SUMALINOG LAW OFFICE

Cardinal Rosales Avenue, Cebu Business Park, Cebu City

Telephone #: 143-1444 Cellphone #: 09171694095
Email: apr.baang.sumalinog@gmail.com

10 August 2019

Ms. Ann Cutis Saima

456 Apple Mango St.,
Cagayan De Oro, City

Re: Mandanas vs. Executive Secretary, on the Positive and Negative

Implication of National and Local Governance

Dear Ms. Saima:

This legal opinion seeks to answer your question as to the Positive and
Negative Implication of National and Local Governance with regard to the
Supreme Court’s decision in Mandanas vs Executive Secretary.

The Facts:
Per our discussion, and the documents you have shown me, the following are
the pertinent facts:

In 2012, Batangas 2nd District Rep. Hermilando Mandanas filed with the
Supreme Court (SC) a petition for certiorari, mandamus and prohibition
against government's alleged misappropriation of Internal Revenue
Allotment (IRA) funds for local governments
In his 23-page petition, Mandanas argued that Section 284 on Allotment of
Internal Revenue Taxes of Republic Act 7160 (Local Government Code)
clearly defines “just share” regarding the IRA while Section 21 of RA 8424
(National Internal Revenue Code) enumerates the sources of revenue as
income taxes, estate and donor’s taxes, value-added tax, other percentage
taxes, excise taxes, documentary stamp taxes, and such other taxes
imposed and collected by the Bureau of Internal Revenue.

Governor Mandanas urged the national government to recast the 2019

national budget that Malacañang endorsed to Congress to implement the
recent Supreme Court ruling on the computation of the Internal Revenue
Allotment (IRA) for local government units (LGUs).
As lead petitioner in the case, Mandanas proposed the passage of a
resolution requesting the Department of Budget and Management (DBM) to
urgently implement the SC decision.

The Supreme Court in its decision announced that the “just share” of LGUs
must be computed and sourced from all national taxes and not just from the
national internal revenue taxes.
According to Mandanas, the National Government, in the persons of the
Respondents, should automatically release the Internal Revenue Allotments
(IRA) or the just shares of the Local Government Units (LGUs) in the national
taxes as determined by law. The unreleased amount due to the Provinces,
Cities, Municipalities and Barangays from 1992 to 2012 has already reached
P500 billion. Compliance by the National Government with the Constitution
and existing laws will enable the LGUs to efficiently and expediently serve
the Filipino people, and hasten the delivery of much needed and long
delayed basic services.
His petition stated that the automatic release of the IRA to the LGUs is
"clearly provided for in Sec. 6 of Art. X of the Constitution" which states:
“Local government units shall have a just share, as determined by law, in the
national taxes which shall be automatically released to them.”
He further claimed that Sec. 284 on Allotment of Internal Revenue Taxes of
Republic Act(RA) No. 7160 (Local Government Code), clearly defines “just
share” regarding the IRA.
The said section states:
“Sec. 284. Allotment of Internal Revenue Taxes. Local government
units shall have a share in the national internal revenue taxes based on
the collection of the third fiscal year preceding the current fiscal year,
as follows:
a) On the first year of the effectivity of this Code, thirty percent (30%);
b) On the second year, thirty five percent (35%);
c) On the third year and thereafter, forty percent (40%).”
It is clear that the legally mandated revenue base to compute the IRA should
include the entire national internal revenue taxes collected annually. The
national internal revenue taxes, are specifically enumerated in Sec. 21 of RA
8424 (National Internal Revenue Code):
“Sec. 21. Sources of Revenue. - The following taxes, fees and charges
are deemed to be national internal revenue taxes:
a) Income taxes;
b) Estate and donor’s taxes;
 c) Value-added tax;
d) Other percentage taxes;
e) Excise taxes;
f) Documentary stamp taxes; and
g) Such other taxes as are hereafter may be imposed and collected
by the BIR (Bureau of Internal Revenue).”
The petition also stated that the Bureau of Customs (BOC) collects national
internal revenue taxes such as value-added tax(VAT), excise taxes, and
documentary stamp taxes on imported goods as an agent of the BIR, as
provided for in Sec. 12 of the National Internal Revenue Code (NIRC).
However, the BIR has not been including the collections of the BOC of the
national internal revenue taxes in the legally mandated revenue base to
compute the IRA for the LGUs since 1992 up to 2012. And when included in
accordance with the Philippine Constitution and other applicable laws, then
the LGUs should receive P498.85 billion or very close to P500 billion. In
seeking immediate temporary relief from the high tribunal on the P60.75
billion capital outlay appropriation. This amount is equivalent to the IRA for
the LGUs in accordance with law that has been misappropriated by the
National Government in the 2012 GAA. And if the unconstitutional release of
the P60.75 billion is not restrained by the Supreme Court, then again the
misuse of Local Funds for National Projects will go unabated.

