Key Topics in Local Government Law
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3. Powers and Functions of LGUs
Title V, Book I of RA 7160
LGUs have three basic powers: police power, the power of eminent domain, and the power of taxation. These powers allow LGUs to regulate local affairs, acquire property for public use, and impose taxes within their jurisdiction.
City of Manila v. Laguio, G.R. No. 118127 (2005)
The case involved the exercise of police power by the City of Manila to close down certain establishments for alleged violations of city ordinances. The owners of the establishments claimed that the closure was illegal.
The Court upheld the City of Manila's exercise of police power, emphasizing that LGUs have the authority to enforce local regulations to protect public health, safety, and morals.
Province of North Cotabato v. Government of the Republic of the Philippines Peace Panel, G.R. No. 183591 (2008)
This case involved the controversial Memorandum of Agreement on Ancestral Domain (MOA-AD) between the Philippine government and the Moro Islamic Liberation Front (MILF), which aimed to establish a new political entity that would affect LGUs in Mindanao.
The Supreme Court ruled that the MOA-AD was unconstitutional, as it encroached on the powers of LGUs and violated the principle of local autonomy.
4. Local Legislation
Title I, Book II of RA 7160
LGUs are empowered to enact local ordinances that are in accordance with national laws. These ordinances have the force of law within the territorial jurisdiction of the LGU and cover matters such as local taxes, public services, and zoning regulations.
Tano v. Socrates, G.R. No. 110249 (1997)
This case challenged a Palawan provincial ordinance that banned certain fishing methods. The petitioners argued that the ordinance violated their rights to engage in lawful fishing activities.
The Supreme Court upheld the ordinance, affirming the power of LGUs to enact regulations that promote the general welfare within their jurisdiction.
5. Local Government Finance and Taxation
Title III, Book II of RA 7160
LGUs are empowered to generate their own revenue through local taxation. The Local Government Code outlines the types of taxes that LGUs can impose, including real property taxes, business taxes, and franchise taxes. LGUs also receive their share of national taxes through the IRA.
City of Makati v. Hon. Judge de Guzman, G.R. No. 157199 (2006)
The case involved a dispute over the collection of business taxes by the City of Makati. The petitioners claimed that the taxes imposed were excessive and violated national law.
The Supreme Court ruled in favor of the City of Makati, holding that LGUs have broad discretion in determining the rates of local taxes, provided that these taxes are reasonable and comply with the law.​
Creation & Structure
Local Government Law addresses the organization, powers, functions, and responsibilities of local government units (LGUs) under the Constitution and the Local Government Code of 1991 (Republic Act No. 7160).
It provides for the decentralization of power from the national government to local governments and ensures local autonomy in governance.
Creation of Local Government Units
LGUs are created under the Local Government Code. According to Section 6 of Article X of the 1987 Constitution, Congress has the power to create, divide, merge, abolish, or substantially alter the boundaries of LGUs based on criteria established in the Local Government Code.
Section 6, RA 7160 specifies that an LGU may only be created, divided, merged, or abolished upon the approval of a majority of the votes cast in a plebiscite conducted in the affected area, as provided by law. The same provision outlines the necessary qualifications for a locality to be established as a new LGU, which includes income, population, and land area requirements.
Section 7 of the Local Government Code mandates that the criteria for the creation of LGUs must ensure that the new unit is financially viable and capable of providing services to its constituents.
Structure of Local Government Units
Under Article X, Section 1 of the Constitution and Section 25 of the Local Government Code, the political subdivisions of the Philippines are divided into provinces, cities, municipalities, and barangays. Each of these units operates autonomously with locally elected officials.
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1. Province: The province serves as the largest territorial and political subdivision. It is composed of component cities and municipalities and is headed by a governor as the chief executive (RA 7160, Sec. 463). The Sangguniang Panlalawigan serves as the legislative body.
2. City: Cities are classified into highly urbanized cities, independent component cities, and component cities. They have greater autonomy than municipalities, particularly in fiscal matters, and are led by a mayor and a Sangguniang Panlungsod as the legislative body (RA 7160, Sec. 448-449).
