Philippines issues new local realty tax policy

The central government is trying to absorb some of the risks and variability of large infra projects for the private sector.

In response to bidding delays and concerns voiced by the private sector, the Philippine government has put forward a policy to limit the taxes that municipal governments in the Philippines can charge on infrastructure projects, in the hopes of reducing the return risk for the private sector partners.

According to Cosette Canilao, the executive director of the Public-Private Partnership Centre of the Philippines, this new policy states that for any infrastructure project that will ultimately be transferred back to the government, the government will absorb the extra realty taxes imposed by local municipal governments on the private sector investor, which can be quite high.

“Local government tax has always been a problem,” Canilao told Infrastructure Investor. For its part, the central government has a deal with local governments to only be charged a set amount for infrastructure projects and development within their jurisdiction. However, that agreement does not extend to the private sector, and local governments have been known to charge unreasonably high taxes on infrastructure projects developed by the private sector.

“The experience of the private sector is, unfortunately, once they take over, local governments tend to impose higher taxes,” Canilao said. That made the variability of many large infrastructure projects quite high, since Philippine municipalities are practically quite autonomous. As the private sector could never be certain how much the local governments would charge, especially when multiple municipalities were involved, it became a “deal-breaker” for the bidders in the recently failed LRT Line 1 Cavite Extension PPP, she added.

This new policy, which is being implemented now, is an attempt to recover credibility with investors and enforce the government’s authority over local jurisdictions, Canilao explained. It will only apply to projects that stretch over at least two municipalities.

However, the Philippine government has not made a final cut-off for this policy, saying instead that only if the realty tax imposed makes the private sector partner’s returns lower than expected will the government pay the extra. What returns are acceptable will have to be determined on a project-by-project basis.

“This is a risk that is appropriately taken on by the central government,” said Christopher Thieme, a director of the Asian Development Bank’s infrastructure finance division. “It may be tempting to look for other [private sector] partners, but it is necessary for the government to take responsibility for these risks.”

The Philippine government is also currently working on amendments to other laws relevant to infrastructure, Canilao added, including the Build-Operate-Transfer law and right-of-way permits. However, the amendments have to be pushed through the country’s legislative body, so Canilao predicts they will not be changed until next year. In the meantime, the PPP Centre will be looking for “intermediate solutions” for current projects.