What is internal revenue allotment? (2023 Review)
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What is internal revenue allotment?
The Internal Revenue Allotment (IRA) is the share of national government revenues that a local government unit (LGU) receives. Each province, independent city, component city, municipality, and barangay is allotted its own budget.
The allotment, in large part, is determined by the type of government and a formula based on land area and population.
The formula for allotment distribution is established in Section 284 of the Local Government Code of the Philippines (RA 7160).
Local governments receive all or nearly all of their revenue from their IRA. However, some have other local revenue sources, such as property taxes and government fees. The IRA typically accounts for 90% of total municipal revenues.
A city’s IRA ranges from 50% to 70% of its total budget because they have more local revenue sources.
Each local government unit receives funding for their Sangguniang Kabataan (SK), or youth council.
The IRA is automatically distributed to each local government unit. It may not be withheld by the national government for any reason. But for the exception and in the extreme case of an:
“unmanageable public sector deficit,” in which case the allotment may be adjusted but must not be set to “be less than thirty percent (30%) of national internal revenue tax collection in the third fiscal year preceding the current fiscal year.”
History of IRA
One of the key features of the Philippine Constitution of 1987 is its emphasis on the decentralization of government and local autonomy.
Local autonomy has two aspects: administrative and fiscal. Fiscal autonomy means that local governments have the authority to generate their own sources of revenue in addition to their equitable share of national taxes levied by the National Government, as well as the authority to allocate their resources in accordance with their own priorities. Such autonomy is as necessary to the viability of decentralization policy as the other.
In order to ensure the fiscal autonomy of the LGUs by specifically having a share in the national internal revenue taxes, Congress enacted the Local Government Code (LGC). This is in order to implement the constitutional mandate for decentralization and local autonomy.
The 1987 Constitution, Article X Sec. 6 stipulates that “Local Government Units shall have a just share as determined by law in the national taxes which shall be automatically released to them.” This is to ensure that subsidiarity is sustained (i.e., responsibilities/concerns are handled by the smallest, lowest, or least centralized competent authority) and that local fiscal autonomy is preserved.
As the basis for intergovernmental transfer, the Local Government Code (Sec. 284) assigns 40% of national internal revenues to LGUs based on the collection of taxes of the third fiscal year preceding the current. Internal Revenue Allotment (IRA) is distributed as follows: provinces (23%), cities (23%), municipalities (34%) and barangays (20%). Individual shares of LGUs shall be determined based on population (50%), land area 25%, and equal sharing 25%.
The internal revenue allotment (IRA) is based on the actual collections of National Internal Revenue Taxes (NIRTs) as certified by the Bureau of Internal Revenue (BIR).
The main intergovernmental fiscal transfer in the Philippines is the internal revenue allotment (IRA). Check here for more info.
It is the primary source of operating revenue for local government units (LGUs). It allows them to provide basic goods and services while also financing other development activities.
LGUs in the Philippines, like other subnational governments in developing countries, have been clamoring for more fiscal transfers to address some of the challenges they have been facing. These include a lack of funds to carry out the functions delegated to them, a hazy division of power and authority, and large disparities in financial resources among LGUs.
The Mandanas-Garcia ruling, which takes effect in 2022, will result in larger LGU coffers, but it will also present varying challenges to both national and local governments.
Strengthening the internal revenue allotment system toward greater equity in the Philippines
Decentralization has been the intrinsic policy of the Philippine government since the institution of the Local Government Code of 1991 or Republic Act 7160. One important component of decentralization is the internal revenue allotment (IRA), which is a transfer of share in revenues from the central national government to the local government units (LGUs).
The internal revenue allotment, or IRA, is an important aspect of the Philippine government’s intergovernmental relations.
Many local government units (LGUs) rely on the transfer of up to 98% of their budget because of the IRA. The fact that the IRA is the primary source of funding for many LGUs emphasizes its significance.
Simultaneously, the central government has mandated that certain mandatory expenditures be funded through the IRA. On the assumption that the central government knows better where the IRA should be spent, the mandatory expenditures must contribute to the country’s collective and overall societal growth.
Here is the summary of the IRA implementation:
- Data show that economic growth has not occurred in the intended locations.
- The provinces’ reliance on the IRA remains significant.
- Poverty rates are comparable in provinces with high IRA reliance.
- As a result, while the Philippines has experienced general economic growth, it has not spread as widely as desired.
- Provincial governments continue to have insufficient resources, owing in part to their own limited administrative capacities or limited resources, as well as the limited resources available to them or the over-assigned expenditure responsibilities they must shoulder.
From IRA to NTA
Under Section 284 of the Republic Act (RA) No. 7160 or the Local Government Code (LGC) of 1991, LGUs are entitled to a forty percent (40%) share of the national internal revenue taxes, otherwise known as the IRA.
The manner by which the IRA was determined was challenged in 2013 by then-Representatives Hermilando Mandanas and Enrique Garcia Jr., who argued that the exclusion of certain taxes collected by the Bureau of Customs (BOC) in the IRA computation caused the diminution of the base for determining the just share of LGUs.
Known as the Mandanas-Garcia ruling, the Supreme Court (SC) held with finality on 10 April 2019 that all collections of national taxes, except those accruing to special purpose funds and special allotments for the utilization and development of the national wealth, should be included in the computation of the base of the just share of LGUs.
Following the Mandanas-Garcia ruling, the IRA is renamed as the national tax allocation (NTA).
The NTA comprises 91 percent of the PhP1.049 trillion Allocation to LGUs (ALGUS) in the 2022 national budget. The remaining nine percent (PhP90.37 billion) of the ALGUS is distributed among the Local Government Support Fund, the Special Shares of LGUs in the proceeds of National Taxes, the Bangsamoro Autonomous Region in Muslim Mindanao, and the Metropolitan Manila Development Authority, among others (Figure 1).
Prior to the SC decision, the IRA accounts for merely 31.20 percent of total national taxes. With the correction made by the SC, LGUs are set to receive in full their mandated 40 percent NTA share going forward.
In summary, we have seen that the IRA and NTA policy is working fine in the State of the Philippines. But there is room for improvement in implementation and management. As we have seen, while the Philippines has experienced general economic growth, it has not spread as widely as desired.
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