3. Municipality: A municipality is a smaller political unit than a province or city and is composed of barangays. The chief executive is the mayor, while the Sangguniang Bayan serves as the legislative body (RA 7160, Sec. 440).
4. Barangay: The barangay is the smallest political subdivision and serves as the basic administrative unit (RA 7160, Sec. 384). It is headed by a Punong Barangay (Barangay Captain), and the Sangguniang Barangay serves as the legislative arm.
No local government unit shall be created, divided, merged, abolished, or its boundaries substantially altered, except in accordance with the criteria established in the Local Government Code and subject to approval by a majority of the votes cast in a plebiscite in the political units directly affected.
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Sinsuat, et al. v. Ebrahim, et al.
G.R. No.: 271741, August 20, 2024
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This case involves two consolidated petitions challenging the constitutionality of Bangsamoro Autonomy Act Nos. 53, 54, and 55, which created new municipalities within the Bangsamoro Autonomous Region in Muslim Mindanao (BARMM).
The petitioners, residents of the original municipalities, argued that the plebiscites to approve the creation of the new municipalities only allowed voters from the newly created areas to participate, excluding voters from the original municipalities. The petitioners contended that this limitation violated the 1987 Constitution and the Bangsamoro Organic Law, which require that all voters in the affected political units participate in plebiscites.
Issue:
Whether the plebiscites conducted under Bangsamoro Autonomy Act Nos. 53, 54, and 55, which limited participation to voters in the newly created municipalities, violated the Constitution and laws on local government unit creation.
Ruling:
The Supreme Court ruled in favor of the petitioners and declared Bangsamoro Autonomy Act Nos. 53, 54, and 55 unconstitutional. The Court found that limiting plebiscite participation to voters in the newly created municipalities disenfranchised voters in the original municipalities from exercising their right to participate in the creation of new local government units, violating Section 10, Article X of the 1987 Constitution and the relevant provisions of the Bangsamoro Organic Law (Republic Act No. 11054).
The Court emphasized that plebiscites should include all directly affected political units, not just those within the newly created local government units. It further underscored that local government creation should adhere to democratic principles, ensuring that the people affected by territorial changes have the right to vote on the matter.
Significance:
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The Supreme Court’s decision highlights that while the creation of new local government units (LGUs) within the BARMM is provided for in the Bangsamoro Organic Law, such creations must still adhere to national laws governing LGU creation, particularly the Local Government Code (Republic Act No. 7160). The Court noted that the plebiscite’s scope violated Section 10, Article X of the 1987 Constitution, which mandates that no local government unit shall be created, divided, merged, abolished, or its boundaries substantially altered, except in accordance with the criteria established in the Local Government Code and subject to approval by a majority of the votes cast in a plebiscite in the political units directly affected.
Disposition:
The Supreme Court declared Bangsamoro Autonomy Act Nos. 53, 54, and 55 unconstitutional, permanently enjoining the Commission on Elections (COMELEC) from conducting plebiscites under these laws. The Court held that the failure to include voters from the original municipalities violated the Constitution and the principle of self-governance. The ruling emphasizes the democratic process in the creation of local government units, ensuring that all affected voters are included in plebiscites.
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Substantial changes in LGU boundaries must be made in accordance with the criteria established in the Local Government Code (Republic Act No. 7160) and approved by a majority vote in a plebiscite in the political units directly affected.
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Municipality of Isabel v. Municipality of Merida
G.R. No.: 216092, December 9, 2020
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The Municipality of Isabel and the Municipality of Merida, both located in Leyte province, became involved in a boundary dispute. The Sangguniang Panlalawigan of Leyte originally adjudicated the dispute in favor of the Municipality of Merida. The Municipality of Isabel appealed the decision to the Regional Trial Court (RTC), which ruled in favor of Isabel. However, the Court of Appeals (CA) reversed the RTC decision, reinstating the ruling of the Sangguniang Panlalawigan in favor of Merida.
The central issue revolved around the proper demarcation of the boundary between the two municipalities. Merida presented evidence pointing to the old shoreward monument and the monument along the old Doldol Creek near an ancient Doldol tree as the true and accurate boundary line.
