The New Real Estate Tax Reform Bill is a piece of proposed legislation in the Philippines that aims to reform the real property tax system currently in place in the country. The purpose of this new bill is to make the process of valuing property more streamlined and to create a method that is more uniform and standardized in its approach to valuing property.
If the measure is approved, real property owners will be required to provide information that is both accurate and comprehensive regarding their properties in order to assist assessors in determining the properties’ fair market value. To ensure that properties are valued in a manner that is both more accurate and equitable, the new method of determining the value of a real property that is up for sale would make use of both modern technologies and data analytics.
How does Fair market values work?
The cost an item would sell for on the market is referred to as its fair market value, and it is determined by making the assumptions that both the buyer and the seller are adequately informed about the asset, are acting in their own best interests, are not subjected to undue pressure, and are given a reasonable amount of time to complete the transaction.
The word “fair market value” is purposely differentiated from other terminology such as “market value” and “appraised value” due to the fact that it takes into account the principles of economics that apply to open and free market activity. On the other hand, the worth of an asset as it is seen by market participants is referred to as market value. Therefore, while the market price of a home can be easily derived from a listing, it is significantly more difficult to determine the home’s actual value.
In many cases, the FMV of the family’s property is utilized as a factor in calculating the amount of municipal property taxes that will be owed. Depending on how long the homeowner has owned the real property, the difference between the home’s original purchase price and its current fair market value (FMV) may be substantial. Appraisers that are competent to do so determine the FMV of a home by using several criteria, norms, and both state and federal regulations to their work. The insurance industry makes extensive use of the FMV calculation. For instance, if an insurance claim is filed after an auto accident, the insurance provider will normally pay for damages up to the fair market value of the vehicle that was owned by the policyholder.
The concept of “fair market value” is applicable to a wider variety of transactions than just those involving real estate. In point of fact, it is necessary for every homeowner who currently possesses a home to remain current on the FMV of their property. This is due to the fact that the FMV of a home effects a wide variety of potential financial concerns, such as taxes and insurance, in addition to the homeowner’s personal wealth and the value of the asset.
Real estate tax reform bill
The clock is winding down on the Duterte administration, and it is becoming increasingly unlikely that the real property taxes valuation reform bill presented by the Department of Finance would be signed into law.
The purpose of the law is to create a property valuation system that is just, equitable, and as efficient as possible in order to broaden the tax base that is utilized in the determination of the property-related taxes that are levied by the national and local governments.
The broadening of the tax base would make it possible for the government to raise its revenue without resorting to the imposition of any new or extra taxes that would ultimately fall on the backs of average taxpayers.
In 2019, the bill passed its third and final reading in the House of Representatives, and it is now in the hands of the Senate, which must decide whether or not to take up the measure.
It provides, among other things, for the establishment of “a single valuation base for taxation, through the adoption of the SMVs (schedule of market values) of LGUs (local government units), and use the updated values as benchmarks for other purposes, such as right-of-way acquisition, lease, rental, etc.” The adoption of the SMVs of LGUs is what makes this possible.
Since the law has already established the valuation base, the process of determining the market value of real estate in LGUs will be shielded from any political considerations or influences. However, they will continue to be responsible for determining, changing, and regulating the tax rates and assessment levels applicable to those properties. This obligation will stay with them.
The Impact of the New Tax Law on Individuals Investing in Real Estate owners
Real property tax is a form of tax that is levied by the government at the municipal, county, or state level, and it is the responsibility of property owners to pay this tax. The following are examples of taxable properties: land, a building, any modifications made to either the building or the land, and machinery.
In the Philippines, land taxes must be paid by anybody whose name appears on titles and certificates of property or by anyone who owns real estate, regardless of whether the property is used for residential or commercial purposes. In 1991, the government of the Philippines enacted Republic Act 7160, more often known as the Local Government Code. The law gives municipal administrations the authority to develop and collect their own sources of income, giving them the ability to pay for public expenses with those funds rather than using tax dollars. One of these sources of income is comprised of levies placed on real property.
A 6% estate tax will be imposed on the value of any real estate that is passed on from one person to another, regardless of whether the property was acquired through purchase, inheritance, or charitable giving.
Also, the act established a basic education of up to 5 million pesos, which qualifies any net estate worth at 5 million pesos or fewer to tax exemptions. Additionally, agricultural assets with a maximum size of 3 hectares were exempted from the taxation as well. In addition to this, it was announced that the requirement for families to provide a death notice to the Bureau of Internal Revenue within one month of the passing of a family member would no longer be in effect. Furthermore, according to the report of the Senate committee, the current deadline for paying estate taxes, which is six months, may be extended to one year.
When it comes to the valuation of land in the Philippines, there are some standards that have been established to ensure uniformity, objectivity, and transparency in the process. When determining the value of land, the location as well as the ease of access to various economic activities are both taken into consideration. Lots that are more easily accessible, adjacent to city centers, and in densely populated, commercialized locations have a higher value than ones that are more remote and secluded.
Following the reduction of income tax rates by the government for people as well as enterprises, there will surely be a decline in the amount of tax revenue collected because this reduction was not accompanied by an increase in tax compliance or a surge in economic activity.
There is no denying that the method that is used to value property needs significant improvements immediately. The objective of this plan is not to raise land tax rates across the country at the same rate; rather, it is to broaden the income base of local government bodies, which will, in turn, lead to a rise in those entities’ tax collection from property owners.
Local government units able to pay their operations with property taxes?
The majority of the money collected from real property taxes comes from the many local levies (county, municipal, township, school district, and special district) that are placed on land and the enhancements made to it.
Real Property Valuation Reform
According to the provisions of the bill, all real properties, regardless of whether they are taxable or exempt, must be evaluated or appraised based on the prevailing market values in the locality where the real property is situated, in accordance with valuation standards. This is done for the purposes of determining its value.
