Real property valuation reform: Making things simpler and efficient

Time is money. It should be managed well because time spent on unnecessary processes is time that could have been used for more productive things. If you’re running a business, this might mean wasted opportunities to generate more income.

This is why it is important to implement more efficient and simplified processes that will not only save you time, but also cut losses incurred from tedious and unnecessary tasks.

This goes the same for businesses and governments alike– and this is exactly what the Philippine government is eyeing to do as it pushes for a reform in the country’s real property valuation system.

The Real Property Valuation Reform, which is the third package of the Comprehensive Tax Reform Program (CTRP) aims to promote the development of a just, equitable, and efficient real property valuation system in the country.

This will broaden the tax base used for property-related taxes of the national and local governments, which will lead to higher government revenue without increasing the existing tax rates or devising new tax impositions, according to the Department of Finance (DOF).

In a recent virtual forum organized by the Foundation for Economic Freedom (FEF), Bureau of Local Government Finance (BLGF) director Ma. Pamela Quizon said the reform can help address inefficiencies  in the current system such as overlapping valuations.

Quizon emphasized that there are currently 23 national government agencies requiring valuations of 1,715 local government units.

However, each agency is using its own systems and methodologies which is causing wide disparities between zonal values, market values and private appraisers’ values.

This leads to varying values for the same piece of property.

“A property may have as many values as there are valuers or valuing agencies,” Quizon said.

There also is no single agency responsible for ensuring that valuations or revaluations are completed in accordance to standards.

Lower real property taxes

Quizon said that the current inefficiencies in the system are also causing lower real property tax (RPT) collections by local government units.

“Before the local government code [was implemented in 1991]real property tax was really the lifeblood of the local government units, but when the LGC was implemented in 1991, we are now seeing a reversal of that trend,” Quizon said, noting the lower share of RPT in the revenue source of LGUs compared to business taxes.

“One possible reason for the decline could be an ineffective policy implementation on tax administration at the local level, low tax rate, broad exemptions, infrequent adjustments and undervaluation, which are among the issues that hopefully Package 3 will be able to address,” she added.

Outdated government valuations

Among the issues experienced in the current real property system is the outdated government valuations particularly through the schedule of market values (SMV).

The SMV refers to an approved schedule of unit base market values for different classes of real property in the LGU. This is used by the provincial, city or municipal assessors as basis for the appraisal and assessment of real properties in their respective assessment territorial jurisdictions for real property taxation purposes.

Under the reform, an updated SMV will be used as the basis for local and national land and property-related taxes.

Quizon reported that as of March 2019, only 45 percent of LGUs have updated SMVs. This means that there are 98 non-compliant cities and provinces.

“This is despite the fact that our local government units are mandated by law to conduct the updating of values and the revision once in every three years, under the local gov code,” Quizon said.

Outdated property values result in unrealized revenues and socio-economic benefits from delayed projects; conflicting land values which result in right of way (ROW) compensation problems; lengthy court litigations arising from valuation disputes; delayed projects; and cost overruns.

Benefits of the reform

As the reform seeks to implement a more efficient system, it will use a single valuation base, which will eliminate wide disparities caused by the overlapping valuations.

Quizon said this would lead to consistency in real property valuation as well as the predictability of valuation.

“The adoption of true market-based values for taxation purposes will increase revenues without necessarily adopting new tax measures,” Quizon said.

The reform could also lead to the increased capacity of the government to generate revenues from real property through the RPT, national government real property transfer taxes and other related taxes.

In addition, the reform may also reduce government costs particularly unnecessary expenses incurred due to conflicting appraisals which lead to court litigations, project delays and cost overruns.

Faster infrastructure implementation

As properties are essential in building infrastructure projects, the real property valuation reform is also seen to benefit the infrastructure development sector, according to  Transportation Undersecretary for Railways Timothy John Batan.

“If you want to build infrastructure, you need the land to build it on. If government does not own the land because of potentially lack of foresight in long term planning 30, 40 or maybe 50 years ago, then that means that the government has to buy the land. Now, when you are buying something, the price has to be determinable in order for the transaction to push through smoothly and to push through fast,” Batan said.

Batan said the disparities in values of a property has led to longer ROW negotiations, which had delayed the implementation of infrastructure projects.

He shared the cases of the LRT-1 Cavite Extension project and the MRT-7 project both of which experienced delays in construction mainly due to prolonged ROW negotiations.

For the LRT-1 Cavite Extension project, Batan said while the start of ROW acquisition began in 2007, civil works for the project only commenced in 2019 or 19 years after its first approval to start construction in 2000.

Similarly, the MRT-7 began its ROW acquisition in 2008, while commencement of works only started in 2016, 15 years after the proponent targeted to start construction.

Batan said the estimated financial loss due to valuation issues in the two railway projects amounted to P7.01 billion.

In addition, the estimated economic loss due to valuation issues in the two projects amounted to P31.34 billion.

Confidence in the land market and real estate industry

As the reform aims to implement uniform standards and efficient processes in the real property tax system, Quizon said she hopes that this will instill more confidence in the country’s real estate industry.

“We hope this will inspire investors and public confidence because the valuation is done professionally, in accordance with the standards,” Quizon said.