The Applicable Law:

It has been a continuing struggle for local government units (LGUs) to defend
their Internal Revenue Allotment (IRA). LGUs need the resources to bankroll
their expanded roles as partners of government in nation building. The 1987
Constitution, implemented by the 1991 Local Government Code (the Code),
made sure they have the means to effectively cope with the hurly burly of
mandated decentralization. To have enough and to hold it immediately.

The Constitution mandates that “local government units shall have a just
share, as determined by law, in the national taxes which shall be
automatically released to them.” But though the provision referred to
national taxes, the Legislature, via the Code, limited the base of the
LGUs’ just share to purely internal revenue taxes only.

The LGU Leagues’ prospects or views on its prospective application differ

from that of the National Government’s opinion. By definition, prospective
application is the implementation of a new policy after the date of the policy
change or at least from the date of commencement of the statute. The
change is not applied to prior periods. Hence, IRA, now termed as National
Tax Allotment (NTA), will henceforth be based on all national tax collections
three years prior.

It is only when the SC’s decision becomes final and executory will the IRA be
adjusted, except on the illegal deductions of the Cost of Devolved Personal
Services or CODEPS from the total IRA when it should be given in addition to
the total IRA annually. Under Sec. 89 of RA 10964, the reckoning year is the
“subsequent fiscal year” or 2019 or by 2020 at the very least.

RA 10964 or GAA FY 2018, SECTION 89. INTERNAL REVENUE ALLOTMENT OF LGUs. x x x

“All valid adjustments, changes, modifications, or alterations in any of the factors affecting the computation of IRA that occurred or

happened, including final and executory court decisions made effective, during the current fiscal year, shall only be considered and

implemented by the DBM IN THE SUBSEQUENT FISCAL YEAR from receipt by the DBM of the notice of said change.

It must be recalled that the LG Code was passed by Congress during the last
quarter of the year. Similarly, DBM had already submitted its proposed NEP
budget for 1992 to Congress in adherence to its budget schedule.
Nonetheless, the LGUs’ IRA share was immediately given by the Aquino
administration in the “subsequent year”, i.e. 1992, using 1989 as the base
year pursuant to Sec. 284 of RA 7610.

Hence, given this precedent, the “base year” against which the IRA is
computed is irrelevant since this was not the phrase declared
unconstitutional, but rather merely the revenue base, i.e. the phrase
“internal revenues” was declared null and void, and that henceforth, LGUs’
NTA should be based on all national taxes to strictly conform with Section 6,
Article X of the 1987 Constitution.

Time and again, the Supreme Court in cases like Alvarez v.

Guingona and Pimentel v. Aguirre saved the day for our LGUs. In Mandanas,
the Court set things straight when it called out Congress for limiting the LGU
share to internal revenue taxes only. The base should also include:
Customs tariffs and duties; percentages of: the VAT, national taxes collected
in the ARMM, national taxes collected from the exploitation and development
of national wealth, tobacco excise taxes, franchise taxes paid by the Manila
Jockey Club and the Philippine Racing Club. Good news for LGUs.

To the national government, bad news. In 2019, LGUs would get an additional
P160 billion. If retroactively applied, estimates go as high as P1.5 to P6
trillion dating back to the Code’s effectivity in 1992. It would compromise the
Build3 program, downgrade our credit ratings and adversely affect
international confidence.

But Mandanas, by its own terms, applies prospectively. Bad news for LGUs.
Across the country, they all had plans for the prospective windfall of a
retroactive entitlement.
To sum it up, he national taxes to be included in the base for computing the just
share the LGUs shall henceforth be, but shall not be limited to, the following:
1. The NIRTs enumerated in Section 21 of the NIRC, as amended, to be
inclusive of the VATs, excise taxes, and DSTs collected by the BIR and
the BOC, and their deputized agents;
2. Tariff and customs duties collected by the BOC;
3. 50% of the VATs collected in the ARMM, and 30% of all other national
taxes collected in the ARMM; the remaining 50% of the VATs and 70%
of the collections of the other national taxes in the ARMM shall be the
exclusive share of the ARMM pursuant to Section 9 and Section 15 of
R.A. No. 9054;
4. 60% of the national taxes collected from the exploitation and
development of the national wealth; the remaining 40% will exclusively
accrue to the host LGUs pursuant to Section 290 of the LGC;
5. 85% of the excise taxes collected from locally manufactured Virginia
and other tobacco products; the remaining 15% shall accrue to the
special purpose funds pursuant created in R.A. No. 7171 and R.A. No.
7227;
6. The entire 50% of the national taxes collected under Section 106,
Section 108 and Section 116 of the NIRC in excess of the increase in
collections for the immediately preceding year; and
7. 5% of the franchise taxes in favor of the national government paid
by franchise holders in accordance with Section 6 of R.A. No. 6631 and
Section 8 of R.A. No. 6632.

I appreciate the opportunity to advise you regarding this matter. Please let
me know if you wish to discuss further these issues further. Thank you.

Sincerely,

APRIL B. SUMALINOG
Legal Counsel