Increasing internal revenue allotments

PHILIPPINES - In Brief 12 Jul 2018 by Romeo Bernardo

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It seems that the Department of Budget and Management (DBM) was as surprised as anyone by the Supreme Court’s decision yesterday on a 5-year old case involving local government units’ (LGU) share of revenues collected by the national government. Under Philippine law, local governments are entitled to a 40% share of “national internal revenue taxes based on the collection of the third fiscal year preceding the current fiscal year”. From the start, i.e., when the Local Government Code was passed in 1991, the national government had interpreted “national internal revenue taxes” to mean taxes collected by the Bureau of Internal Revenue. Per news reports, the Supreme Court yesterday ruled that “national internal revenue taxes” include collections of the Bureau of Customs (BOC) as well.Based on the formula, our calculations show that the national government owes LGUs over P1.5 trillion for the latter’s 40% share of customs’ revenues over the almost 3 decades since the Local Government Code. The amount is equivalent to 9% of this year’s estimated GDP, clearly unaffordable. Considering that the amount represents intragovernmental transfer, we expect the national government to haggle the amount down at the same time restructuring it and pay over a long period of time. Hence, we do not expect a dramatic fiscal impact from this source at the macro level. The Supreme Court ruling will however mean that going forward, the national government will need to allot approximately 1% of GDP annually as additional revenue share of LGUs, an “expenditure” item that will translate into cutbacks elsewhere. While there are certain national government functions that should in principle be handle...