Issue:
Whether the Court of Appeals was correct in reinstating the decision of the Sangguniang Panlalawigan of Leyte, ruling in favor of the Municipality of Merida in the boundary dispute.
Ruling:
The Supreme Court ruled in favor of the Municipality of Merida and affirmed the Court of Appeals’ decision, which had reinstated the ruling of the Sangguniang Panlalawigan. The Court agreed that the evidence presented by Merida, particularly regarding the monuments and landmarks, more accurately reflected the true boundary line between the municipalities.
Key Points:
The Constitution and laws of the Philippines regulate the creation, division, and alteration of local government unit (LGU) boundaries. Article X, Section 10 of the 1987 Constitution requires that substantial changes in LGU boundaries be made in accordance with the criteria established in the Local Government Code (Republic Act No. 7160) and approved by a majority vote in a plebiscite in the political units directly affected.
The relevant provisions in the Local Government Code include Section 6, which authorizes the creation, division, or merger of LGUs, and Section 10, which requires a plebiscite for any boundary alteration.
The Court noted that the landmarks and historical evidence presented by Merida outweighed the evidence provided by Isabel. As a result, the boundary line marked by the old shoreward monument and the Doldol Creek monument near the ancient Doldol tree was upheld as the proper demarcation.
Disposition:
The Supreme Court upheld the decision of the Court of Appeals and the Sangguniang Panlalawigan of Leyte, ruling in favor of the Municipality of Merida. The Court emphasized the importance of proper historical evidence and monuments in boundary disputes and applied the constitutional and statutory requirements for alterations of local government unit boundaries.
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The creation and alteration of local government unit boundaries is a legislative function, subject to plebiscites when necessary.
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G.R. No.: 235316,December 1, 2021
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The City of Makati and the City of Taguig have long been embroiled in a territorial dispute over the Enlisted Men’s Barangays (Barangays Pembo, Comembo, Cembo, South Cembo, West Rembo, East Rembo, and Pitogo) and the entirety of Fort Andres Bonifacio. Makati claimed jurisdiction over these areas based on historical documents, census results, and certifications from government agencies such as the Commission on Elections (COMELEC) and the City Accountant.
On the other hand, Taguig presented evidence in the form of cadastral surveys, historical documents, and proclamations, asserting its jurisdiction over the disputed areas. Among the laws and documents presented were Presidential Proclamations that Taguig argued favored its claim.
Issue:
The main issue was which city had territorial jurisdiction over the disputed areas of Fort Andres Bonifacio and the Enlisted Men’s Barangays—Makati or Taguig.
Ruling:
The Supreme Court ruled in favor of the City of Taguig, reinstating the Regional Trial Court’s (RTC) decision that confirmed Taguig’s jurisdiction over the disputed areas. The Court found that the evidence presented by Taguig, including historical evidence and cadastral surveys, outweighed that of Makati.
Key Points:
1. Local Government Unit (LGU) Jurisdiction:
The Supreme Court underscored that territorial jurisdiction is an important aspect of local governance and autonomy. Under the Constitution and relevant laws, the creation and alteration of local government unit boundaries is a legislative function, subject to plebiscites when necessary.
2. Historical and Legal Basis:
The Court held that the historical cadastral surveys and Presidential Proclamations favoring Taguig provided strong legal and factual support for its claim over the disputed areas. Makati’s reliance on certifications from COMELEC and the City Accountant was insufficient to prove its jurisdiction.
3. Office of the Solicitor General (OSG) and Proclamations:
The Court noted that it could not rule on the constitutionality or validity of the Presidential Proclamations in question without the appearance of the Office of the Solicitor General. Nevertheless, the absence of this ruling did not affect the core issue of the boundary dispute.
4. Constitutional Framework:
The decision highlights the evolution of the constitutional framework governing local government units and their territorial boundaries. The Court traced how the power to create and define LGU boundaries shifted from being purely discretionary to being subject to public approval via plebiscite under current laws.
Disposition:
The Supreme Court ruled in favor of Taguig, affirming its territorial jurisdiction over Fort Andres Bonifacio and the Enlisted Men’s Barangays. The decision emphasized the importance of historical evidence and proper legal procedures in resolving territorial disputes between local government units. The ruling marked the conclusion of a long-standing legal battle between the two cities over these strategic areas.
