3519 and House Bill No. 7094) seeking to reform the country´s real property valuation system that has constrained the economic development, reduced the opportunities for the poor, and discouraged sustainable management of land.

 Why is the reform necessary and urgent? Real property is the country´s most important resource and greatest financial asset. It is estimated that 50-75% of a nation´s wealth is contained in real estate, making it the biggest potential source of national income to fund social and economic programs. In the Philippines, its contribution to GNP has remained at a meager 6% in the past 10 years.

The real property valuation system is ineffective and inequitable. It does not provide landowners and buyers the ´true´ value of properties on which to make confident decisions for disposition, acquisition or investments. It is inequitable particularly in ensuring a fair sharing of the burden of taxation, and thus has contributed to the erosion of  public confidence in the system, in particular, and to national governance, in general.

There are inefficiencies and age old systemic problems that have affected the capacity of the real property market to effectively mobilize capital and investments from the private sector and the government as well.

 What are the major problems of real property valuation/appraisal in the country? a. Multiple valuation system and standards

At least 23 different government agencies undertake real property valuation for various purposes, e.g. the DENR for the acquisition, disposition and rental of public lands, the DPWH and National Power Corporation for expropriation of private property and acquisition of land for right-of-way, the GSIS, SSS, Land Bank and private banks for

mortgage lending, the Land Registration Authority for litigation and garnishment proceedings, registration and extraction fees, the BIR for the assessment of real-property-related national taxes, i.e. capital gains tax, documentary stamp tax, estate tax, etc., the DAR for compensation of land covered by the comprehensive agrarian reform  program, the COA for government real proper ty transactions, the local government units (LGUs) for the assessment of real property tax, etc.

Each of these agencies has its own system and standards for real property valuation resulting in as many different values for the same piece of property. Individual and institutional appraisers also have their own valuation systems which are used for estate planning and development, mortgage foreclosures, financial reporting and accounting, investment choices for fund management, etc.

The multiplicity of valuation for a single property has perennially led to lengthy court litigations that delay the implementation of vital infrastructure projects that would have benefited the poor, and saddled the taxpayers with multiplied costs for these projects.

b. Wide disparities in the valuation of the same properties.

The varied standards being used by each agency in valuing real properties has resulted in wide disparities in the valuation of the same property among government agencies, and between the government valuation vis-á-vis that of  private sector. The Schedule of Market Values (SMV) developed and adopted by LGUs as basis for the assessment of real property tax is from 13-94% lower than the zonal values used by the BIR for the assessment of national taxes, e.g. capital gains tax, documentary stamp tax, estate taxes, etc. These zonal values, on the other hand, are from 5 –  930% lower than the valuation of the same property by private appraisers. In urban areas, the SMV is 1877,474% lower than the market value established by the private appraisers.

The chaotic situation has made real property valuation conducive to litigation and even corruption. It also creates confusion as to whether one is getting the correct price for the sale of a property and whether one is paying the correct taxes for their properties vis-á-vis the other property-owners.

c. Rampant and widespread undervaluation of real property/overvaluation for special cases

Undervaluation of real property appears to be standard operating practice, particularly where government is receiver of payment, as in valuation for tax purposes. There is also overvaluation when government is payer for the property, as in expropriation, right of way cases etc., causing huge financial losses for the government in the form of foregone revenues and unnecessary expenditures. The financially-starved LGUs, which primary source of local income is real  property tax, derive on the average only 12% from real propert y tax due to reported undervaluation of real  properties, which has made them largely dependent on national government transfers, notably the IRA. Real  property related revenues are the most stable and progressive source of local income.

d. Rampant non-compliance with legal requirement for the general revision of Schedule of Market Values (SMV)

The Local Government Code (LGC) requires LGUs to revise their SMV every three years to reflect the changes in the market as to the current values of the real properties, and reclassification of real properties, e.g., from agricultural to commercial, resulting from developments in the community. Since 1994, when the first general

revision was undertaken, percentage of LGUs complying with this rule has been progressively declining through the years. In the four mandated general revisions from 1994-2003, the number of cities that complied dwindled from 95% in 1994 to 17% in 2003. For the same period, compliance by provinces went down from 83% to 21%. Some LGUs went through the process of reviewing their SMVs but these were not approved.

