Bureau of Local Government Finance Opinion

September 7, 2011 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION The Honorable Hermilando I. Mandanas Chairman, Committee on Ways and Means House of Representatives Batasan Complex, Batasan Road Constitution Hills, Diliman Quezon City, Metro Manila Sir : This refers to your letter dated August 31, 2011, requesting for observations and comments on the following issues relating to the correct amount of the Internal Revenue Allotment (IRA) for Local Government Units (LGUs) which is presently being discussed: 1. "Can LGUs automatically include the entire IRA, as computed in accordance with Sections 284, 285 and 286 of the Local Government Code (LGC), as statutory provision in their respective local budgets as source of revenues without any need for any document from the Department of Budget and Management (DBM), or any National Government agency?" 2. "In the computation of the legally mandated base for the IRA in accordance with Section 284 of the LGC, should the national internal revenue taxes collected by the Bureau of Customs on imported goods be included, considering Secs. 12 and 14 of the National Internal Revenue Code (NIRC)?" TDcHCa 3. "And considering Sec. 283 of the NIRC, Sec. 286 of the LGC and the Supreme Court decision in the 2004 case of the Province of Batangas vs. Executive Secretary Alberto Romulo, can LGUs allot the appropriated IRA to be obligated for expenditures and capital outlays after complying with R.A. No. 9184, and other applicable laws and regulations?" Firstly, we welcome this initiative relating to the correct amount of IRA for LGUs as we comprehend their predicament on lack of funds, aware of the magnitude and complexity of demands and services that they should respond to within their respective jurisdictions primarily owing to the devolved functions. Basically, the issues raised pertain to the determination of the IRA level and local budgeting and expenditures which are within the authority of BIR and DBM. However, in view that same issues directly impact on LGU revenues and local treasury operations which are within our mandate, we deem it appropriate to submit our comments and observations, as follows: AEIcSa Automatic inclusion of the IRA in the local budget without need of any document from the DBM or any National Government Agency The intervention by DBM in the local budget process is in pursuance of its mandate under Section 354 of R. A. No. 71 60, or the Loc al Government Code of 19 91. IRA as an essential component of the local budget is determined by DBM per LGU level on the basis of the certification issued by the Bureau of Internal Revenue (BIR) on the actual national internal revenue taxes collected for a particular period. Thereafter, DBM notifies the LGUs and prescribes the general guidelines in the preparation of local budgets. The guidelines prescribed by DBM embrace the procedures, schedules and forms to be followed, complied with and accomplished, as well as the considerations that has to be taken into account; use of the IRA; special shares of LGUs; and provision for technical assistance. All these are necessary process and considerations in the preparation of local budget. Inclusion of the collections of the Bureau of Customs in the computation of actual national internal revenue collections to determine the IRA level Section 21 of the National Internal Revenue Code (NIRC) as last amended by R.A. No. 9504, provides national internal revenue to include the following taxes, fees and charges: a) Income Tax; b) Estate and Donor's Taxes; c) Value-Added Tax; d) Other Percentage Taxes; e) Excise Taxes; f) Documentary Stamp Taxes; and g) Such other taxes as are or hereafter may be imposed and collected by the BIR. Black's Law Dictionary defines internal revenue as governmental revenues from internal sources by way of taxes as contrasted with revenues from customs and foreign sources. CAaEDH Significantly, national internal revenue as contemplated in the computation of IRA shares of LGUs refers only to impositions on domestically sourced goods and services which are collected by the BIR. Accordingly, tariff, customs duties, and excise taxes collected by the Bureau of Customs imposed on importations or internationally sourced goods are not included in the computation of national internal revenue to determine the IRA level of LGUs. Allotment of the appropriated IRA to be obligated for expenditures and capital outlays Anchored on the provisions of Sections 326 and 354 of R. A. No. 71 60, LGUs can allot the appropriated IRA to be obligated for expenditures and capital outlays provided the applicable provisions of R. A. No. 91 84, or the Governm ent Procurement A ct are properly observed and complied with, and that such allotment is in accordance with the Updated Budget Operations Manual (UBOM) for LGUs, applicable DBM circulars and by virtue of a duly approved appropriation ordinance. Please take note that the Allotment System as budget control system is used to ensure that obligations incurred will not exceed authorizations under an appropriation ordinance. Under the Allotment System, obligations may be incurred as long as they are within the allotment ceiling even if the total amount of the obligation is not supported by cash in the bank at the time it is incurred. This provides flexibility in the implementation of local programs and projects. We hope that the foregoing comments and observations will provide relevant inputs in the on-going discussion on the matter. DTEScI Very truly yours, (SGD.) ATTY. FLOSIE F. FANLO-TAYAG (Deputy Executive Director) Officer-in-Charge