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The creation of the Province of Dinagat Islands unconstitutional due to its failure to meet the population and land area requirements under the Local Government Code.
Navarro, et al. v. Ermita, et al.
G.R. No. 180050, May 12, 2010
This case concerns the constitutionality of Republic Act No. 9355, which created the Province of Dinagat Islands. The petitioners, led by Ruben E. Navarro, challenged the creation of the province, arguing that it did not meet the criteria set by the Local Government Code (LGC), particularly on the requirements for population and land area for the creation of a new province. According to Section 461 of the LGC, a province must have a minimum population of 250,000 and a land area of at least 2,000 square kilometers, unless the proposed province is composed of islands.
In 2006, the Commission on Elections (COMELEC) conducted a plebiscite, which resulted in the ratification of RA 9355. However, the petitioners contended that the Province of Dinagat Islands did not meet the requirements for population and land area under the LGC. The Supreme Court initially ruled in favor of the petitioners, declaring the creation of the province unconstitutional for failure to meet the statutory requirements.
Issue:
The central issue was whether Republic Act No. 9355 creating the Province of Dinagat Islands complied with the Local Government Code’s population and land area requirements.
Ruling:
The Supreme Court ruled that Republic Act No. 9355 was unconstitutional. It found that the Province of Dinagat Islands failed to meet the land area and population requirements under the Local Government Code. Specifically, the province had an area of only 802.12 square kilometers, which was far below the 2,000 square kilometer minimum required under Section 461 of the LGC. Furthermore, it did not meet the population requirement of 250,000, with only about 106,951 inhabitants according to the 2000 census.
Key Points:
1. Local Government Code Requirements:
The creation of a province requires compliance with the following under Section 461 of the LGC:
• Land Area: At least 2,000 square kilometers, unless composed of islands.
• Population: At least 250,000 inhabitants.
• Income: Must have sufficient income to provide for government facilities and services.
2. Non-compliance with Land Area and Population Requirements:
The Supreme Court found that the Province of Dinagat Islands did not meet the required land area of 2,000 square kilometers, as it only had 802.12 square kilometers. The province also did not meet the population requirement of 250,000 inhabitants, having only 106,951 according to the 2000 census.
3. Motions for Reconsideration Denied:
The petitioners filed motions for reconsideration, arguing that Dinagat Islands should be exempt from the requirements due to its nature as an island province. However, the Court ruled that the motions lacked merit and reiterated that the creation of a province must strictly comply with the Local Government Code requirements.
Disposition:
The Supreme Court upheld its earlier decision, declaring the creation of the Province of Dinagat Islands unconstitutional due to its failure to meet the population and land area requirements under the Local Government Code. The Court emphasized its duty to ensure that laws creating local government units adhere to constitutional and statutory limitations.
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Principle of Uniformity violated: Cityhood Laws violated the equal protection clause and the Local Government Code because they allowed certain municipalities to become cities without meeting the P100 million income requirement, thus discriminating against other municipalities that adhered to the income threshold.
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League of Cities of the Philippines, et al. v. Commission on Elections, et al.
G.R. No.: 176951, August 24, 2010
Petitioners: League of Cities of the Philippines, et al.
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The League of Cities of the Philippines (LCP) challenged the constitutionality of 16 Cityhood Laws enacted by Congress, which allowed certain municipalities to convert into cities. The LCP argued that these laws violated Section 10, Article X of the 1987 Constitution and the Local Government Code (LGC) because the municipalities involved did not meet the updated income requirement for cityhood as amended by Republic Act No. 9009. This law raised the minimum annual income required for a municipality to become a city from P20 million to P100 million.
The municipalities in question sought cityhood through exemptions from the income requirement provided in their individual cityhood laws. However, the LCP argued that these exemptions violated the uniformity of the criteria for cityhood established in the LGC and the Constitution.
Issue:
The primary issue was whether the Cityhood Laws violated the 1987 Constitution and the Local Government Code, particularly the requirement that municipalities meet the P100 million income threshold for cityhood as amended by RA 9009.