The general revision of the SMVs on a regular basis is the best way to regulate the valuation process, which is vital to maintaining equity and uniformity in the base record. As the basis of assessing taxes, an outdated SMV results in the inequitable sharing of the tax burden. With the SMVs remaining unrevised for many years, the LGUs are deprived of huge local income from the biggest, most reliable, and progressive source.

e. Lack of competent, qualified appraisers and assessors particularly in the government sector

Studies indicate that in the Philippines there are only four appraisers or valuers per million population  –  a low ratio compared to international standards. Appraisers and assessors also generally do not possess the required qualifications, i.e., education training to perform the job. This is due to the generalist orientation of the civil service qualification standards for this highly technical position, the incursion of political considerations in the appointment  process, the absence of an academic course tailored fit for the duties and responsibilities of t he position as well as an organized program of continuing training and development

f. Outdated and distorted database

Real property transaction data on sales and rentals (market information) are important to guide the appraisal system, and to develop public and business awareness of trends in the property market on which to make informed investments. Up to date, comprehensive real estate transaction data also promote transparency in the valuation  process.

Presently, there is no complete, updated and accurate collection and recording of real property transactions as required by law. An estimated 60% of transactions in the land market is informal, keeping appraisers and assessors with little information on property which is so vital in the appraisal of the market value to support the revision of the Schedule of Market Values (SMV). There is also inaccurate, underreporting of sales prices in the official documents.

Real property sales transactions data are dispersed among various groups and individuals, namely the assessors, the Registry of Deeds (RD), the BIR, the banks, notaries public, developers, brokers, agents, etc. This serves as an obstacle to the development of an efficient and equitable property market.

g. Politicization of the technical function of valuation

Valuation is a highly technical function requiring the application of various disciplines-law, economics, finance, marketing, engineering, environment, etc. which should be performed by valuers who are highly trained in the valuation discipline and who do their jobs objectively and professionally. It is separate and distinct from assessment and tax administration-two purely political functions, which are in the realm of decisions by the elected local officials and policy makers.

At the LGU level, these disparate functions are often comingled in application, removing the vaunted independence required in the valuation process and blurring it with assessment and tax policy, thus rendering an inequitable and inefficient system. While some LGUs are able to review and revise their SMVs these have not been adopted again due to the political considerations. How does VRA address these problems?

The bill will undertake the following reforms: 

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Establish valuation standards and guidelines for real property valuation in the country benchmarked with international standards, principles and concepts;  Adopt market value as the s ingle valuation base for appraising real property by all government agencies and for the assessment of real property related taxes; Harmonize valuation systems and coordinate valuation functions of the central and local governments; Separate the technical function of appraisal/valuation from the political function of tax policy and tax administration, and improve the accountability and integrity of the valuation system; Ensure reliable and accessible database on real property transactions; Depoliticize and strengthen the valuation process by enabling the DOF to effectively perform a regulatory function over local government assessors and improve the accountability for valuation by providing licensure and residency requirements in the appointment of assessors.

Redrafted VRA Bill for the 15th Congress

Redrafting the Valuation Reform Act (VRA) bill marked the harmonization of the valuation reforms, featured under the Second Land Administration and Management Project (LAMP2), with the Aquino administration´s policy priorities. Guided by the current administration´s objective to streamline the Philippine bureaucracy coupled with fiscal austerity measures, the redrafted VRA now strengthens and reorganizes the Bureau of Local Government Finance (BLGF), instead of the creating a separate government agency - the National Valuation Authority. The proposal maximizes the existing institutional and organizational capacity of the BLGF while minimizing additional budgetary requirements to implement the VRA when enacted as law of the land. While redrafted, the VRA kept core valuation reforms as follows: 

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 Adopt market value as the single valuation base for appraising real property by all government agencies, and adopt the SMV as basis for assessment of all local and national real property-related taxes;  Adopt internationally accepted valuation standards and best practices; Enhance the technical process of appraisal, and the procedures governing the preparation of the SMV and the general revision of property assessments; and Develop and maintain a comprehensive and up-to-date electronic database of real property transactions and prices of materials for buildings, machinery, and other structures, as well as a compliance monitoring system, as tool for LGU valuations.

The redrafted bill is filed by Congressmen Mel Senen S. Sarmiento (HB No. 4400) and Rufus B. Rodriguez (HB No. 4687) in the House of Representatives. Senator Panfilo M. Lacson, on the other hand, filed the VRA in the Senate as SB No. 2787.

Tax Policy Reform Program TAX POLICY STUDIES To support the valuation reform program, the National Tax Research Center (NTRC), the research arm of the DOF, provides the relevant policy studies and research in the area of real property taxation. These studies seek to develop policy options and complementary approaches at national and local levels to sustain the positive impact of valuation reform. In particular, they are developed to help LGUs improve real property tax administration and collection through effective target-setting, thereby broadening the tax base and increase overall revenues.

