New Law on Real Property Valuation May Impact Lease Agreements

20 June 2024

Republic Act No. 12001 has been signed into law by President Ferdinand Marcos Jr. This new law is called the Real Property Valuation and Assessment Reform Act (RPVARA). Simply put, the RPVARA seeks to provide a uniform valuation for real properties in the country. It also creates the Real Property Information System, which shall maintain a database of the sale, exchange, lease, mortgage, donation, transfer, and all other real property transactions and declarations, as well as reorganizes the Real Property Valuation Service under the Bureau of Local Government Finance under the Department of Finance (DOF).

RPT as a Significant Source of Income for LGUs

It is important to note that local government units (LGUs) —the provinces, cities, and municipalities — have several sources of income to fund their programs and budgets. Among the main sources of income of LGUs are the Internal Revenue Allotment (IRA), Real Property Taxes (RPT), and Business Tax collections.

For 2019, revenues of provinces consisted of the IRA at 70 percent, RPT collections at percent, and business tax collections at 2 percent. For the cities, the IRA comprised 39 percent of its revenues, RPT collections at 15 percent, and business tax collections at 29 percent. And, for municipalities, the IRA accounted for 73 percent, RPT, and business tax collections at 4 percent and 6 percent, respectively.

The DOF has noted that local sources of revenues (RPT, business taxes, and others) of LGUs as well as collection have been on a downward trend. This leaves LGUs having to rely more on their IRA from the national government.

Where Do RPT Payments Go?

The Local Government Code of 1991 (Sec. 271) provides that the proceeds of the RPT payments are distributed as follows:

  • For RPT payments to provinces, 35 percent to the province, 40 percent to the municipality where the property is located, and 25 percent to the barangay where the property is located.
  • For RPT payments to cities, 70 percent shall go to the city and 30 percent to the barangays where half will go to the barangay where the property is located and the other half to the other component barangays in the city.
  • For municipalities within the Metropolitan Manila Area, 35 percent shall go to the Metropolitan Manila Authority, 35 percent to the municipality where the property is located, 30 percent to the component barangays where half will go to the barangay where the property is located, and the remaining half to the other component barangays in the municipality.

Why the Need for RPVARA

According to the DOF, 38 percent of the schedule of zonal values by the BIR and 60 percent of the Schedule of Market Values (SMV) used by LGUs for the RPT are outdated. In particular, 137 out of 227 LGUs did not revise their property values in the last three years. As of 2024, about 97 cities and 40 provinces were found to be non-compliant with the requirement to revalue properties once every three years.

This is why the government has made the passage of the RPVARA one of its priority legislations. Some reasons given are to address multiple and overlapping valuations from various agencies, allow property owners to unlock the value of their real property, hasten automation with the creation of the Real Property Information System, enhance efficiency of tax collection, promote transparency and enhance investor confidence.

Why It Matters – Practical Effect

Generally, there are two sets of valuation being used – the zonal value maintained by the Bureau of Internal Revenue (BIR) and the SMV of the LGUs. The zonal values are published by the BIR to determine tax assessments for real property transactions and the SMVs are from the LGUs, which they use for the market values of properties in tax declarations.

To give a practical example, let’s say there is a property owner with a 300-square-meter residential land located on Santol St., Brgy. Santol, Quezon City. This property is assigned a zonal value of P25,500 per square meter based on the zonal value of the BIR as of April 1, 2016. As of February 17, 2024 BIR Zonal Value Schedule, this value has been adjusted to P44,000 per square meter or almost double its value in 2016.

This means that based on BIR zonal values in 2016, the property’s value is P7,650,000. This same property will be covered by a tax declaration issued by Quezon City local government with its market value based on SMV. In 2016, Quezon City Council proposed an increase in land values for RPT computation; for this same property on Santol St., Brgy. Santol in Quezon City, market value was proposed to be increased to P12,000 per square meter. Therefore, Quezon City will value this property at P3,600,000 for RPT purposes.

To compute RPT due by this property owner, Quezon City will apply an assessment level for residential land (a maximum of 20 percent) then multiply that by city’s real property tax rate. On selling this property, BIR zonal value of P7,650,000 will be used as basis for capital gains and documentary stamp taxes.

Will Real Property Taxes Increase?

There have been questions whether RPVARA’s uniform market values will increase Real Property Tax payments. The answer is it’s hard to see how RPT payments won’t increase.

The RPVARA provides that new updated SMVs will be used for real property transactions involving national and local governments. The law specifically states these values shall be basis for revising property classification, assessment levels and tax rates by local assessors of LGUs; basis for BIR gross selling price in real property transactions; and for real property appraisals in all government agencies including government-owned corporations.

Considering existing BIR zonal values are generally higher than LGU SMVs and real estate price index is positive, it’s doubtful revised SMVs from RPVARA implementation will be lower than existing BIR zonal values.

While there’s more than even chance Real Property Taxes will increase, this may not be a foregone conclusion. RPVARA caps any increase in real property taxes at 6 percent for its first year. Proponents argue LGUs may temper higher real property taxes by managing assessment levels and tax rates considering higher taxes’ impact on constituents.

Local assessors must update their Schedule of Market Values within two years from RPVARA effectivity and conduct general revision every three years thereafter. During this time real property values may decrease resulting in lower SMVs.

Should there be an increase in real property tax collections, this could be beneficial if LGUs use additional funds wisely for constituents’ benefit.

(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco Siao Bello & Associates Law Offices, an Arbitrator of Construction Industry Arbitration Commission of Philippines and teaches law at De La Salle University Tañada-Diokno School of Law. He may be contacted at [email protected]. Views expressed in this article belong solely to author.)

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