Ruling:
The Supreme Court ruled that the Cityhood Laws were unconstitutional. The Court emphasized that the 1987 Constitution requires the creation and conversion of local government units (LGUs), including cities, to follow the criteria set out in the Local Government Code. Any deviation from these uniform criteria violates the constitutional mandate.
Specifically, the Court ruled that the Cityhood Laws violated the equal protection clause and the Local Government Code because they allowed certain municipalities to become cities without meeting the P100 million income requirement, thus discriminating against other municipalities that adhered to the income threshold.
The Court also invoked the principle of uniformity, which demands that the creation and conversion of cities must follow the same non-discriminatory criteria as provided under the Local Government Code, not through individual exemptions created by Congress.
Key Points:
1. Section 10, Article X of the 1987 Constitution:
This provision mandates that the creation, division, or alteration of local government units must follow the criteria set by the Local Government Code. The Constitution ensures that all municipalities seeking cityhood must meet the same criteria.
2. Income Requirement (RA 9009):
RA 9009 amended Section 450 of the Local Government Code to raise the income requirement for cityhood from P20 million to P100 million. This amendment was intended to ensure that only financially capable municipalities could be converted into cities. The Court found that the 16 municipalities in question did not meet this requirement.
3. Unconstitutionality of Cityhood Laws:
The Cityhood Laws that granted exemptions to these municipalities were declared unconstitutional for violating the equal protection clause and the Local Government Code’s uniform cityhood criteria. The Court ruled that Congress cannot pass laws that create special exemptions for certain municipalities, as this would undermine the Constitution’s mandate for uniformity in the creation of cities.
4. Finality of the Decision:
The Court reiterated its earlier decision on the matter, declaring the Cityhood Laws unconstitutional, and denied the motions for reconsideration. The decision reinstated the Court’s ruling on November 18, 2008, which had already declared the Cityhood Laws unconstitutional.
Disposition:
The Supreme Court reaffirmed the unconstitutionality of the Cityhood Laws for violating the 1987 Constitution and the Local Government Code. The decision emphasized the need for uniformity in the creation and conversion of local government units, and declared that any deviation from the income requirement for cityhood violates the Constitution. The motions for reconsideration were denied, and the November 18, 2008 decision was reinstated, affirming that the municipalities did not meet the legal criteria for conversion into cities.
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Sulu, et al. v. Medialdea, et al.
G.R. No.: 242255, September 9, 2024
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The Province of Sulu, represented by its Governor, Abdusakur A. Tan II, filed a petition challenging the constitutionality of Republic Act No. 11054, known as the Bangsamoro Organic Law (BOL), which established the Bangsamoro Autonomous Region in Muslim Mindanao (BARMM). The petitioners contended that Sulu was automatically included in BARMM despite its voters rejecting the law in a plebiscite.
The petition argued that the inclusion of Sulu in BARMM violated the Philippine Constitution, particularly the provisions on local autonomy and suffrage. Additionally, the Philippine Constitution Association (PHILCONSA) challenged the legality of the BOL, arguing that Congress lacked the authority to abolish the Autonomous Region in Muslim Mindanao (ARMM) and replace it with BARMM, as ARMM was created by a constitutional mandate.
Issue:
1. Whether the automatic inclusion of Sulu in the Bangsamoro Autonomous Region in Muslim Mindanao (BARMM), despite its negative vote in the plebiscite, is unconstitutional.
2. Whether the Bangsamoro Organic Law (BOL) and the creation of BARMM are unconstitutional.
Ruling:
The Supreme Court ruled partially in favor of Sulu, declaring that its automatic inclusion in BARMM was unconstitutional. The Court held that the Constitution requires that only provinces, cities, and geographic areas that vote favorably in a plebiscite should be included in an autonomous region. Since Sulu’s voters rejected the BOL, the Court found that it could not be forcibly included in BARMM. This violated the right of the people of Sulu to local autonomy and suffrage as protected by the Constitution.