Completed Tax Policy Studies Review of National and Local Land-Related Taxes and Fees

The study evaluates the land-related taxes and fees collected by national government agencies (NGAs) and local government units (LGUs) based on generally accepted taxation principles, viz: efficiency, equity, administrative simplicity, transparency, adequacy and stability. The review covers the following taxes and fees: 1. 2. 3.

1.National land-related taxes: Capital Gains Tax (CGT); Documentary Stamp Tax (DST); Estate Tax; Donor´s Tax; and Value Added Tax (VAT) 1.Local land-related taxes: Real Property Tax (RPT); Special Education Fund (SEF) tax; Tax on Transfer of Real Property Ownership; Special Levy and Idle Land Tax 1.Fees imposed by NGAs on land transactions and registration, principally the Department of Environment and Natural Resources (DENR) and the Land Registration Authority/Register of Deeds (LRA/ROD).

The study generally finds the above-cited taxes and fees poor in terms of the evaluation criteria. In this regard, tax policy reform options are recommended also taking into consideration the government�s revenue requirements and present fiscal situation.

Other On-Going Research Survey of Public Perceptions on Property-Related Taxes and Fees

The study aims to: 1. 2. 3.

Produce a documentation of public and professional perceptions on current and proposed levels of real propertyrelated taxes and fees which will form part of the overall taxes and fees policy study; Assess the level of public awareness and attitude regarding national and local property-related taxes and fees, policies and land registration processes; and Establish how the taxpayer weighs the benefits stemming from the program of public services against the cost of tax and fee liabilities and compliance to the required administrative processes.

Selected as study areas were the cities of Marikina, Naga and Iloilo as well as Pili Municipality of Camarines Sur. The study entailed secondary data gathering at the national and local levels, conduct of perception survey among people who have made recent land transactions, and holding of focus group discussions (FGDs) among real property developers and brokers.

 Among the significant findings of the survey are: 1.

2. 3. 4. 5. 6.

All respondents recognized the importance of formal land registration. A majority of the respondents said that the pre-registration requirement of paying back taxes did not discourage them from formally registering their land transactions. Among the respondents, there was a high level of awareness of the real property tax (98%); documentary stamp tax ((%%); capital gains tax (93%); and tax on transfer of real property ownership (88%). Many respondents paid taxes to comply with government rules (70%); formalize their ownership (67%); and fulfill their responsibility as owner (58%). A majority of the survey respondents and FGD participants were not clear on which sectors the different real property-related taxes went. Most respondents said that the fees and charges of the DAR, LMB/LMS, NAMRIA, and ROD were reasonable. However, 50% of the respondents found transacting with said agencies difficult. Respondents in both the survey and FGDs regarded as acceptable the tax reform options proposed in the Tax Policy Study.

Results of the survey and FGDs emphasize, among others, the need for a reform package consisting of: 1. 2.

Tax bases, rates and assessment systems that are fair, simple to understand, within the taxpayers ability to pay, and remunerative. A reformed public expenditure system characterized by a transparent budget process and public service effectiveness and efficiency.

Property Tax Naga City: CY 2007

Compliance

and

Distributional

Impact

Study

on

The study aims to: 1. 2. 3.

Assess compliance in the payment of property taxes in Naga City to serve as baseline for the introduction of property tax reforms; Examine the extent to which the different classes and strata of properties are contributing to property tax collection; and Recommend measures to improve property tax compliance and introduce greater equity in the distribution of the tax burden among taxpayers.

Overall, 63% of the potential revenue from the four major property classes in CY 2007 was collected. In detail, 56% was generated from residential properties; 72% from commercial properties; 69% from industrial; and 43% from agricultural properties. By property classification, the bulk of potential real property tax collectible came from residential properties (49%), followed by commercial properties (47%), agricultural (2.5%), and industrial (1.5%). By stratum of land value, low-end (85%) and medium-end (78%) commercial lands recorded the highest compliance ratios followed by medium-end (75%) and high-end (68%) industrial lands. By level of building values, the most compliant are commercial buildings at the medium and high-end strata (79% and 77%, respectively). The relatively low compliance ratio of the city can be attributed to the following: 1. 2. 3.

