Dominguez: Proper land valuation is the ‘right way’ to impose a wealth tax

Finance Secretary Carlos Dominguez III said on Monday that proper land valuation was the “right way” to impose a wealth tax on the wealthy.

Dominguez in a statement pushed for reforms to the property assessment system that would allow local government units to collect the right amount of taxes by regularly updating the scale of market values ​​when assessing real estate assets.

He said that unlike wealth tax on movable assets which could only lead to capital flight and tax evasion, proper taxation of land ensures that the government can collect taxes from the wealthy. , because lands cannot be hidden or evaded.

“The current land assessment for property tax purposes is outdated and very low compared to the actual market value. The market value of the main shopping areas on Ayala Avenue near San Lorenzo in Makati City is only around 40,000 pesos per square meter, based on the city’s SMV, while in fact, the actual market value ranges from 400,000 pesos. at P900,000 per m². So we lose tens of billions of pesos because this type of wealth is not properly taxed,” Dominguez said.

He said that a check carried out by the Ministry of Finance on the land values ​​located in Barangays San Lorenzo and Bel-Air in Makati showed that the current SMV for the property tax imposed by the LGUs in these areas was only P40,000 per m². at the premium zone value of P940,000 per m². used by the Bureau of Internal Revenue to calculate estate gift and capital gains taxes, which are state taxes.

Estimated total area of ​​taxable commercial land from Ayala Avenue to Barangay San Lorenzo, covering the vicinity of Salcedo Street to Makati Avenue at 52,640 m². gives a total assessed value of 842.24 million pesos based on the current SMV, which means that the total property tax to be collected, including the additional levy for the special education fund, at a tax rate combined maximum of 3%, will only amount to 25 pesos. .27 million, he says.

He said that for the two commercial areas, the total RPT would be a relatively paltry 50.27 million pesos based on the current SMV set by Makati local government. Using similar calculations for Barangay Bel-Air with an estimated area of ​​52,080 m². translates to a rateable value of 833.28 million pesos, with a total PTR of just 25 million pesos, he said.

He said that if the most current zonal values ​​were used to calculate the PTR – as what the BIR had defined – the estimated value of the commercial land sample in Ayala Avenue in the vicinity of Barangay San Lorenzo would be 19.79 billion pesos, while it would be 19.58 billion pesos for Barangay Bel-Air, he said.

“Thus, the total TPR that could be collected each year would be higher at 593.78 million pesos for Barangay San Lorenzo and 587.46 million pesos for Barangay Bel-Air, making a total of 1.18 billion pesos for these commercial areas sampled in Ayala. Av.”, he said.

Collectibles using the zonal value are 1.13 billion pesos or 2,250% higher than the tax due using the LGU’s SMV, Dominguez said.

“That kind of wealth can’t escape to offshore accounts or anywhere else. That’s the wealth here. The other kind of wealth that they want to tax can go away,” Dominguez said, referring to proposals from some individuals and legislators to impose a “wealth” tax on the country’s wealthiest Filipinos.

Dominguez said that since RPTs are local taxes, LGUs are in the best position to implement this efficient form of wealth tax using updated SMVs and a property valuation system aligned with international standards.

LGU officials, however, are reluctant to impose the RPT based on updated VMSs mainly due to political considerations, although the Local Government Code states that these should be updated every three years.

Property values ​​inevitably appreciate over time and faster in metropolitan areas, but the tax that is rightfully owed to the government is not properly collected, thus violating the principle of fairness in property taxation.

Dominguez said that’s why the DOF is pushing for passage of the Real Estate Assessment and Valuation Reform Act, which is the third package in the administration’s comprehensive tax reform program. Duterte.

This tax reform proposal aims to promote the development of a fair, equitable and efficient real estate assessment system and to broaden the tax base used for property taxes imposed by state and local governments.

The goal is to increase government revenue without increasing existing tax rates or designing new taxes.

Dominguez warned lawmakers last year against imposing a “super-rich” tax on individuals with assets over 1 billion pesos because it would only encourage aggressive tax avoidance schemes and drive much-needed capital and investment out of the Philippines.

Dominguez sent a letter to Chairman Lord Allan Jay Velasco explaining that this tax proposal outlined in Bill 10253 would defeat his purpose of generating more revenue.

He said that while this wealth tax may initially lead to gains in tax revenue, it could, at the same time, discourage growth and long-term investment.

Decreased long-term investment will lead to much greater revenue losses and fewer new jobs to help Filipinos and the national economy recover quickly from the pandemic, he said.

“There is a risk of capital flight if the wealth tax is passed in the Philippines. Currently, only four countries continue to apply wealth tax: Belgium, Norway, Spain and Switzerland. Many countries that previously had wealth taxes have ended up repealing said measures, in particular due to increased capital mobility and access to tax havens in other countries,” Dominguez said in his letter.

Additionally, the proposed wealth tax will also discourage companies from undertaking less profitable and riskier ventures that benefit the public, Dominguez said.

Even when they generate low or even negative profits when starting their operations, they will still be subject to tax liabilities due to the high capital value of their assets, he said.

Dominguez said a study in Germany suggests that wealth taxes can have a significant negative impact on economic activity by dampening economic growth, investment and employment.

According to the study, wealth taxes reduce income from wealth and savings, so potential taxpayers will tend to invest or save less.

Tax reforms pursued by the Duterte administration, such as the Tax Reform for Acceleration and Inclusion Act, and the Assessment Reform Bill and the Passive Income Taxation Bill and financial intermediaries, are already addressing the inequalities of the system, he said.

He said, for example, that TRAIN imposed a higher tax rate of 35% compared to the previous 32% for major taxpayers whose annual taxable income exceeds 8 million pesos.

Moreover, “existing literature views land tax as a perfect tax because land, in particular, being a fixed asset, is visible and immovable, which is an important tax tool in this era of globalization and competition”, has said Dominguez.

He said HB 10253 is prone to aggressive tax evasion, as the so-called “super-rich” will find ways to avoid paying the right tax by transferring their assets to different accounts where they can claim tax breaks and exemptions, as evidenced by what has happened. in other countries that had imposed a similar wealth tax on wealthy citizens.

He said that while the bill’s sponsors estimate their proposal will generate 236.7 billion pesos a year, and the DOF projects a more conservative revenue of 57.6 billion pesos, losses to other taxes are much more important.

Dominguez also said a wealth tax would be expensive and complex to implement as it would require additional labor and costs, not to mention the need to relax the bank secrecy law and forge information exchange agreements with other countries, to determine the different aspects of a wealth of “super-rich” taxpayers.

He also cited the lack of a reliable database to identify the wealthiest individuals in the country.