However, the Court upheld the constitutionality of the Bangsamoro Organic Law (BOL) and the creation of BARMM. The Court ruled that Congress has the authority to amend or repeal the organic act of an autonomous region, as long as it is consistent with the Constitution and is ratified by the people in a plebiscite. The establishment of a parliamentary form of government in BARMM was found to be in line with the Constitution’s allowance for flexibility in the structure of autonomous regions.
The Court further held that the BOL does not create a separate state but grants BARMM expansive autonomy within the framework of the Philippine Constitution, ensuring national sovereignty and territorial integrity. The rights of indigenous peoples within BARMM were also recognized and protected under the BOL, consistent with national laws and international standards.
Conclusion:
The Supreme Court declared that the automatic inclusion of Sulu in BARMM was unconstitutional, as it violated the will of the people expressed in the plebiscite and their right to local autonomy. The Court, however, upheld the Bangsamoro Organic Law and the creation of BARMM as constitutional, emphasizing that it does not create a separate state but allows for greater autonomy within the Philippine legal framework.
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Taxation & Finance
The taxation and finance of local government units (LGUs)are primarily governed by the Constitution and Republic Act No. 7160 (Local Government Code of 1991). These laws empower LGUs to generate their own revenues and manage their finances to promote self-sufficiency and ensure the efficient delivery of basic services to their constituents.
Taxation Powers of Local Government Units
LGUs are granted the authority to impose taxes, fees, and charges within their jurisdiction.
Article X, Section 5 of the Constitution provides that each LGU has the power to create its own sources of revenue and levy taxes, subject to limitations provided by law.
The Local Government Code, through Section 129, further empowers provinces, cities, municipalities, and barangays to exercise this power, within the scope provided by the Code.
1. Provinces: Provinces are authorized to impose taxes on real property, transfer of real property ownership, businesses, and the practice of professions, among others (RA 7160, Sec. 134-135). They can also collect franchise taxes and other taxes as prescribed by the Code.
2. Cities: Cities have broader taxing powers compared to municipalities and provinces. They can impose all taxes that provinces and municipalities are authorized to levy (RA 7160, Sec. 151).
3. Municipalities: Municipalities can impose business taxes, fees for the issuance of permits and licenses, and other charges. They are also responsible for collecting amusement taxes and charges for public services (RA 7160, Sec. 142-143).
4. Barangays: The barangays, as the smallest political units, have limited taxing powers. They can collect taxes on small-scale retailers, service fees for barangay services, and charges on barangay-owned properties (RA 7160, Sec. 152).
Share in National Taxes
One of the significant sources of LGU income is their share in national taxes, commonly referred to as the Internal Revenue Allotment (IRA). Under Section 284 of the Local Government Code, LGUs are entitled to a share of 40% of the national internal revenue taxes collected by the national government. This allocation is distributed among provinces, cities, municipalities, and barangays based on population, land area, and equal sharing.
The Supreme Court decision in Mandanas v. Ochoa (G.R. Nos. 199802 and 208488, July 3, 2018) clarified that the basis for the IRA should include all national taxes, not just those collected by the Bureau of Internal Revenue (BIR). This ruling expanded the revenue base for the IRA, increasing the amount allocated to LGUs, effective in 2022.
Borrowing and Financial Management
LGUs are also empowered to borrow funds to finance development projects, subject to certain limitations. Under Section 297 of the Local Government Code, LGUs may contract loans, credits, or any form of indebtedness with government financial institutions, as well as domestic and foreign sources. Borrowed funds may be used for development projects, infrastructure, and the provision of basic services, provided these loans are repaid from LGU resources and do not exceed the annual income of the LGU.
Furthermore, LGUs are mandated to maintain sound financial management practices. Section 305 of the Local Government Code outlines the basic principles governing local fiscal management, emphasizing that LGUs must allocate resources in a manner that promotes the general welfare. LGUs must also comply with national accounting standards and procedures, as provided under Section 306.
Budgeting and Expenditure
Each LGU is required to prepare an annual budget, outlining its estimated income and proposed expenditures for the upcoming fiscal year. Section 318 of the Local Government Code mandates that the local budget must give priority to basic services, such as health, education, infrastructure, and environmental protection.