Existence of poor urban housing grantees who cannot afford to pay their property tax obligations; Difficulty in collecting tax from GOCC-owned properties; and Lack of clear policy on the taxability of certain properties like road lots and those owned by the Catholic Church.

 Administrative measures are recommended to aid the City government in its campaign to improve tax compliance of property taxpayers.

Framework for the  Impact Study for an LGU

Conduct

of

a

Property

Tax

Compliance

and

Distributional

This paper presents the framework for the conduct of a property tax compliance and distributional impact study of an LGU to

guide LGUs who may be interested to conduct such study to introduce reforms to their property taxation policy and

administration. Among others, if describes the objective and scope of the study, the methodology and date requirements,

analytical framework, and benefits of the study.

 Valuation Education Program  About the Program To sustain the professionalization program of the Government for real estate service practitioners, particularly the appraisers and LGU assessors, the Project is supporting the institutionalization of real property valuation as an important field of study or discipline in the country.

As such, the LAMP2 Property Valuation and Taxation Component is working on the establishment of appropriate higher education upgrade program on real property valuation through (1) partnerships with local university & collaboration with international academic institution, (2) courseware and local university faculty development, and (3) establishment of scholarship program to start-up the newly developed courses.

The Philippine Situation The Philippines´ land and property sector has an unrealized potential to become a major engine of economic development. It has been estimated that 50-75% of the country´s wealth is in the form of real estate, yet the sector has contributed a mere 7.3% to the GNP in the past 10 years (DOF-BLGF 2008). Many issues plague the sector, including the lack of generally applied standards of practice, resulting in large disparities in the valuation of the same properties. In government, widespread undervaluation of property for tax purposes results in loss of revenue. In the private sector, unreliable valuations lead to ill-informed decisions on investments in real property.

The weaknesses of valuation practice in the Philippines stem from (1) inadequate efforts to regulate the practice and upgrade its standards, and (2) the lack of competent and qualified valuers. The Philippine Government is attempting to address these two issues by legislative efforts such as the passage of the Real Estate Service Act (RESA) last June 29, 2009 and ongoing work to pass the Valuation Reform Act (VRA). In particular, the VRA calls for the adoption of standards of practice based on the International Valuation Standards, which shall be known as the Philippine Valuation Standards (1ST Edition) –  Adoption of the IVSC Valuation Standards Under Philippine Setting.

The adoption of international standards of practice needs to be matched with efforts to improve the competency of the current corps of valuers. In the Philippines, valuers in the private sector are employed mostly by banks while valuers in government work mostly as assessors in local government units. Except for a few who have the opportunity to train abroad, most valuers learn valuation on the job and through the self-study of manuals. Yet to  become competent, an aspiring valuer requires a multidisciplinary education that draws fro m economics, finance,  building construction and law, among others. Thus, in advanced countries and in some ASEAN countries, property valuation is a recognized field of study with dedicated baccalaureate and graduate programs. In contrast, the Philippines does not have a formal education program in land valuation. Typically, valuers learn procedures and  practices handed down by their supervisors. If they wish to become licensed valuers, t hey would attend a review seminar consisting of 20-24 hours of instruction in preparation for the licensure examination. Thus, the training of Philippine valuers is inadequate. Clearly, the lack of a formal education program in valuation is the main reason why the country lacks competent valuers.

While the need for valuation education can be seen from the context of enabling the property sector to realize its  potential, it has also become a need that is actually felt by practitioners, gi ven impending changes signaled by recent legislative efforts.

 Approach to Valuation Education A phased approach has been considered by the Project in developing new qualifications for property valuation, which will commence with non-degree/certificate courses to upgrade the existing professionals and provide them with learning opportunities, gradually progressing to a graduate diploma program, to a master´s degree program, and eventually to a full bachelor´s degree program.

To satisfy the need and the demand for CPE on valuation, the Continuing Professional Education Program on Land Valuation (CPEPLV) at the UPOU is established. Targeted mostly at professionals who will most likely study parttime, the program will be offered in the distance learning mode because of the flexibility and reach of this mode. The UPOU is the ideal institution to offer this program given its track record in distance learning.

LAMP2 The 2nd Land Administration and Management Project (LAMP2) is an inter-agency project of the Department of Environment and Natural Resources (DENR) and the Department of Finance (DOF), with technical assistance from the  Australian Agency for International Development (AusAID) and funding support from the World Bank. The DOF, through the Bureau of Local Government Finance (BLGF) and the National Tax Research Center (NTRC), is pursuing real property valuation and taxation reforms under Component 4 of LAMP2