In terms of expenditures, LGUs are bound by the 45% Personnel Services Limitation under Section 325, which restricts the amount they can spend on salaries and wages to no more than 45% (or 55% for first-class LGUs) of their annual income. This ensures that funds are available for development projects and essential services.
Revenue-Generating Enterprises
LGUs are also encouraged to engage in revenue-generating enterprises. Section 17 (c) of the Local Government Code allows LGUs to establish local economic enterprises, such as public markets, slaughterhouses, and other public utilities, which can generate income for the LGU. These enterprises are intended to reduce LGU dependence on national subsidies and improve local economic development.
Fiscal Autonomy and Limitations
The fiscal autonomy of LGUs is guaranteed by Article X, Section 5 of the Constitution, and the Local Government Code provides the legal framework for the exercise of this autonomy. However, there are limitations on the taxing powers of LGUs. Section 133 of the Local Government Code prohibits LGUs from imposing certain types of taxes, such as those on national government agencies, the exercise of the professions, and excise taxes on certain products like petroleum.
Moreover, all local taxes, fees, and charges must be reasonable and should not be unjust, excessive, oppressive, or confiscatory, as required by Section 130 of the Local Government Code.
In summary:
The taxation and finance of LGUs in the Philippines are crucial for their autonomy and ability to deliver services. With the power to levy local taxes and share in national revenues, LGUs are equipped with the resources necessary to sustain their operations and implement development programs. The Local Government Code of 1991 and subsequent legal rulings provide the framework for LGUs to achieve fiscal independence while ensuring responsible financial management and adherence to national standards.
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Local governments cannot tax the National Government or its instrumentalities.
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National Food Authority v. City Government of Tagum, et al.
G.R. No.: 261472, May 21, 2024
Petitioner: National Food Authority (NFA)
The City Government of Tagum issued a real property tax assessment to the National Food Authority (NFA) amounting to PHP 2,643,816.53 for several properties under NFA’s ownership. The NFA protested the assessment, arguing that it is a government instrumentality exempt from paying real property taxes under the Local Government Code of 1991 (LGC).
The City of Tagum contended that the NFA is a government-owned and controlled corporation (GOCC) and therefore subject to local taxation, including real property tax, under the LGC. The Court of Tax Appeals (CTA) initially ruled in favor of the City Government of Tagum, upholding the tax assessments.
The NFA elevated the case to the Supreme Court, arguing that as a government instrumentality, it is exempt from local taxation under Sections 133(o) and 234(a) of the LGC.
Issue:
The key issue in this case was whether the NFA is a government-owned and controlled corporation (GOCC) or a government instrumentality, and whether it is exempt from paying real property taxes under the Local Government Code.
Ruling:
The Supreme Court ruled in favor of the National Food Authority (NFA), declaring that it is a government instrumentality and not a GOCC. As such, it is exempt from paying real property taxes under Sections 133(o) and 234(a) of the Local Government Code of 1991.
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Section 133(o) of the LGC prohibits local government units from imposing taxes, fees, or charges on the National Government, its agencies and instrumentalities.
Section 234(a) of the LGC provides exemptions for properties owned by the government and used for public purposes.
The Court emphasized that the NFA, being an instrumentality of the National Government, is tasked with the responsibility of ensuring food security and stabilizing the supply and prices of rice and other grains. Its properties are for public dominion, intended for public use and public service, making them exempt from local taxation.
The Supreme Court reiterated the principle that local governments cannot tax the National Government or its instrumentalities, as this would merely result in the transfer of funds between government entities without serving any real purpose or benefit.
Disposition:
The Supreme Court reversed the decision of the Court of Tax Appeals, ruling that the tax assessments and notices of delinquency issued by the City Government of Tagum against the NFA were void. The Court held that the NFA is exempt from real property taxes as a government instrumentality, and local government units cannot impose taxes on such entities.
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While tax-exempt entities within special economic zones may be exempt from paying certain national and local taxes, this exemption does not extend to regulatory fees, such as business permits.
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Bases Conversion and Development Authority, et al. v. City Government of Baguio City
G.R. No.: 192694, February 22, 2023
The Bases Conversion and Development Authority (BCDA) and the John Hay Management Corporation (JHMC), the entities responsible for managing the John Hay Special Economic Zone (JHSEZ), contested the imposition of business permit fees by the City Government of Baguio on businesses operating within the zone. The petitioners argued that as the JHSEZ is a special economic zone, its locators (establishments) should be exempt from securing business permits and paying the corresponding fees, invoking the zone’s tax-exempt status.
The City Government of Baguio, through Administrative Order No. 102, required all establishments within its jurisdiction, including those within the JHSEZ, to secure business permits and pay business permit fees. The city argued that these fees were regulatory in nature and did not fall under the definition of “local taxes.”
Issue:
Whether establishments within the John Hay Special Economic Zone (JHSEZ) are exempt from paying business permit fees imposed by the City Government of Baguio.
Ruling:
The Supreme Court ruled in favor of the City Government of Baguio, holding that businesses operating within the John Hay Special Economic Zone (JHSEZ) are not exempt from paying business permit fees.
The Court emphasized that business permit fees are regulatory in nature and are not considered “local taxes” aimed at revenue generation. The fees are imposed as part of the police power of the local government unit to ensure that businesses comply with local regulations for the protection of public health, safety, and welfare.
While tax-exempt entities within special economic zones may be exempt from paying certain national and local taxes, this exemption does not extend to regulatory fees, such as business permits. The Court further clarified that only businesses registered with the Philippine Economic Zone Authority (PEZA) are entitled to tax and duty exemptions. Establishments within the JHSEZ that are not registered with PEZA must comply with local laws, including the payment of business permit fees.
Disposition:
The Supreme Court upheld the validity of Baguio City’s Administrative Order No. 102, requiring establishments within the John Hay Special Economic Zone to secure business permits and pay the corresponding fees. The Court ruled that these fees are regulatory and not considered local taxes from which special economic zone establishments are exempt. Therefore, businesses within the JHSEZ that are not registered with PEZA must comply with the requirement to pay business permit fees to the City Government of Baguio.
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LRTA is an instrumentality of the national government, its properties are exempt from real property tax when they are used for public purposes. Portions leased to private entities however are not tax-exempt.
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Light Rail Transit Authority v. City of Pasay
G.R. No.: 211299, June 28, 2022
The Light Rail Transit Authority (LRTA), a government instrumentality, operates the LRT system, which includes railroads, stations, and terminals located within the City of Pasay. The City Government of Pasay assessed real property taxes on these properties, prompting LRTA to dispute the assessment. The city argued that the properties are subject to local real property taxation, while LRTA claimed that, as a government instrumentality, it is exempt from such taxes under the Local Government Code (LGC).
LRTA filed a petition against the City of Pasay, asserting that its properties, used for public purposes, are exempt from real property tax under Section 133(o) of the LGC, which limits the taxing powers of local governments over national government instrumentalities.
Issue:
Whether the Light Rail Transit Authority’s (LRTA) properties used for public purposes are exempt from real property tax under the Local Government Code (LGC).
Ruling:
The Supreme Court ruled in favor of LRTA, exempting its properties, including the LRT railroads and terminals, from real property tax imposed by the City of Pasay. The Court emphasized that properties of public dominion, which are used for public service and owned by the government, are exempt from levy, encumbrance, or disposition under tax laws.
The Court reiterated that under Section 133(o) of the Local Government Code, local government units cannot impose taxes, fees, or charges on the national government, its agencies, and instrumentalities. As LRTA is an instrumentality of the national government, its properties are exempt from real property tax when they are used for public purposes.
However, the Court clarified that portions of LRTA properties leased to private entities for commercial purposes are not covered by the tax exemption. In such cases, the private lessees are liable for the payment of real property taxes on the leased areas.
Disposition:
The Supreme Court declared that the Light Rail Transit Authority’s (LRTA) properties used for public purposes, such as railroads and terminals, are exempt from real property tax under the Local Government Code. However, portions of the properties leased to private parties are subject to taxation, and the private lessees are responsible for paying the corresponding taxes. The real property tax assessments made by the City of Pasay on the LRTA properties used for public purposes were declared void.